INNOVA Announces Q1 Financial Results

Revenue $5.7 million; Adjusted EBITDA1 +66% to $1.9 million; Adjusted EPS2 +200% to $0.06

LOS ANGELES, May 11, 2017 /CNW/ - INNOVA Gaming Group Inc. ("INNOVA" or the "Company") (TSX: IGG), announced today its financial results for the three month period ended March 31, 2017. All figures in this press release are in U.S. dollars, unless otherwise noted. 

Highlights – Operations

  • 1,948 LT-3 ticket dispensers ("LT-3s") were deployed as of March 31, 2017 and 1,951 LT-3s were deployed as of May 10, 2017.
  • Subsequent to the end of the first quarter, INNOVA announced that its wholly-owned subsidiary, Diamond Game Enterprises ("Diamond Game"), extended its Distribution/Dispenser Agreements (collectively, the "Agreements") with Atlantic Bingo Supply, Inc., covering 403 LT-3s installed in three bingo halls in the State of Maryland. The new Agreements extend for three years from May 1, 2017 and include two one-year extension options for Atlantic Bingo Supply, Inc. The LT-3s deployed in Maryland are regulated by the Maryland State Lottery & Gaming Control Agency.

Highlights – Financial 

  • Revenue of $5.7 million in Q1-2017, compared to $5.4 million in Q1-2016.
  • Average LT-3 WPU3 (Win Per Unit per day) and ARPU4 (Average Revenue Per Unit per day) of $161 and $30, respectively in Q1-2017.
  • Adjusted EBITDA1 of $1.9 million in Q1-2017, compared to $1.1 million in Q1-2016.
  • Adjusted EPS2 of $0.06 in Q1-2017, compared to $0.02 in Q1-2016.
  • Recognized $385,902 of EBITDA support compensation as part of other non-operating income.

1   

Adjusted EBITDA is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

2  

Adjusted EPS is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

3  

WPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

4  

ARPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators".

 

"In Q1-2017, we generated strong Adjusted EPS growth as the LT-3's deployed over the past year ramped up to higher levels of ARPU and our initiatives to maximize efficiency continued to drive profitability," said Richard Weil, Chairman and CEO of INNOVA. "Our business is on track to reach an inflection point in 2017, where recurring revenue will generate more than enough cash to fund maintenance capital expenditures and drive positive free cash flow. While the process for new deployment mandates sometimes takes time, we are currently engaged in several late stage discussions with both existing and new customers to drive LT-3 deployments over the next 12 months. We are in a solid competitive position, with unique and innovative products that face limited competition, a solid base of recurring revenue and a strong balance sheet."

Subsequent Highlights

On April 19, 2017, Pollard Banknote Limited ("Pollard Banknote"), through its wholly-owned subsidiary 10188557 Canada Inc., made an unsolicited offer to acquire all of the outstanding common shares of INNOVA (the "Shares") for cash consideration of $2.10 per Share (the "Pollard Banknote Offer").

On May 4, 2017, the board of directors of INNOVA (the "Board of Directors") unanimously recommended that shareholders reject the Pollard Banknote Offer and not tender their Shares thereto.  A copy of the directors' circular (the "Directors' Circular") prepared in connection with the Board of Directors' recommendation to INNOVA's shareholders is available under INNOVA's issuer profile on SEDAR at www.sedar.com. Shareholders are strongly encouraged to read the Directors' Circular carefully and in its entirety, as it contains important information regarding INNOVA, Pollard Banknote and the Pollard Banknote Offer, including a detailed discussion of the reasons for the recommendation of the Board of Directors.

To ensure that the best interests of INNOVA and its shareholders are served, a special committee of independent directors of INNOVA (the "Special Committee") is currently overseeing a process (the "Strategic Review Process") aimed at exploring and considering the full range of potential value-enhancing strategic alternative transactions to the Pollard Banknote Offer that may be available to INNOVA, including, but not limited to, soliciting expressions of interest regarding an acquisition of all of the Shares.

