TABLE OF CONTENTS
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Amaya Gaming Group Inc. and its subsidiaries as at December 31, 2012 and December 31, 2011 and their financial performance and their cash flows for the years ended December 31, 2012 and December 31, 2011 in accordance with International Financial Reporting Standards. Signed Richter LLP1 Chartered Professional Accountants Montral, Qubec April 29, 2013
1
CPAauditor,CApermitnoA112505
2 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
ASSETS Current Cash and cash equivalents (note 5) Investment tax credits receivable (note 6) Accounts receivable (note 7) Investment in marketable securities (note 8) Income tax receivable Inventories (note 9) Current maturity of receivable under finance lease (note 10) Prepaid expenses and deposits Restricted cash (note 11) Goodwill and intangible assets (note 12) Property and equipment (note 13) Deferred development costs (net of accumulated amortization of $1,314,318 ; 2011 - $1,036,521) Receivable under finance lease (note 10) Investment tax credit receivable long-term (note 6) Deferred income taxes (note 14) LIABILITIES Current Bank indebtedness (note 15) Accounts payable and accrued liabilities (note 16) Provisions (note 17) Customer deposits Income tax payable Current maturity of long-term debt (note 18) Current maturity of equipment financing (note 19) Deferred revenue Convertible debentures (note 20) Long-term debt (note 18) Equipment financing (note 19) Provisions (note 17) Holdback of purchase price (note 34) Deferred income taxes (note 14) Commitments (note 21) and contingency (note 31) SHAREHOLDERS EQUITY Share capital (note 22) Contributed surplus (note 23) Accumulated other comprehensive income (loss) Deficit
31,327,745 787,449 45,235,016 422,368 7,530,793 3,611,295 8,809,827 97,724,493 5,093,108 180,732,715 36,674,350 1,485,824 10,764,292 2,350,386 14,249,436 349,074,604
3,049,387 433,595 4,732,500 2,331,999 178,704 983,246 2,269,924 2,348,144 16,327,499 118,585 10,370,957 6,779,715 668,943 8,292,839 1,215,487 3,427,448 47,201,473
32,451,222 7,539,742 13,902,892 1,498,596 6,133,862 1,019,985 62,546,299 149,320 23,118,845 99,366,585 1,114,925 5,260,235 4,974,500 6,964,418 203,495,127 154,771,764 2,351,415 (835,371) (10,708,331) 145,579,477 349,074,604
2,096,656 2,403,427 300,000 4,800,083 46,719 725,000 5,571,802 42,921,994 1,814,990 363,021 (3,470,334) 41,629,671 47,201,473
See accompanying notes Approved and authorized for issue on behalf of the Board on April 29, 2013
Number
Deficit $
Balance January 1, 2011 Issue of common shares in relation to private placement Issue of common shares in relation to Chartwell Technologies purchase Transaction costs relating to the issue of units Deferred income taxes in relation to transaction costs Issue of warrants in relation to private placement Issue of common shares in relation to exercised warrants Issue of common shares in relation to exercised employee stock options Stock based compensation Net loss Other comprehensive income (loss) Balance December 31, 2011 Balance January 1, 2012 Deferred income taxes in relation to transaction costs Issue of equity component of convertible debentures and warrants, net of transaction costs Issue of common shares in relation to exercised warrants Issue of common shares in relation to exercised employee stock options Stock based compensation Issue of common shares in relation to conversion of convertible debentures Issue of equity in relation to private placement Transaction costs in relation to private placement Net effect of transactions with noncontrolling interest (note 34) Net loss Other comprehensive income (loss) Balance December 31, 2012
39,544,923 3,300,000
18,743,763 10,230,000
1,261,344
(1,544,309)
18,460,798 10,230,000
2,779,356 4,321,668
132,858 (522,960)
717,534
1,411,107
685,925 (270,603)
685,925 1,140,504
730,450
1,321,206
(292,806) 880,825
1,028,400 880,825
(82,916) 2,351,415
Revenues (note 33) Cost of products (note 35) Gross profit Expenses Selling (note 35) General and administrative (note 35) Financial (note 35) Acquisition-related costs (note 34) Realized gain on sale of marketable securities Loss before income taxes Current income taxes (note 14) Deferred income taxes (note 14) Net loss Other Comprehensive income (loss), net of tax Unrealized gain on marketable securities Foreign currency translation loss Total Comprehensive Loss Basic and diluted earnings per common share (note 36)
76,435,009 1,224,795 75,210,214 11,683,890 61,676,556 6,816,527 6,028,339 86,205,312 (913,352) (10,081,746) 807,336 (3,776,730) (7,112,352) (1,198,392) (1,198,392) (8,310,744) $(0.11)
18,375,249 1,357,225 17,018,024 6,481,209 13,743,139 679,820 20,904,168 (3,886,144) 42,833 (2,002,952) (1,926,025) 596,189 (233,168) 363,021 (1,563,004) $ (0.04)
Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 5
Operating activities Net loss Interest accretion on promissory notes Interest accretion on convertible debentures Interest accretion on long term debt Gain on sale of property and equipment Unrealised loss on foreign exchange Unrealised gain on marketable securities Depreciation of property and equipment Amortization of intangible assets Amortization of deferred development costs Transfer of inventory to property and equipment Deferred income taxes Stock-based compensation Finance lease Accrued acquisition-related costs Accrued transaction costs Research and development tax credits Changes in non-cash operating elements of working capital (note 29) Financing activities Bank indebtedness Repayment of promissory notes Proceeds from special warrants Issuance of capital stock Transaction costs relating to the issuance of capital stock Issuance of capital stock in relation with exercised warrants Issuance of capital stock in relation with exercised ESOP Repayment of long-term debt Investing activities Deferred development costs Additions to property and equipment Acquired intangible assets Disposal of license and software Proceeds from sale of property and equipment Proceeds from sale of marketable securities Investment in marketable securities Investment in subsidiaries (net of cash acquired) (note 29) Increase (decrease) in cash and cash equivalents Cash and cash equivalents beginning of year Unrealized foreign exchange difference in cash and cash equivalents Cash and cash equivalents end of year
(7,112,352) 1,185,219 274,937 (87,597) (319,659) (913,352) 3,486,934 6,156,877 314,967 (1,710,701) (3,776,730) 880,825 (3,812,824) 800,000 (118,137) 441,031 (4,310,562) (22,105,906) (26,416,468) (2,096,656) 26,597,603 107,408,430 (2,918,972) 1,140,504 1,028,400 (300,000) 130,859,309 (1,572,361) (6,685,044) (2,659,425) 1,004,940 352,668 (66,415,043) (75,974,265) 28,468,576 3,049,387 (190,218) 31,327,745
(1,926,025) 9,280 (262,633) 797,804 978,696 383,504 (2,002,952) 989,009 (7,783,408) 579,517 (8,237,208) (2,960,495) (11,197,703) (250,008) (460,443) 10,230,000 (947,930) 6,367,132 172,000 (300,000) 14,810,751 (960,246) (2,323,390) (3,810,702) 12,204,566 (1,166,424) (13,737,675) (9,793,871) (6,180,823) 9,260,960 (30,750) 3,049,387
6 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
2. Private Placement
On June 15, 2011, the Corporation completed a private placement offering of 3,300,000 common shares at a price of $3.10 per common share for aggregate gross proceeds of $10,230,000. The offering was conducted through a syndicate of underwriters that were paid an aggregate underwriting commission of $613,800 and granted compensation warrants to purchase an aggregate number of 198,000 common shares at a price of $3.10 per common share. The compensation warrants expire on June 15, 2013. The total transaction costs of the offering, including the underwriters compensation warrants, amounted to $947,930.
