INNOVA Announces Q2 Financial Results

Revenue $5.2 million; Adjusted EBITDA¹ $1.7 million; Adjusted EPS² $0.05

LOS ANGELES, Aug. 11, 2017 /CNW/ - INNOVA Gaming Group Inc. ("INNOVA" or the "Company") TSX: IGG), announced today its financial results for the three and six months ended June 30, 2017. All figures in this press release are in U.S. dollars, unless otherwise noted. 

Q2 Highlights – Operations

• 2,015 LT-3 ticket dispensers ("LT-3s") were deployed as of June 30, 2017 and 2,015 LT-3s were deployed as of August 10, 2017.
• Diamond Game deployed 60 modified LT-3 break open ticket dispensers ("LT-3") under an Agreement with the Red Arrow Bingo Hall in Clovis, New Mexico.
• Diamond Game extended its Distribution/Dispenser Agreements with Atlantic Bingo Supply, Inc., covering 403 LT-3 break open ticket dispensers installed in three bingo halls in the State of Maryland.

Q2 Highlights – Financial 

• Revenue of $5.2 million in Q2-2017, compared to $5.9 million in Q2-2016.
• Average LT-3 WPU³ (Win Per Unit per day) and ARPU⁴ (Average Revenue Per Unit per day) of $164 and $28, respectively in Q2-2017.
• Adjusted EBITDA¹ of $1.7 million in Q2-2017, compared to $1.5 million in Q2-2016.
• Adjusted EPS² of $0.05 in Q2-2017, compared to $0.04 in Q2-2016.
• Recognized $431,255 of EBITDA support compensation as part of other non-operating income.

"INNOVA generated strong Adjusted EBITDA and Adjusted EPS growth in Q2-2017, despite Missouri removals, as we continued to prudently manage our costs during the quarter," said Richard Weil, CEO of INNOVA.

Pollard Banknote Take-Over Bid

On August 3, 2017, Pollard Banknote and INNOVA announced that 10188557 Canada Inc. (the "Offeror"), a wholly-owned subsidiary of Pollard Banknote, had taken up approximately 89.32% of the outstanding common shares of INNOVA pursuant to its offer to acquire all of the outstanding common shares of INNOVA (the "Offer"). As required by applicable Canadian securities laws, the Offer has been extended until 5:00 p.m. (Toronto time) on August 15, 2017 to provide holders of common shares who have not yet tendered their common shares to the Offer an opportunity to do so. Pollard Banknote has advised that it does not intend to further extend the Offer beyond 5:00 p.m. (Toronto time) on August 15, 2017. As described in the Offer and associated take-over bid circular dated April 19, 2017 (the "Original Offer and Circular"), the Offeror intends to carry out a compulsory acquisition or subsequent acquisition transaction to acquire any common shares that are not validly deposited under the Offer. Full details of the Offer are contained in the Original Offer and Circular, as amended by the notice of variation dated July 20, 2017 and the notice of extension dated August 3, 2017. Those documents are accessible under INNOVA's SEDAR profile at www.sedar.com and INNOVA shareholders are urged to read such documents and to tender their common shares to the Offer.  

Selected Unaudited Condensed Consolidated Financial Information

Selected Unaudited Condensed Consolidated Financial Information (continued)

Revenue

Three month period ended June 30, 2017

Compared to the same period in 2016, revenue decreased by $0.7 million or 13%.  LT-3 revenue declined by $0.5 million or 9% due mainly to removal of all machines from the Missouri liquor-by-the-drink locations at the end of Q1 2017 and a lower revenue share at Maryland bingo, resulting from a change in revenue share agreement effective Q2 2017, partially offset by higher revenue from paper sales at Ontario due to continuous improvements in machine performance resulting from additional game features and higher machine placements at Maryland Lottery. AGP revenue declined by $0.2 million or 81% due mainly to the removal of 145 machines from operation relative to the end of the same period in 2016.

The increase in LT-3 WPU from $142 in Q2 2016 to $164 in Q2 2017 resulted mainly from the abovementioned improvements in machine performance in Ontario but with an adverse impact on ARPU due to Ontario's fixed fee revenue arrangement. ARPU was also adversely impacted from a decrease in fixed fee rate on certain machines, partially offset by slightly better ARPU on 60 machines placed in New Mexico at the end of Q2 2017. The increase in AGP WPU from $158 in Q2 2016 to $215 in Q2 2017 is primarily due to the removal of relatively lower performing WPU AGP machines, however, the remaining machines have an adverse impact on ARPU due to lower revenue share arrangements.

Six month period ended June 30, 2017

Compared to the same period in 2016, revenue decreased by $0.4 million or 4%, mainly in AGP resulting from removal of 145 machines from operation relative to the end of the same period in 2016 while LT-3 revenue was flat. The increase in WPUs and decrease in ARPUs for LT-3 and AGP resulted from the reasons noted above.