Since the launch of the Strategic Review Process, INNOVA and its financial advisor have approached, or have been approached by, a number of third parties who have expressed interest in considering transactions involving the Company. INNOVA has entered into confidentiality agreements with 10 interested parties and has provided each of them with a confidential information memorandum containing detailed information regarding INNOVA and its business and a financial model based on projections provided by the Company's senior management team in order to assist these interested parties in assessing potential alternative transactions to the Pollard Banknote Offer that may be in the best interests of INNOVA and its shareholders. Discussions remain ongoing with these parties and several other parties who have expressed an interest in considering potential value-enhancing alternative transactions to the Pollard Banknote Offer.

While there can be no assurances that a transaction superior to the Pollard Banknote Offer will emerge from the Strategic Review Process, the Board of Directors believes that INNOVA and its business may be very attractive to parties other than Pollard Banknote. The Pollard Banknote Offer is open for acceptance until August 3, 2017 and remains subject to numerous conditions. Accordingly, INNOVA's shareholders should be patient and understand that tendering their Shares to the Pollard Banknote Offer before the Special Committee and its advisors have had an opportunity to fully explore all available alternatives to the Pollard Banknote Offer may preclude a financially superior transaction from emerging.

Selected Unaudited Condensed Consolidated Financial Information





For the three month
period ended March 31,


2017

2016

2015


$

$

$

Revenue

5,686,475

5,365,088

4,644,123

Gross profit

5,062,657

4,753,471

4,265,471

Net income

521,430

863,768

34,143

Total assets

34,387,031

36,254,666

35,109,394

Total long term financial liabilities

1,585,542

4,178,627

4,127,883





Reconciliation of Basic to Adjusted EPS(1)




Basic and diluted earnings per Share

0.03

0.04

-

Income taxes expense

0.03

-

-

Acquisition and related costs

0.00

-

0.02

Audit adjustment

-

-

0.01

Stock based compensation

0.01

0.01

-

Unrealized foreign exchange (gain) loss

(0.01)

(0.03)

0.02

Adjusted EPS(1)

0.06

0.02

0.05





Weighted average number of basic and diluted Shares

20,075,530

20,450,000

16,700,000



1

Adjusted EPS is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators".

 

Selected Unaudited Condensed Consolidated Financial Information (continued)




For the three month

period ended March 31,


2017

2016

2015


$

$

$

Reconciliation of net income to adjusted EBITDA(1)




Net income

521,430

863,768

34,143

Interest and financing costs (net of interest income)

16,803

40,186

68,335

Income tax expense (recovery)

507,448

(38,063)

62,284

Depreciation and amortization

726,302

618,249

485,663

Acquisition and related costs

45,581

7,090

411,842

Audit adjustment

-

-

95,807

Stock based compensation

110,873

177,259

-

Severance and related cost

(939)

-

-

Unrealized foreign exchange (gain) loss

(61,543)

(542,235)

265,006

Adjusted EBITDA(1)

1,865,955

1,126,254

1,423,080

 





For the three month

 period ended March 31,


2017

2016




LT-3 Revenue

$5,536,525

$5,050,746

AGP Revenue

$149,950

$314,342

Total Revenue

$5,686,475

$5,365,088




LT-3 Key Performance Indicators ("KPIs"):



Total units

1,948

1,940

Net units deployed

(114)

63

WPU(2)

$161

$133

ARPU(3)

$30

$29




AGP KPIs:



Total units

119

236

Net units removed

(86)

(241)

WPU(2)

$221

$187

ARPU(3)

$14

$15



1

Adjusted EBITDA is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

2

WPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

3

ARPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators".

 

Revenue

Compared to the same period in 2016, revenue increased by $0.3 million or 6% in Q1-2017 due mainly to an increase in LT-3 revenue of $0.5 million or 10%, partially offset lower alternative gaming product (AGP) revenue of $0.2 million or 52%. LT-3 revenue growth was primarily attributable to seasonal upticks in machine performances and higher average machine deployments relative to Q1-2016, most significantly in Missouri and Maryland. The lower AGP revenue is primarily attributable to the removal of 117 machines from operation relative to the end of the same period in 2016.