On June 27, 2012, the Corporation completed a private placement offering of 25,568,400 common shares at a price of $4.05 Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 7 per common share for aggregate gross proceeds of $103,552,020. On July 12, 2012 the Corporation completed the final closing under its private placement financing issuing 952,200 additional common shares at $4.05 per common share, for additional gross proceeds of $3,856,410. Gross proceeds raised under the Private Placement, including proceeds raised under the first closing, is $107,408,430. The total transaction costs of the offering, including underwriters compensation, amounted to $2,918,972.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries. A wholly owned subsidiary is an entity over which the Corporation has control, where control is defined as the power to govern financial and operating policies. On consolidation, all significant inter-entity transactions and balances have been eliminated. As at December31, 2012, the consolidated financial statements included fifty-three wholly owned subsidiaries. A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. The Corporations interests in jointly controlled entities are accounted for by proportionate consolidation. The Corporation combines its share of the joint ventures individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Corporations financial statements. At December 31, 2012, the joint-venture has no significant impact on the Corporations consolidated financial statements.
REVENUE RECOGNITION
8 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
Revenue is recognized when all the following criteria are met: the Corporation has transferred to the buyer the significant risks and rewards; the amount of revenue can be reliably measured; it is probable that the economic benefits associated with the transaction will flow to the Corporation; and the costs incurred or to be incurred in respect of the transaction can be reliably measured.
Product Sales
Revenue from product sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled Corporation obligations that affect the customers final acceptance of the arrangement. Any cost of warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized.
Participation arrangements
In contracts that stipulate profit sharing arrangements, revenues are earned based on revenue splits established in the contracts and can vary depending on the contracts. Revenues are recognized when performance has been achieved and collectability is reasonably assured.
Service fees
Service fees are made up of network administration and hosting. The Corporation provides continuing services for a fixed monthly rate and fees are reported on an accrual basis during the period of service.
Software Licensing
License fees, including fees from master license agreements, most of which are contingent upon licensees customer usage, are calculated as a percentage of each licensees level of activity. The license fees are recognized on an accrual basis as earned.
Hosted Casino
Revenues from Hosted Casino are recognized as the services are performed, on a daily basis, at the time of the gambling transactions.
Lease revenues
In the course of its normal business the Corporation enters into lease agreements for its gaming equipment.
Assets subject to finance leases are initially recognized at an amount equal to the net investment in the lease, which is the fair Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 9 value of the asset, or, if lower, the present value of the minimum lease payments. Revenue is recognized on the basis of policy for product sales. Interest income is subsequently recognized over the term of the applicable leases based on the effective interest rate method. Interest income is grouped with the revenues, in the statement of comprehensive income (loss). Assets under operating leases are included in property and equipment. Lease income from operating leases is recognized on a straight-line basis over the term of the lease and is included in revenues, in the statement of comprehensive income (loss).
Group companies
Each foreign operation determines its own functional currency and items included in the financial statements of each foreign operation are measured using that functional currency. The results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
(ii) income and expenses for each statement of comprehensive income (loss)are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and (iii) all resulting exchange differences are recognized in other comprehensive income (loss). The following functional currencies are referred to herein below:
10 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
Currency Symbol
Currency Description
CAD USD EUR KES UGX GBP AMD MDL DOP AUS CHF DKK JPY NOK MXN SEK
Canadian Dollar United States Dollar Euro Kenyan shilling Ugandan shilling Pound Sterling Armenian Dram Moldovan Leu Dominican Peso Australian Dollar Swiss Franc Danish Krone Japanese Yen Norwegian Kroner Mexican Pesos Swedish Krona
BUSINESS COMBINATION
Business combinations are accounted for using the acquisition method. Under this method, the identifiable assets acquired and liabilities assumed, including contingent liabilities, are recognized, regardless of whether they have been previously recognized in the acquirees financial statements prior to the acquisition. On initial recognition, the assets and liabilities of the acquired subsidiary are included in the consolidated statement of financial position at their fair values. Goodwill is recorded when the identifiable intangible assets have been determined. Goodwill is the excess of the fair value of the consideration transferred over the fair value of the Corporations share in the acquirees net identifiable assets on the date of acquisition. Any excess of the identifiable net assets over the consideration transferred is recognized in income immediately. The consideration transferred by the Corporation to acquire control of a subsidiary is calculated as the sum of the acquisitiondate fair values of the assets transferred, liabilities incurred and equity interests issued by the Corporation, including the fair value of all the assets and liabilities resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred.
OPERATING SEGMENTS
The Corporations operating segments are organized around the markets it serves and are reported in a manner consistent with the internal reporting provided to the Chairman and Chief Executive Officer, the Corporations chief operating decisionmaker. An operating segment is a component of the Corporation that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Corporation. Currently the Corporation has only one operating segment, Diversified Gaming Solutions.
FINANCIAL INSTRUMENTS
Financial assets
Financial assets are initially recognized at fair value and are classified either as fair value through profit and loss; availablefor-sale; held-to-maturity; or loans and receivables. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition.
Available-for-sale
Available-for-sale assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included in other non-current financial assets unless management intends to dispose of the investment within twelve months of the consolidated statements of financial position date. Financial assets classified as available-for-sale are carried at fair value with the changes in fair value recorded in other comprehensive income (loss), except for investments in equity instruments that do not have a quoted market price in an active market which are measured at cost. Interest on available-for-sale assets is calculated using the effective interest rate method and is recognized in the net income (loss). When a decline in fair value is determined to be other-than-temporary, the cumulative loss included in accumulated other comprehensive income (loss) is removed and recognized in the consolidated statement of comprehensive income (loss). Gains and losses realized on disposal of available-for-sale securities are recognized in comprehensive income (loss). Investments in marketable securities were classified as available-for-sale.
Impairment
At the end of each reporting period, the Corporation assesses whether a financial asset or a group of financial assets, other than those classified as fair value through profit and loss, is impaired. If there is objective evidence that impairment exists, the loss is recognized in the consolidated statements of comprehensive income (loss). The impairment loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of comprehensive income (loss).
