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

please contact Jonathan Ross, LodeRock Advisors, INNOVA Investor Relations, [email protected], Tel: [phone]