The increase in LT-3 WPU and ARPU was primarily attributable to LT-3 deployments into comparably higher-performance locations in Missouri, and improvements resulting from additional game features in Ontario, offsetting the decrease in the fixed fee revenue components of some contracts. The significant increase in AGP WPU is primarily due to the removal of relatively lower performing AGP machines.

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 month period ended March 31, 2017, the Company recognized $385,902 of EBITDA support compensation as part of other non-operating income (Q1-2016: $380,850). Outstanding accounts receivable from Amaya as of March 31, 2017 was $1,089,826 (Q1-2016: $703,924).

Missouri

In response to discussions with the Missouri Lottery, and members of the Missouri state legislature, we have amended our participation in the pilot program in the State of Missouri on a number of fronts, including working with liquor-by-the-drink locations to withdraw their suit against the Missouri Lottery.   In conjunction with the withdrawal of the suit, we agreed with the Missouri Lottery to withdraw our machines from the remaining liquor-by-the-drink locations. Those removals are now complete. We believe that accommodating the Missouri Lottery with the withdrawal of our machines from liquor-by-the-drink locations will facilitate the continuation of our pilot program in fraternal and veteran halls in the State of Missouri, and potentially allow us to redeploy some of the removed machines in fraternal and veteran halls in the state.

Cost of products

Compared to the same period in 2016, cost of products was flat in Q1-2017. Higher paper costs resulting from an increase in sales volume was offset by lower part repairs expenses. 

Selling expenses

Compared to the same period in 2016, selling expenses were lower by $0.1 million or 34% in Q1-2017 due mainly to lower travel expenses and shipping expenses.  

General and administrative expenses

Compared to the same period in 2016, general and administrative expenses were lower by $0.3 million or 6% in Q1-2017 mainly resulting from a decrease of payroll cost of $0.1 million, stock based compensation expense of $0.1 million, consulting expense of $0.1 million (partially related to certain one-time costs in prior year), and legal expenses of $0.1 million, partially offset by higher depreciation expense of $0.1 million due to the increased deployment of revenue producing assets.

Financial expenses

Compared to the same period in 2016, financial expenses were lower by $0.4 million or 91% in Q1-2017 due mainly to lower unrealized foreign exchange gains.

Income taxes

Compared to the same period in 2016, income taxes were higher by $0.5 million in Q1-2017 due mainly to increase in taxable earnings and lower tax losses available for offset.

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 processes ("RFP"), and we entered a new charitable market (New Hampshire) in 2016 which is now regulated by that state's lottery. 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 deployed four new game themes with multi-bet and progressive features into nearly all facilities where our machines are deployed in Ontario. These new game themes have been well received and have helped to further increase WPU and ARPU figures.  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 period from 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. An aggregate of 376,600 Shares were purchased and cancelled under this program at an average price per Share of CAD$1.36 for a total amount of CAD$510,334

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

INNOVA will host a conference call later today, Thursday, May 11, 2017 at 10:00 a.m. (Eastern Time) to discuss its 2017 first quarter financial results. Richard Weil, Chairman & Chief Executive Officer of INNOVA, and Stephen Koo, Chief Financial Officer of INNOVA, will lead the call.