Financial Liabilities
Financial liabilities are classified as either financial liabilities at fair value through profit or loss, or other financial liabilities. Financial liabilities are initially measured at fair value and subsequently measured at amortized cost using the effective interest rate method for liabilities that are not hedged and fair value for liabilities that are hedged. All financial liabilities are classified as other liabilities.
Transaction costs
12 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities (other than financial assets and financial liabilities that are classified as Through Profit or Loss) are added to or deducted from the fair value of the financial instrument on initial recognition. These costs are expensed to interest on the consolidated statement of comprehensive income (loss) over the term of the related financial asset or financial liability using the effective interest method. When a debt facility is retired by the Corporation, any remaining balance of related debt transaction costs is expensed to interest on the consolidated statement of comprehensive income (loss) in the period that the debt facility is retired. Transactions costs related to financial instruments at fair value through profit or loss are expensed when incurred.
amortized cost using the effective interest method. The equity components of the convertible debentures are not re-measured subsequent to initial recognition.
Embedded derivatives
Derivatives may be embedded in other financial and non-financial instruments (the host instrument). Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not held-for-trading or designated at fair value. These embedded derivatives are measured at fair value with subsequent changes recognized in the consolidated statement of comprehensive income (loss). The Corporation has no embedded derivatives.
The Corporation estimates the fair value of its financial instruments based on current interest rates, market values and Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 13 pricing of financial instruments with comparable terms. Fair value estimates are made as of a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and may not be determined with precision.
INVENTORY VALUATION
Inventories are priced at the lower of cost or net realizable value. Cost is determined on a weighted average basis. The cost of inventories comprises all costs of purchase and other costs incurred in bringing the inventory to its present location and condition. Raw materials and purchased finished goods are valued at purchase cost. Net realizable value represents the estimated selling price for inventory less all estimated costs necessary to make the sale.
PREPAID EXPENSES
Prepaid expenses consist of amounts paid in advance or deposits made for which the Corporation will receive goods or services within the next normal operating cycle.
INTANGIBLE ASSETS
Software Licenses Declining balance Straight-line 20% Over the term of licenses
ACQUISITION-RELATED INTANGIBLES
14 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
Straight-line Straight-line
5 years 15 years
The depreciation method, useful life and residual values are assessed annually and the assets are tested for impairment, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Upon retirement or disposal, the cost of the asset disposed of and the related accumulated amortization are removed from the accounts and any gain or loss is reflected in earnings. Expenditures for repairs and maintenance are expensed as incurred.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business acquisition. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment at least annually or more frequently if circumstances such as significant declines in expected sales, earnings or cash flows indicate that it is more likely than not that the asset might be impaired.
Impairment losses recognized for a CGU (or group of CGU) first reduce the carrying amount of any goodwill allocated to that Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 15 CGU and then reduce the carrying amounts of the other assets of the CGU (or group of CGU) pro rata on the basis of the carrying amount of each asset in the CGU (or group of CGU). An impairment loss recognized for goodwill may not be reversed. On each reporting date, the Corporation assesses if there is an indication that impairment losses recognized in previous periods for other assets have decreased or no longer exist. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. The increased carrying amount of an asset attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized.
TAXATION
Income tax expense represents the sum of current and deferred taxes. Current and deferred taxes are recognized in the consolidated statement of comprehensive income (loss), except to the extent it relates to items recognized in other comprehensive income (loss) or directly in equity.
Current tax
The tax currently payable is based on taxable income for the year. Taxable income differs from earnings as reported in the consolidated statements of comprehensive income (loss) because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Corporations liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax
Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable income. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable income will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable income nor the accounting earnings. Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, except where the Corporation is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable income against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Corporation expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against
16 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Corporation intends to settle its current tax assets and liabilities on a net basis.
STOCK-BASED COMPENSATION
The Corporation has one share option plan and accounts for grants under this plan in accordance with the fair value-based method of accounting for stock-based compensation. Compensation expense for equity settled stock options awarded to employees under the plan is measured at the fair value at the grant date using the Black-Scholes valuation model and is recognized using the graded vesting method over the vesting period of the options granted. Compensation expense recognized is adjusted to reflect the number of options that has been estimated by management for which conditions attaching to service will be fulfilled as of the grant date until the vesting date so that the ultimately recognize expense corresponds to the options that have actually vested. The compensation expense credit is attributed to contributed surplus when the expense is recognized in income or loss. When options are exercised or shares are purchased, any consideration received from employees as well as the related compensation cost recorded as contributed surplus are credited to share capital. Non-employee equity-settled share-based payments are measured at the fair value of the goods and services received, except where that fair value cannot be estimated reliably. If the fair value cannot be measured reliably, non-employee equity-settled share-based payments are measured at the fair value of the equity instrument granted, measured at the date the entity obtains the goods or the counterparty renders the service. The Corporation subsequently measures non-employee equitysettled share-based payments at each vesting period and settlement date, with any changes in fair value recognized in the consolidated statement of comprehensive income (loss). Stock-based compensation expense is recognized over the contract life of the options or the option settlement date, whichever is earlier.
LEASES
The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the arrangement conveys a right to use the asset. When substantially all risks and rewards of ownership are transferred from the lessor to the lessee, lease transactions are accounted for as finance leases. All other leases are accounted for as operating leases.
PROVISIONS
Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 17 Provisions represent liabilities to the Corporation for which the amount or timing is uncertain. Provisions are recognized when the Corporation has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at the present value of the expected expenditures required to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in provisions due to the passage of time is recognized in interest on the consolidated statement of comprehensive income (loss). Provisions are not recognized for future operating losses. The Corporations current product warranty includes a twelve month warranty period for defects in design, materials and workmanship. Provisions for product warranties are recorded at the time of shipment of products to customers. The Corporation accrues a provision for estimated future warranty costs based upon the historical relationship of warranty claims to sales. The Corporation periodically reviews the adequacy of its product warranties and adjusts, if necessary, the warranty percentage and accrued warranty reserve for actual historical experience. As at December 31, 2012, the Corporation did not have any significant provision for product warranty (December 31, 2011 $nil).
ROYALTIES
The Corporation licenses various royalty rights from several owners of intellectual property rights. These rights are used to produce games for use in Hosted Casino and Branded Games. Generally, the arrangements require material prepayments of minimum guaranteed amounts which have been recorded as prepayments in the consolidated statements of financial position. These prepaid amounts are amortized over the life of the arrangement as gross revenue is generated or on a straightline basis if the underlying games are expected to have an effective royalty rate greater than the agreed amount. The amortization of these amounts is recorded as royalty expense. The Corporation regularly reviews its estimates of future revenues under its license arrangements.
The consolidated financial statements include estimates based on currently available information and Managements
18 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
judgment as to the outcome of future conditions and circumstances. Management uses historical experience, general economic conditions and trends, as well as assumptions regarding probable future outcomes as the basis for determining estimates. Estimates and their underlying assumptions are reviewed on a regular basis and the effects of any changes are recognized immediately. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions. The following areas require managements most critical estimates and judgments.