In 2016, the machine reductions in Texas resulted from the termination of an equipment lease agreement between the Company's wholly-owned subsidiary, Diamond Game, and Blue Stone Entertainment LLC ("Blue Stone"). Prior to the termination, Blue Stone operated donation-based sweepstakes terminals leased from Diamond Game ("Terminals") at the Ysleta del Sur Pueblo's (the "Pueblo") two entertainment centers in Texas, pursuant to a separate agreement between Blue Stone and the Pueblo. The Terminals, which have been removed from the Pueblo's entertainment centers, are part of a class of products previously referred to in the Company's communications as alternative gaming products, or AGPs.

In connection with INNOVA's initial public offering, the Company entered into an EBITDA support agreement (the "EBITDA Support Agreement") with Amaya Inc. ("Amaya"), INNOVA's largest shareholder who currently holds approximately 40.8% of the Shares, pursuant to which, subject to the terms and conditions thereof, Amaya will pay INNOVA each year for up to five years from July 1, 2015 an amount equal to the shortfall, if any, between (i) the Company's EBITDA directly or indirectly derived from the deployment of Diamond Game's products at the Pueblo's entertainment centers or in connection with INNOVA's relationship with Blue Stone and/or the Pueblo, and (ii) CAD$2.0 million. The Company believes that the EBITDA Support Agreement will substantially mitigate any adverse financial impact resulting from the termination of the lease agreement with Blue Stone. A copy of the EBITDA support agreement is available under INNOVA's issuer profile on SEDAR at www.sedar.com.

For the three and six month period ended June 30, 2017, the Company recognized $431,255 and $817,157 for the EBITDA support compensation, respectively as part of other non-operating income (2016: $236,359 and $617,209).

Cost of products

Three and six month period ended June 30, 2017

Compared to the same period in 2016, cost of products was flat. Slightly higher repairs and parts costs due mainly to timing of maintenance on machines were offset by lower inventory excess and obsolescence expenses. 

Selling expenses

Three and six month period ended June 30, 2017

Compared to the same period in 2016, selling expenses were lower by $0.1 million or 27% for the three month period and $0.2 million or 31% for the six month period due mainly to lower travel and shipping expenses.  

General and administrative expenses

Three month period ended June 30, 2017

Compared to the same period in 2016, general and administrative expenses were lower by $0.3 million or 7% due mainly to a decrease in payroll cost of $0.3 million, bad debt recovery of $0.2 million, and legal fees of $0.1 million, partially offset by higher acquisition related costs of $0.3 million resulting from the Pollard Banknote Offer.

Six month period ended June 30, 2017

Compared to the same period in 2016, general and administrative expenses were lower by $0.6 million or 6% due mainly to a decrease in payroll cost of $0.4 million, bad debt recovery of $0.2 million, and legal fees of $0.2 million and lower software and office related costs of $0.1 million, partially offset by higher acquisition related costs of $0.3 million resulting from the Pollard Banknote Offer.

Financial expenses

Three and six month period ended June 30, 2017

Compared to the same period in 2016, financial expenses were lower by $0.3 million for the three month period and lower by $0.2 million for the six month period due mainly to changes in unrealized foreign exchange gains and losses.

Income taxes

Three and six month period ended June 30, 2017

Compared to the same period in 2016, income tax expenses were higher by $0.1 million for the three month period and by $0.6 million for the six month period due mainly to increase in taxable earnings, one-time favorable adjustment in prior year of $0.3 million in relation to fixed assets and tax losses available for offset in prior year.

Outlook

We believe we are well-positioned for future growth in our existing lottery markets and other new markets. We have secured five lottery contracts in North America since 2012, four of which were earned after competitive request for proposal ("RFP") processes, and we entered one new charitable market (New Hampshire) in 2016 which is now regulated by that state's lottery and another in 2017 (New Mexico) which is regulated by the New Mexico Gaming & Control Board. Our sales and marketing staff continue to pursue long-term recurring revenue relationships with new customers, as well as fostering growth within existing customers.  We believe that our business development team has the ability to capitalize on its extensive relationships and knowledge of market opportunities, including lottery RFP responses independently or in partnership with other vendors.  We also believe that our product portfolio, with the recent development of our NexPlay suite of products, puts our business development team in an even better position to open new markets.

We are also actively pursuing opportunities to continue to grow our average WPU by improving game functionality, offering new game titles, and introducing enhanced features.  For example, we have submitted three new game themes for approval by OLG, which we expect will help further increase WPU and ARPU figures in Ontario if/when these games are approved and deployed.  Additionally, we are currently in the process of introducing two new game themes to the Maryland Lottery Veteran's Program, with early results looking very promising. Similarly, we have submitted for approval game theme and denomination recommendations to Michigan, and Missouri, Lotteries that we expect will improve WPU and ARPU once deployed.