Participant Dial-in

Webcast

Reference Number

Conference Call

 

647-427-7450; or

1-888-231-8191

http://bit.ly/2oEFCWb


Replay

(available for 2 weeks)

416-849-0833; or

1-855-859-2056


13585191

 

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 March 31, 2017, INNOVA had 20,073,400 Shares outstanding, no preferred shares outstanding and 866,551 options entitling their holders to acquire one Share per option and 190,618 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-month period ended March 31, 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 Strategic Review Process, 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



March 31,
2017

$

December 31,
2016

$




ASSETS



Current



Cash

9,487,916

10,560,806

Accounts receivable

3,981,534

2,948,497

Inventories

1,084,468

1,047,378

Prepaid expenses and deposits

961,220

653,807

Income taxes receivable

-

29,166


15,515,138

15,239,654







Property and equipment

8,933,589

9,520,953

Intangibles

1,998,012

1,894,737

Deferred income taxes

7,801,382

7,656,681

Long term prepaid expenses and deposits

138,910

95,784


34,387,031

34,407,809




LIABILITIES



Current



Accounts payable and accrued liabilities

2,164,549

2,797,983

Income tax payable

603,664

-

Deferred revenue

1,268,223

1,201,902

Current portion of equipment financing

925,236

1,215,571

Current portion of long term debt

355,058

380,989


5,316,730

5,596,445




Deferred revenue

954,429

1,173,201

Equipment financing

423,937

516,392

Deferred income taxes

125,308

107,615

Long term debt

81,868

152,427


6,902,272

7,546,080




SHAREHOLDERS' EQUITY



Share capital

21,349,377

21,358,650

Share issuance reserve

1,316,742

1,205,869

Retained earnings

4,818,640

4,297,210


27,484,759

26,861,729


34,387,031

34,407,809

 

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




For the three month
period ended March 31,


2017

$

2016

$




Revenue

5,686,475

5,365,088

Cost of products

623,818

611,617

Gross Profit

5,062,657

4,753,471




Selling expenses

230,332

349,245

General and administrative expenses

4,193,128

4,454,928

Income (loss) from operations

639,197

(50,702)




Financial expenses

37,361

64,697

Interest income

(20,558)

(24,511)

Effects of foreign exchange gain

(63,813)

(535,256)

Other non-operating income

(342,671)

(381,337)

Income before income taxes

1,028,878

825,705




Current income tax expense

634,455

107,795

Deferred income tax recovery

(127,007)

(145,858)

Net income and comprehensive income

521,430

863,768




Basic and diluted earnings per share

0.03

0.04

 

Unaudited Condensed Consolidated Interim Statements of Cash Flows
In US dollars




For the three month
period ended March 31,


2017

$

2016

$




Cash (used in) operating activities



Net income

521,430

863,768

Adjustments to reconcile net income to net cash



provided by operating activities:




Loss (gain) on disposal of property, equipment and intangibles

44,576

(487)


Depreciation and amortization expense

726,302

618,249


Share-based compensation expense

110,873

177,259


Unrealized foreign exchange gain

(60,467)

(512,380)


Deferred income tax recovery

(127,007)

(145,858)


Decrease in deferred revenue

(218,772)

(152,451)


(Increase) decrease in long term prepaid expenses and deposits

(43,126)

2,513


Income tax expense recognized in net income

634,455

107,795


Interest expense

34,528

60,638


Interest income

(20,558)

(24,511)

Changes in non-cash operating elements of working capital

(1,944,653)

(959,534)

Income taxes paid

(1,625)

(23,476)

Interest paid

(34,528)

(60,638)


(378,572)

(49,113)

Cash (used in) investing activities



Purchase of property, equipment and intangibles

(286,789)

(542,762)

Proceeds from sale of property, equipment and intangibles

-

487


(286,789)

(542,275)

Cash (used in) financing activities



Repurchase of shares

(9,273)

-

Repayment of debt

(96,490)

(89,941)

Repayment of equipment financing

(386,508)

(332,185)

Interest income

20,558

24,511


(471,713)

(397,615)




Decrease in cash

(1,137,074)

(989,003)

Cash – beginning of period

10,560,806

11,098,280

Effects of foreign exchange on cash

64,184

556,973

Cash – end of period

9,487,916

10,666,250

 

SOURCE INNOVA Gaming Group

For further information: please contact Jonathan Ross, LodeRock Advisors, INNOVA Investor Relations, jon.ross@loderockadvisors.com, Tel: (416) 283-0178


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890