ESTIMATES
Goodwill
The recoverable amount of the operating segment, representing the group of CGUs to which goodwill is allocated, is based on the higher of fair value less costs to sell and value in use. The recoverable amount was calculated as at December 31, 2012 based on fair value less costs to sell. The fair value less cost to sell is the amount for which the CGU could be exchanged between knowledgeable willing parties in an arms length transaction, less cost to sell. Management undertakes an assessment of relevant market data, which is the market capitalization of the Corporation and in addition use a discounted cash flow model. Estimated future cash flows for the first five years were based on the budget and strategic plans. A growth rate of 2.5% was applied to the last year of the strategic plan to derive estimated cash flows beyond the initial five-year period. The post-tax discount rate is also a key estimate in the discounted cash flow model and is based on a representative weighted average cost of capital. The pre-tax discount rate used to calculate the recoverable amount as at December 31, 2012 was 12.00%. As at December 31, 2012 and 2011 there was no need for impairment.
The key assumptions utilized in the determination of future cash flows represent managements best estimate of the range of Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 19 economic conditions relating to the CGU, and are based on historical experience, economic trends, and communications with other key stakeholders of the Corporation. These key assumptions include the revenue growth rate, EBITDA margin as a percentage of revenues, capital expenditures as a percentage of revenues, and the inflation growth rate. Significant changes in the key assumptions utilized in the determination of future cash flows could result in an impairment charge or reversal of an impairment loss. As at December 31, 2012 and 2011, there was no need for an impairment charge.
1
Inventory write-down
Periodical reviews of the inventory are performed for excess inventory, obsolescence and declines in net realizable value below cost and allowances are recorded against the inventory balance for any such declines. The Corporation writes down the value of ending inventory for obsolete and unmarketable inventory equal to the difference between the cost of inventory and the net realizable value. These reviews require Management to estimate future demand for products and evaluate market conditions. Possible changes in these estimates could result in a write-down of inventory. If actual market conditions are less favourable than those projected, additional inventory write-downs may be required.
Income taxes
Deferred tax assets and liabilities are due to temporary differences between the carrying amount for accounting purposes and the tax basis of certain assets and liabilities, as well as undeducted tax losses. Estimation is required for the timing of the reversal of these temporary differences and the tax rate applied. The carrying amounts of assets and liabilities are based on amounts recorded in the financial statements and are subject to the accounting estimates inherent in those balances. The tax basis of assets and liabilities and the amount of undeducted tax losses are based on the applicable income tax legislation, regulations and interpretations. The timing of the reversal of the temporary differences and the timing of deduction of tax losses are based on estimations of the Corporations future financial results.
1 EBITDA as defined by the Corporation means earnings before interest and financing costs (net of interest income), income taxes, depreciation
and amortization, stock-based compensation, restructuring and other non-recurring costs, and non-controlling interests. EBITDA is a nonIFRS measure.
The Corporation recognizes an income tax expense in each of the jurisdictions in which it operates. However, actual amounts
20 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
of income tax expense only become final upon filing and acceptance of the tax return by the relevant authorities, which occur subsequent to the issuance of the financial statements. Additionally, estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of the ability to use the underlying future tax deductions before they expire against future taxable income. The assessment is based upon enacted or substantively enacted tax laws and estimates of future taxable income. To the extent estimates differ from the actual amounts determined when preparing the final tax returns, earnings would be affected in a subsequent period. As at December31, 2012 and 2011, it was determined that no valuation allowance was necessary. Changes in the expected operating results, enacted tax rates, legislation or regulations, and the Corporations interpretations of income tax legislation, will result in adjustments to the expectations of future timing difference reversals, and may require material deferred tax adjustments. To the extent that forecasts differ from actual results, adjustments are recognized in subsequent periods.
JUDGMENTS
Finance leases
Judgement is required in the initial classification of leases as either operating leases or finance leases and, in respect of finance leases, determining the appropriate discount rate implicit in the lease to discount minimum lease payments. The useful life of the leased property is determined by Management at the inception of the lease. The useful life is based on historical experience with similar products as well as anticipation of future events, which may impact their useful economic life, such as changes in technology. The estimated fair values established at lease inception is periodically reviewed to determine if values are realizable, which depends on the credit risk of the lessee, market conditions and other subjective and qualitative factors.
FINANCIAL INSTRUMENTS
In October 2010, the IASB issued IFRS 9, Financial Instruments (IFRS 9), which is the result of the first phase of the IASBs project to replace IAS 39, Financial Instruments: Recognition and measurement (IAS 39). IFRS 9 uses a single model approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple classification and measurement models in IAS 39. In December 2011, the IASB amended the transition date of IFRS 9, which requires the application of IFRS 9 for periods beginning on or after January 1, 2015. The previous transition date was January 1st, 2013. The Corporation has not yet assessed the impact of the adoption of this standard on its consolidated financial statements
CONSOLIDATION
In May 2011, the IASB released IFRS 10, Consolidated Financial Statements, which replaces SIC-12, Consolidation Special Purpose Entities, and parts of IAS 27, Consolidated and Separate Financial Statements. The new standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included in a Corporations consolidated financial statements. The standard provides additional guidance to assist in the determination of control where it is difficult to assess. IFRS 10 will be effective for the Corporations fiscal years beginning on January 1, 2013, with earlier application permitted. The Corporation is currently assessing the impact of the adoption of this standard, and does not expect material changes on its consolidated financial statements.
JOINT ARRANGEMENTS
In May 2011, the IASB released IFRS 11, Joint Arrangements, which supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities Non-monetary Contributions by Venturers. IFRS 11 focuses on the rights and obligations of a joint arrangement, rather than its legal form as is currently the case under IAS 31. The standard addresses inconsistencies in the reporting of joint arrangements by requiring the equity method to account for interests in joint ventures. IFRS 11 will be effective for the Corporations fiscal years beginning on January 1, 2013, with earlier application permitted. The Corporation currently uses proportionate consolidation to account for its interests in a joint venture, but may have to apply the equity method under IFRS 11. The Corporation is currently assessing the impact of the adoption of this standard on its consolidated financial statements.
In May 2011, the IASB released IFRS 13, Fair Value Measurement. IFRS 13 will improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The standard will be effective for the Corporations fiscal years beginning on January 1, 2013, with earlier application permitted. The Corporation is currently assessing the impact of the adoption of this standard on its consolidated financial statements.