As a management team, we have a significant amount of experience executing accretive acquisitions and we see a number of opportunities in the lottery and charitable gaming space. We will continue to evaluate opportunities and pursue those that meet both our strategic and financial criteria.

Normal Course Issuer Bid

A normal course issuer bid ("NCIB") program was initiated for the from period March 31, 2016 to March 30, 2017 to purchase up to 10% of the public float of outstanding Shares. The NCIB program expired on March 31, 2017 and was not renewed.

During the NCIB period, the Company purchased the Shares at prevailing market prices and by means of open market transactions through the facilities of the Toronto Stock Exchange (the "TSX"), alternative Canadian trading systems or other means permitted by the TSX rules and policies. 

The total amount paid to purchase the Shares is allocated to Shares in the consolidated statements of changes in equity. The amount allocated to Shares is based on the average cost per Share and amounts paid above the average cost are allocated to retained earnings.  The Company manages its Share capital, contributed surplus and retained earnings as capital. The Company's objectives when managing capital are to safeguard the Company's ability to continue and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk, as there are no external restrictions on it. The Company manages the capital structure and makes adjustment to it depending on the changes in economic conditions.

Conference Call

The Company will not be holding a conference call to discuss its second quarter financial results.

INNOVA's interim unaudited consolidated financial statements and the accompanying management's discussion and analysis for the three months ended March 31, 2017 are available under INNOVA's issuer profile on SEDAR at www.sedar.com and the Company's website at www.innovagaminggroup.com.

Outstanding Share Data

INNOVA is authorized to issue an unlimited number of Shares without nominal or par value and an unlimited number of preferred shares, issuable in series. As at June 30, 2017, INNOVA had 20,073,400 Shares outstanding, no preferred shares outstanding and 859,295 options entitling their holders to acquire one Share per option and 189,121 restricted share units ("RSUs") entitling their holders to receive one Share per RSU outstanding.

Non-IFRS Measures and Financial Indicators

INNOVA's financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). In this press release, as a complement to results provided in accordance with IFRS, INNOVA discloses and discusses certain non‐IFRS financial measures, including EBITDA, Adjusted EBITDA, Adjusted EPS, WPU and ARPU as well as other measures discussed elsewhere in this release. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of INNOVA's results of operations from management's perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of INNOVA's financial information reported under IFRS. These measures are used to provide investors with supplemental measures of INNOVA's operating performance. For a full description of these measures and, where applicable, a reconciliation to the most directly comparable measure calculated in accordance with IFRS, please refer to the "Non‐IFRS Measures and Financial Indicators" section in INNOVA's Management's Discussion and Analysis for the three and six month period ended June 30, 2017, available under INNOVA's issuer profile on SEDAR at www.sedar.com and the Company's website at www.innovagaminggroup.com.

About INNOVA Gaming Group Inc.

INNOVA develops unique games and products for the global gaming industry, with particular focus on state and provincial lotteries. Through the Company's wholly-owned subsidiary, Diamond Game, INNOVA focuses on enhancing the revenues of government-sponsored lotteries and other regulated operators by offering its unique "extended play" products in traditional and non-traditional gaming venues. Its primary product is the LT-3, an instant ticket vending machine that dispenses tickets while simultaneously displaying the results of each ticket on a video monitor in an entertaining fashion. For more information, please visit www.innovagaminggroup.com.

Forward-Looking Statements

Certain statements and information included herein, including those that express management's expectations or estimates of our future performance or future events, including, without limitation, with respect to the Pollard Banknote Offer, the deployment of additional machines, the creation of higher sales volumes and ongoing revenue and the expected mitigation of adverse financial impact as a result of the EBITDA support agreement, constitute "forward-looking statements" within the meaning of applicable securities laws. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management at this time, are inherently subject to significant business, economic, regulatory and competitive uncertainties, contingencies and risks that could cause actual results or events to differ materially from those expressed or implied in such statements. Applicable risks and uncertainties include those identified under the heading "Risk Factors" in INNOVA's annual information form dated March 27, 2017, available under INNOVA's issuer profile on SEDAR at www.sedar.com, and in other filings that INNOVA has made and may make with applicable securities authorities in the future. Investors are cautioned not to put undue reliance on forward-looking statements. The forward-looking statements contained herein reflect INNOVA's current views with respect to future events, and except as required by law, INNOVA does not intend, and undertakes no obligation, to update any forward-looking statements to reflect, in particular, new information or future events, or otherwise.

Unaudited Condensed Consolidated Interim Statements of Financial Position
In US dollars

Unaudited Condensed Consolidated Interim Statements of Income and Comprehensive Income
In US dollars

Unaudited Condensed Consolidated Interim Statements of Cash Flows
In US dollars

SOURCE INNOVA Gaming Group

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