Cash in bank Guaranteed investment certificate (Yield of 0.9%; maturing January 19, 2012)
31,327,745 31,327,745
Research and development investment tax credits 2007 2008 2009 2010 2011 2012 Investment tax credit receivable Investment tax credit receivable long-term
7. Accounts receivable
Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 23 The Corporations accounts receivable include the following:
December 31, 2012 Amount CAD equivalent Amount December 31, 2011 CAD equivalent
CAD USD EUR KES GBP UGX DOP MDL AMD AUS CHF JYP NOK MXN SEK
983,258 34,498,906 4,448,520 42,120,595 759,513 74,317,796 5,723,818 246,492 4,480,428 25,333 7,128 478,756 229 20,115,421 6,548,387
983,258 34,321,504 5,851,654 490,566 1,221,191 28,024 143,028 20,477 11,069 26,147 7,765 5,525 41 1,543,510 581,257 45,235,016
9. Inventories
December 31, 2012 $ December 31, 2011 $
The cost of inventory recognized as an expense during the year ended December 31, 2012 was approximately $1,224,795 (2011 $1,357,000). The amount of inventory write-downs recognized as an expense in the cost of products for the same period was $nil (2011 $61,000). In 2012 and 2011 there were no reversals of write-downs from the previous years.
Total minimum lease payments receivable Unearned finance income Current maturity of receivable under finance lease
Finance income recognized in revenue for year ended December 31, 2012 amounted to $300,716 (2011 $59,818).
The present value of minimum lease payments receivable, unearned finance income and future minimum lease payments
24 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
COST
AcquisitionRelated Intangibles $
Software $
Licenses $
Goodwill $
Total $
Balance January 1, 2011 Additions Disposals Reclassifications Translation Balance December 31, 2011 Additions Additions from business combinations Disposals Reclassifications Translation Balance December 31, 2012
162,355 3,761,175 4,532,332 (176,058) 13,703 (3,910) 3,757,265 4,532,332 434,929 2,531,106 79,373,257 (52,071) (109,456) (41,058) 273,941 6,520,715 84,179,530
1,602,775 1,401,572 9,744,605 (176,058) 13,703 (3,910) 1,401,572 11,181,115 2,659,425 92,286,732 174,356,358 (1,004,941) 276,171 511,540 93,964,475 187,703,497
Software $
Licenses $
Goodwill $
Total $
Balance January 1, 2011 Amortization Disposals Translation Balance December 31, 2011 Amortization Translation Balance December 31, 2012
CARRYING AMOUNT
AcquisitionRelated Intangibles $
Software $
Licenses $
Goodwill $
Total $
1,346,656 2,543,344
3,497,134 4,336,701
4,125,595 79,888,195
26 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
Total $
Balance January 1, 2011 Additions Reclassifications Translation Balance December 31, 2011 Additions Additions from business combinations Additions from inventory Disposals Reclassifications Translation Balance December 31, 2012
3,232,247 1,610,616 (61,315) 4,781,548 4,777,033 17,435,604 1,710,701 (170,563) 169,905 671,898 29,376,126
764,250 160,556 (4,042) (15,485) 905,279 533,921 1,958,690 (52,225) (13,346) 3,332,319
349,399 4,438,504 1,711,343 3,942,530 (65,357) (15,485) 2,060,742 8,300,192 1,223,738 6,685,044 3,655,535 25,527,071 1,710,701 (232,316) (455,104) 166,925 75,253 751,230 6,782,952 42,686,059
Total $
Balance January 1, 2011 Depreciation Reclassifications Translation Balance December 31, 2011 Depreciation Disposals Reclassifications Translation Balance December 31, 2012
787,304 797,804 (61,315) (3,316) 1,520,477 3,486,934 (279,222) 131,599 1,151,921 6,011,709
CARRYING AMOUNT
RevenueProducing Assets $ Machinery and Equipment $ Furniture and Fixtures $ Computer Equipment $
Total $
3,948,230 25,770,532
676,323 2,844,315
467,266 2,494,268
1,687,896 5,565,235
6,779,715 36,674,350
Statutory income taxes Non-taxable income Non-deductible expenses Differences in effective income tax rates in foreign jurisdictions Decrease in valuation allowance Acquisition of subsidiaries Non-capital losses for which no tax benefit has been recorded Change in tax rates Other Income taxes
Significant components of the Corporations deferred income tax assets at December 31, 2012 were as follows:
Finance Lease $
Intangibles $
Tax Losses $
Other $
Total $
At January 1, 2011 Charged / (credited) to the income statement Charged / (credited) to other comprehensive income Charged / (credited) directly to equity Acquisition of subsidiary At December 31, 2011 Charged / (credited) to the income statement Charged / (credited) to other comprehensive income Charged / (credited) directly to equity Acquisition of subsidiary At December 31, 2012
100,000 59,000
470,500
533,000
(568,000) (1,792,000)
52,000
1,115,000 2,968,000
1,180,000 1,757,500
(2,360,000) (1,664,000)
317,500
(1,717,000) 2,069,000
(4,024,000) (19,956,000)
352,000 7,285,000
As at December 31, 2012, the Corporation had Federal and Provincial non-capital losses of approximately $27,759,378 and $21,803,836 respectively (December 31, 2011 $19,385,000; $8,847,000) that may be applied against earnings of future years, not later than 2031. The Corporations foreign subsidiaries have non-capital losses of approximately $26,115,176 (December 31, 2011 - $1,578,000) that may be applied against earnings in future years, no later than 2016. The possible income tax benefit of these losses has been recognized in the accounts. As at December 31, 2012, the Corporation had undeducted research and development expenses of approximately $1,156,500 federally and $2,898,670 provincially (December 31, 2011 $656,518; $2,807,307) with no expiration date. The deferred income tax benefits of these deductions are recognized in the accounts.
28 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
CAD USD EURO KES UGX GBP AMD MDL DOP SEK MXN DKK TOTAL
3,646,172 13,902,136 6,405,161 12,721,417 47,484,212 828,516 19,205,345 688,294 906,696 31,961,465 449,575 27,882
3,646,172 13,831,439 8,424,696 148,162 17,906 1,333,163 47,445 57,180 22,604 4,883,040 34,497 4,918 32,451,222
17. Provisions
The provision in the statement of financial position is for the provision for jackpots and estimate of contingent consideration in connection with the acquisition of OnGame (see note 34). The carrying amounts and the movements in the provision are as follows:
December 31, 2012
Balance January 1, 2012 Additional provision for jackpots Contingent consideration in connection with OnGame acquisition Jackpot provision amounts utilised Balance December 31, 2012 Short-term portion Long-term portion
(a)
Subordinated Debt
On April 29, 2010 the Corporation entered into a subordinated debt agreement in the amount of $3,000,000 which is disbursable in two tranches of $1,500,000 each, closing no later than April 30, 2010 and twelve months after the first drawing respectively, pursuant to the conditions of the related loan agreement. On April 30, 2010 the first tranche amounting to $1,500,000 was disbursed. The Corporation did not draw on the second $1,500,000 tranche and has waived its rights to draw on the second tranche. The subordinated debt is repayable in equal monthly instalments over a five-year period. The loan bears interest at the annual rate of 14% plus an additional interest representing 1% of yearly gross sales of the Corporation for the first $25,000,000 of sales and an additional 0.20% for sales over $25,000,000. In the event that only the first drawing is disbursed by the lender, the calculation of the additional interest shall be adjusted to 0.5% of the first $25,000,000 of the Corporations gross sales for a given year, and to 0.1% of the Corporations gross sales exceeding $25,000,000 for a given year. Any amount, principal or interest, which is not paid when due will bear interest at the annual rate of 25% until it is paid in full. Under the terms of the subordinated debt agreement with the lender, the Corporation is required, amongst other conditions, to maintain at all times certain ratios. As at December 31, 2012, the Corporation was in breach of the Fixed Charge Coverage ratio but had previously received a waiver from the lender that the breach of the ratio will not result in default. Subsequent to year end, the Corporation received a waiver from the lender that a breach of the ratio in 2013 will not result in default. The subordinated debt is convertible into voting and participating shares of the Corporation upon an event of default by the Corporation under the terms of the related loan agreement, at the discretion of the lender. In the event the lender exercises the conversion privilege as a result of an event of default, the conversion is based on the greater of (i) the book value of the common shares of the Corporation on the basis of the most recent audited consolidated financial statements or, at the lenders sole discretion, the most recent unaudited consolidated quarterly financial statements of the Corporation, provided that such book value shall not be less than one cent per share, and (ii) the minimum price authorized by the applicable policies of the TSX Venture Exchange if the Corporation is listed on such Exchange. The fair value of the long-term debt was established using information for comparative debt instruments and the Corporation concluded that there was no significant equity component. During the year ended December 31, 2012, the Corporation incurred $121,033 (2011 $162,659) in interest.
December 31, 2012 $ December 31, 2011 $
Subordinated loan bearing interest at 14% per annum plus additional interest, maturing in 2015 and payable in monthly instalments of $25,000 plus interest Current maturity
Long-term debt principal repayments over the next three years amount to the following:
30 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
$
(b)
On November 5, 2012, in connection with the agreement and plan of merger dated September 25, 2012 to acquire Cadillac Jack, the Corporation entered into a credit agreement with a syndicate of lenders securing a USD$110.0 million nonconvertible senior secured term loan secured by Cadillac Jacks assets and guaranteed by the Corporation. The term loan is amortized over the three-year term as follows: 5% in year one, 10% in year two, 15% in year three with the balance payable at maturity. The term loan bears interest at the annual rate of LIBOR plus a margin of 7.75%, with a LIBOR floor of 1.25%. The term loan has maintenance covenants based on maximum leverage and minimum coverage, for which the Corporation was in compliance with as of December 31, 2012. During the year ended December 31, 2012, the Corporation incurred $1,807,624 (2011 $nil) in interest.
December 31, 2012 $ December 31, 2011 $
Principal Transaction costs Accretion (effective interest rate of 11.21%) Current maturity
Term loan principal repayments over the next three years amount to the following:
$
(c)
Other long-term debt is comprised of a long-term debt in the amount of USD $750,000 bearing interest at 6.0% per annum, repayable in equal semi-annual instalments over a two-year term. During the year ended December 31, 2012, the Corporation incurred $6,859 (2011 $nil) in interest.
December 31, 2012 $ December 31, 2011 $
Loan bearing interest at 6% per annum repayable in equal semi-annual instalments over a two year term Current maturity
Long-term debt principal repayments over the next two years amount to the following:
$
2013 2014
361,912 384,263
Agreements bear interest at between 1.11% and 18% per annum, all maturing in 2015 and payable in monthly instalments of $70,174 including interest Current maturity
Principal repayments over the next three years amount to the following:
$
32 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
Fair Value of Liability component of Convertible Debenture Fair Value of Equity component of Convertible Debenture Fair Value of Warrants Face Value Transaction costs
The following table reflects movements recognized during the period ended December 31, 2012:
Liability component of Convertible Debenture Equity component of Convertible Debenture
Face Value
Warrants
Opening Balance (net of transaction costs) Accretion of liability component of Convertible Debenture (effective interest rate of 16.74%) Conversion of Convertible Debentures Balance at December 31, 2012
28,750,000
25,911,670 1,185,219
576,081
109,844
(4,138,000) 24,612,000
(3,978,044) 23,118,845
(82,916) 493,165
109,844
21. Commitments
LEASES
The Corporations commitment under lease agreements for premises, exclusive of occupancy and escalation charges aggregate to approximately $20,770,000.
$
Within one year Later than one year but not later than 5 years More than 5 years
34 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
Beginning balance Transactions during the period: Issued Exercised Expired / forfeited Ending balance
During the year ended December 31, 2012, the Corporation granted 3,253,500 stock options to employees to purchase common shares. The stock options are exercisable at prices ranging from $0.001 to $4.35 per share and have a weighted average contractual term of 3.91 years.
Outstanding options Weighted average outstanding maturity period (years) Exercisable options Exercise price $
Exercise prices $
Number of options
Number of options
0.001 1.00 1.25 1.30 2.16 2.50 2.60 2.61 2.63 2.71 2.85 3.38 4.20 4.24 4.35
350,000 1,206,500 42,500 50,000 70,750 165,000 65,000 30,000 10,000 65,000 202,500 65,000 1,376,000 1,659,550 90,000 5,447,800
2.55 2.55 2.67 2.70 3.73 3.04 3.00 3.27 3.15 3.50 3.53 3.41 4.53 4.92 4.92 3.91
350,000 1,206,500 42,500 50,000 35,375 123,750 65,000 22,500 7,500 32,500 101,250 48,750 2,085,625
0.001 1.00 1.25 1.30 2.16 2.50 2.60 2.61 2.63 2.71 2.85 3.38 4.20 4.24 4.35 1.20
The weighted-average share price of options exercised during fiscal year 2012 was $1.41 ($1.00 during fiscal year 2011). The Corporation recorded a compensation expense of $880,822 for the year period ended December 31, 2012 (2011 $989,010). The Corporation has $3,197,976of stock option expense to be recorded in future periods.
As part of the Corporations management option plan, the expected life of the options had to be determined. The expected life Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 35 is estimated using the average of the vesting period and the contractual life of the options. The volatility is estimated based on stock prices of comparable companies, as adjusted to take into account the Corporations public trading history. Forfeiture rate is estimated based on a combination of historical forfeiture rates and expected turnover rates. The stock options were accounted for at their fair value of $3,738,709, as determined by the Black-Scholes valuation model using the following weighted-average assumptions:
2012 2011
Expected volatility Expected life Expected forfeiture rate Risk-free interest rate Dividend yield Weighted average share price Weighted average fair value of options at grant date
WARRANTS
A summary of the activity in the Corporations issued warrants during the year is presented below: The following table provides information about outstanding warrants at December 31, 2012:
For the year ended December 31, 2012 Weighted average exercise price Number of warrants $ For the year ended December 31, 2011 Weighted average exercise price Number of warrants $
Beginning balance Transactions during the period: Issued Exercised Expired Ending balance
Grant date
Expiry date
Number of warrants
Exercise price
15-Jun-11 28-Mar-12
15-Jun-13 30-Apr-15
During the year ended December 31, 2012, the Corporation received $1,140,504 for the exercise of 717,504 warrants. On the exercise of 717,504 warrants, the value of $270,603 originally allocated to contributed surplus was reallocated to the share capital. During the year ended December 31, 2011, the Corporation received $6,367,132 for exercise of 4,321,668 warrants granted on July 21, 2010. On the exercise of 4,321,668 warrants, the value of $522,960 originally allocated to contributed surplus was reallocated to the share capital. During the year ended December31, 2012, 1,437,500 warrants were issued in connection with the 28,750 special warrants issued by the Corporation, representing an allocated fair value of $109,844 (see note 20).
The following weighted average assumptions were used in the Black-Scholes valuation model:
36 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
2012 2011
Expected volatility Expected life Expected forfeiture rate Risk-free interest rate Dividend yield Weighted average fair value of warrants at grant date
CONVERSION OPTION
In connection with 28,750 special warrants issued by the Corporation, an amount of $576,081 was recorded in the contributed surplus (see note 20). The following assumptions were used in the Black-Scholes valuation model underlying the fair value allocated to the conversion option: Expected volatility Expected life Expected forfeiture rate Risk-free interest rate Dividend yield 52% 2 years 0% 1.17% Nil
Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 37
Cash $
Restricted Cash $
Accounts receivable $
Customer deposits $
EUR KES USD GBP UGX AMD MDL DOP AUS CHF DKK JPY NOK MXN SEK
4,274,000 19,198,000 2,029,000 15,000 131,000 12,000 13,000 100,000 38,000 57,000 133,000 56,000 373,000 1,723,000
105,000 4,975,000
5,852,000 491,000 34,322,000 1,221,000 28,000 11,000 20,000 143,000 26,000 8,000 6,000 1,544,000 581,000
14,376,000
420,000 3,000
(8,425,000) (148,000) (13,831,000) (1,333,000) (18,000) (47,000) (57,000) (23,000) (5,000) (34,000) (4,883,000)
A ten percent increase (decrease) in the strengthening or weakening of the following currencies versus the Canadian dollar at the end of the year would have increased (decreased) net loss for the year, all other variables held constant, by:
Currency 10% Increase (Decrease)
USD EUR KES UGX GBP AMD MDL DOP AUS CHF DKK JPY NOK MXN SEK
4,636,404 90,038 34,239 2,509 161,522 9,454 (2,507) 11,915 12,615 4,576 5,208 13,853 5,604 188,161 (267,678)
The Corporation does not hedge these exposures. This exposure is monitored by the Corporations reporting system and is reviewed by management on a monthly basis.
CREDIT RISK
38 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
The Corporation, in the normal course of business, monitors the financial condition of its customers and reviews the credit history of each new customer. The Corporation establishes an allowance for doubtful accounts that corresponds to the credit risk of its specific customers, historical trends and economic circumstances. The Corporation is exposed to credit risk in the event of non-payment by certain customers for their accounts receivable. The Corporation has focused on reducing customer concentration and growing its base of Tier 1 operators. Details of the Corporations accounts receivable were as follows:
December 31, 2012 $ December 31, 2011 $
Not past due Past due 1-30 days Past due 31-60 days Past due 61-90 days Past due 91-120 days Past due 121-150 days Past due 151-180 days Past due more than 181 days Allowance for doubtful accounts Outstanding, end of period
The Corporations maximum exposure to credit risk is equal to the carrying value of accounts receivable as set out on the statement of financial position.
LIQUIDITY RISK
Liquidity risk is the Corporations ability to meet its financial obligations when they come due. The Corporation is exposed to liquidity risk with respect to its contractual obligations and financial liabilities. The Corporation manages liquidity risk by continuously monitoring forecast and actual cash flows and matching maturity profiles of financial assets and liabilities. The Corporations objective is to maintain a balance between continuity of funding and flexibility through borrowing facilities available through the Corporations bank and other lenders. The Corporations policy is to ensure adequate funding is available from operations, established lending facilities and other sources as required. The Corporation believes that future cash flows generated by operations and availability under its borrowing facility will be adequate to meet its financial obligations.
On Demand $ Less than 3 months $ 3 to 6 Months $ 6 to 9 Months $ 9 to 12 months $ Greater than 1 year $
Accounts payable and accrued liabilities Provisions Customer Deposits Income tax payable Holdback on purchase price Convertible debentures* Equipment financing* Long-term debt* Total
*includescapitalandinterest
40 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
The distribution of the Corporations non-current assets (consisting of goodwill and intangible assets and property and equipment) by geographical location is approximately as follows:
December 31, 2012 $ December 31, 2011 $
Investment tax credits receivable Accounts receivable Prepaid expenses Inventories Income taxes receivable Income taxes payable Equipment financing Accounts payable and accrued liabilities Provisions Deferred revenue Customer deposits Supplemental information Interest received Interest paid
(1,079,248) (19,594,444) (2,445,299) 1,518,568 626,913 (110,808) 785,643 305,399 2,018,625 196,898 (4,328,153) (22,105,906) 322,393 3,441,480
385,746 (2,014,403) (265,746) (6,997) (30,812) (974,753) (53,530) (2,960,495) 57,483 786,056
Non-cash transaction Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 41 Pursuant to the terms of the credit agreement entered into, the merger consideration funded by the lenders to acquire Cadillac Jack was disbursed directly to the sellers. A portion of the amount was also directly allocated to the repayment of Cadillac Jacks debt.
For the year ended December 31, 2012 $ For the year ended December 31, 2011 $
Gross Investment in subsidiaries (net of cash acquired) Net Proceeds from senior secured term loan Repayment of long-term debt Investment in subsidiaries (net of cash acquired)
13,737,675
13,737,675
Salaries, bonuses and short term employee benefits Share based payments
Short-term employee benefits consist of directors fees. The remuneration of the Chairman and Chief Executive Officer and the Chief Financial Officer consists primarily of a salary and share based payments.
31. Contingency
As a result of two separate lawsuits filed by one of the Corporations former clients in the Courts of Malta, a combined total of $114,324 Canadian Dollar Equivalent is currently being held by the Courts (see note 11). Management is of the opinion that these claims are unfounded and that the possibility of a material liability is unlikely. As a result, no provision has been recorded.
33. Revenues
The Corporation revenues consist of the following major categories:
December 31, 2012 $ For the year ended December 31, 2011 $
42 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
Finance income Finance leases Software licensing Sales Participation arrangements Hosted casino
The main factors leading to the recognition of goodwill are the synergistic growth and revenues expected to be created from Amaya Gaming Group Inc. | For the year Ended December 31, 2012 | Annual Financial Statements | 43 the strong strategic fit between Amaya and CryptoLogic. CryptoLogics international capabilities, existing customer relationships, together with the breadth and scale of Amaya's business, provide a strong platform to maximize the potential of CryptoLogic's business. If the acquisition had occurred on January 1, 2012, CryptoLogic would have contributed $35.13 million and $1.94 million to consolidated revenues and net losses respectively. Since the date of acquisition, CryptoLogic has contributed $27.46 million and $6.81 million to consolidated revenues and net income respectively. Acquisition-related costs directly related to the CryptoLogic acquisition were $2,421,320 and is expensed in the consolidated statement of comprehensive loss.
ONGAME
The acquisition of OnGame has been accounted for using the acquisition method and the results of operations are included in the consolidated statement of comprehensive loss from the date of acquisition, which is November 1, 2012. The following table summarizes the preliminary estimated fair value of the identifiable assets and liabilities acquired, at the date of acquisition, and is subject to change: Fair value on Acquisition $
Cash and cash equivalents Income taxes receivable Trade and other receivables Prepaid expenses Property and equipment Trade payables and accrued liabilities Provisions Income tax payable User funds held on deposit Purchase price allocation intangibles Goodwill Deferred income tax liability Total consideration Cash consideration Contingent consideration Total consideration 4,886,486 757,524 4,233,714 1,322,320 1,727,823 (8,810,670) (2,770,980) (320,873) (15,748,490) 15,712,968 18,705,887 (3,928,242) 15,767,467 10,606,267 5,161,200 15,767,467
The price includes a contingent consideration of up to 10 million, which will become payable by Amaya if there is regulated online gaming in the United States within five years of completion of the acquisition. The exact amount of the contingent consideration will depend upon the extent of U.S. regulation of online gaming, including the number of states that regulate it and the total population living in those regulated states. The Corporation has estimated the contingent consideration to be approximately 4 million ($5,260,235), which amount is recorded in Provisions in the consolidated statement of financial position. The maximum undiscounted amount of future payment that the Corporation could be required to make under the arrangement is 10 million ($13.12 million). The main factors leading to the recognition of goodwill are the synergistic growth and revenues expected to be created from the strong strategic fit between Amaya and OnGame. OnGame positions Amaya to participate in the U.S. market as regulation online poker evolves, complements and strengthens Amaya's B2B interactive product portfolio and provides Amaya with the ability to deliver complementary and value added services to its existing and new licensees.
If the acquisition had occurred on January 1, 2012, OnGame would have contributed $18.58 million and $18.86 million to
44 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
consolidated revenues and net losses respectively. Since the date of acquisition, OnGame has contributed $2.99 million and $3.53 million to consolidated revenues and net loss respectively. Acquisition-related costs directly related to the OnGame acquisition was $481,438, and is expensed in the consolidated statement of comprehensive loss
CADILLAC JACK
The acquisition of Cadillac Jack has been accounted for using the acquisition method and the results of operations are included in the consolidated statement of comprehensive loss from the date of acquisition, which is November 5, 2012. The following table summarizes the preliminary estimated fair value of the identifiable assets and liabilities acquired at the date of acquisition and is subject to change: Fair value on acquisition
$ Cash and cash equivalents Inventory Trade and other receivables Prepaid expenses Deferred tax assets Intangible assets Property, plant and equipment Trade payables and accrued liabilities Provisions Income tax payable Long term debt Purchase price allocation Intangibles Goodwill Deferred income tax liability Total consideration Cash consideration Total consideration 4,726,626 8,080,721 14,168,760 986,500 19,067,148 2,310,195 21,955,901 (14,282,321) (2,308,021) (177,505) (19,988,841) 48,213,067 66,281,631 (12,053,268) 136,980,593 136,980,593 136,980,593
Of the approximately $137 million consideration paid by Amaya in connection with the acquisition of Cadillac Jack, there is a holdback of US$5 million (CAD$4,974,500) which is payable on the second anniversary of the closing of the acquisition (see note 11). The main factors leading to the recognition of goodwill are the synergistic growth and revenues expected to be created from the strong strategic fit between Amaya and Cadillac Jack. Cadillac Jack presents a variety of opportunities to leverage each business' product and intellectual property suite across a broader combined platform with greater geographic presence and creates revenue synergies by accelerating Amaya's penetration in the United States and extending Cadillac Jack's offering beyond the United States and Mexico to new markets in Canada and Europe. If the acquisition had occurred on January 1, 2012, Cadillac Jack would have contributed $79.31 million and $5.21 million to consolidated revenues and net losses respectively. Since the date of acquisition, Cadillac Jack has contributed $11.67 million and $1.51 million to consolidated revenues and net loss respectively. Acquisition-related costs directly related to the Cadillac Jack acquisition was $3,125,581, and is expensed in the consolidated statement of comprehensive loss.
Cost of Products Inventories, beginning of period Purchases Transfer to revenue producing assets Inventories, end of period
Financial General and administrative Utilities Office Foreign exchange Taxes and licenses Insurance Salaries and fringe benefits Non-recurring bonuses Termination of employment agreement Stock-based compensation Amortization of property and equipment Amortization of deferred development costs Amortization of intangible assets Consulting fees General Donations Maintenance and repairs Professional fees Termination of agency agreement Communications Automobile Bad Debt Rent Other Selling Donations Royalties Advertising and promotion Travel and entertainment Shipping Acquisition-related costs Underwriter fees Professional fees
139,202 942,586 (979,195) 1,099,214 553,986 20,094,753 5,367,280 3,367,001 880,825 3,486,934 314,967 6,156,877 6,453,099 75,489 839,287 3,883,889 749,000 3,599,925 118,323 697,232 3,182,622 653,260 61,676,556 218,193 3,708,708 4,997,378 2,282,944 476,667 11,683,890 691,972 5,336,367 6,028,339
200,261 583,673 (195,587) 124,271 181,221 5,198,249 989,010 797,804 383,504 978,696 2,062,859 42,035 72,016 1,423,379 106,579 34,441 760,728 13,743,139 564,469 553,195 3,951,175 1,184,231 228,139 6,481,209
46 | Annual Financial Statements | For the year Ended December 31, 2012 | Amaya Gaming Group Inc.
Numerator Numerator for basic and diluted earnings (loss) per common share net loss Denominator Denominator for basic earnings (loss) per common share weighted average number of common shares Effect of dilutive securities Stock options Warrants Convertible debentures Dilutive potential common shares Denominator for diluted earnings (loss) per common share adjusted weighted number of shares Basic and diluted earnings (loss) per common share
(7,112,352)
(1,926,025)
For the year ended December 31, 2012 and 2011, the diluted loss per share was the same as the basic net loss per share since the dilutive effect of stock options, warrants and other convertible instruments was not included in the calculation; otherwise the effect would have been anti-dilutive. Accordingly, the diluted loss per share for the period was calculated using the basic weighted average number of common shares outstanding. For the year ended December 31, 2011, the dilutive effect of convertible instruments was not significant.