INNOVA Announces Q2 Financial Results

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

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

Q2 Highlights – Operations

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

Q2 Highlights – Financial 

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

^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".

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

Pollard Banknote Take-Over Bid

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

Selected Unaudited Condensed Consolidated Financial Information

	For the three month period ended June 30,		For the six month  period ended June 30,
	2017	2016	2017	2016	2015
	$	$	$	$	$
Revenue	5,172,773	5,921,831	10,859,248	11,286,918	10,121,630
Gross profit	4,516,002	5,282,379	9,578,659	10,035,848	8,828,003
Net income (loss)	266,343	205,181	787,773	1,068,949	(1,303,575)
Total assets			33,993,980	35,539,918	33,955,220
Total long term financial liabilities			1,266,584	3,282,840	4,615,893
Reconciliation of Basic to Adjusted EPS^(1)
Basic and diluted earnings (loss) per Share	0.01	0.01	0.04	0.05	(0.07)
Income taxes expense (recovery)	0.02	0.02	0.05	0.02	(0.00)
Acquisition and related costs	0.02	-	0.02	0.00	0.05
Audit adjustment	-	-	-	-	0.01
IPO discretionary bonus	-	-	-	-	0.06
Inventory adjustment	-	-	-	-	0.01
Stock based compensation	0.01	0.01	0.01	0.02	-
Severance and related cost	-	-	(0.00)	-	-
Unrealized foreign exchange (gain) loss	(0.01)	0.00	(0.02)	(0.03)	0.03
Adjusted EPS^(1)	0.05	0.04	0.10	0.06	0.09
Weighted average number of basic and diluted Shares	20,073,400	20,423,436	20,074,459	20,436,718	17,901,657
^1 Adjusted EPS is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators".

Selected Unaudited Condensed Consolidated Financial Information (continued)

Reconciliation of net income (loss) to adjusted EBITDA
Net income (loss)	266,343	205,181	787,773	1,068,949	(1,303,575)
Interest and financing costs (net of interest income)	8,794	44,876	25,597	85,062	159,667
Income tax expense (recovery)	491,108	436,984	998,556	398,921	(66,607)
Depreciation and amortization	718,273	650,419	1,444,575	1,268,668	1,099,081
Acquisition and related costs	311,696	-	357,277	7,090	896,881
Audit adjustment	-	-	-	-	95,807
IPO discretionary bonus	-	-	-	-	1,125,204
Inventory adjustment	-	-	-	-	211,086
Share based compensation	75,793	148,085	186,666	325,344	-
Severance and related cost	-	-	(939)	-	-
Unrealized foreign exchange (gain) loss	(201,006)	26,162	(262,549)	(516,073)	562,873
Adjusted EBITDA^(2)	1,671,001	1,511,707	3,536,956	2,637,961	2,780,417
^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

Three month period ended June 30, 2017

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

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

Six month period ended June 30, 2017

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

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

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

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

Cost of products

Three and six month period ended June 30, 2017

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

Selling expenses

Three and six month period ended June 30, 2017

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

General and administrative expenses

Three month period ended June 30, 2017

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

Six month period ended June 30, 2017

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

Financial expenses

Three and six month period ended June 30, 2017

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

Income taxes

Three and six month period ended June 30, 2017

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

Outlook

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

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

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

Normal Course Issuer Bid

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

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

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

Conference Call

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

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

Outstanding Share Data

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

Non-IFRS Measures and Financial Indicators

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

About INNOVA Gaming Group Inc.

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

Forward-Looking Statements

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

Unaudited Condensed Consolidated Interim Statements of Financial Position
In US dollars

	June 30, 2017	December 31, 2016
	$	$
ASSETS
Current
Cash	8,944,668	10,560,806
Accounts receivable	4,625,221	2,948,497
Inventories	1,298,061	1,047,378
Prepaid expenses and deposits	930,395	653,807
Income taxes receivable	-	29,166
	15,798,345	15,239,654
Property and equipment	8,408,279	9,520,953
Intangibles	2,249,856	1,894,737
Deferred income taxes	7,329,045	7,656,681
Long term prepaid expenses and deposits	208,455	95,784
	33,993,980	34,407,809
LIABILITIES
Current
Accounts payable and accrued liabilities	2,072,483	2,797,983
Income tax payable	512,264	-
Deferred revenue	1,335,419	1,201,902
Current portion of equipment financing	691,029	1,215,571
Current portion of long term debt	289,305	380,989
	4,900,500	5,596,445
Deferred revenue	784,755	1,173,201
Equipment financing	288,713	516,392
Deferred income taxes	143,697	107,615
Long term debt	49,419	152,427
	6,167,084	7,546,080
SHAREHOLDERS' EQUITY
Share capital	21,349,377	21,358,650
Share issuance reserve	1,392,536	1,205,869
Retained earnings	5,084,983	4,297,210
	27,826,896	26,861,729
	33,993,980	34,407,809

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

	For the three month period ended June 30,		For the six month period ended June 30,
	2017 $	2016 $	2017 $	2016 $
Revenue	5,172,773	5,921,831	10,859,248	11,286,918
Cost of products	656,771	639,452	1,280,589	1,251,070
Gross Profit	4,516,002	5,282,379	9,578,659	10,035,848
Selling expenses	253,387	348,065	483,719	697,310
General and administrative expenses	4,138,809	4,449,759	8,331,937	8,904,690
Income from operations	123,806	484,555	763,003	433,848
Financial expenses	28,723	66,071	66,084	130,768
Interest income	(19,929)	(21,195)	(40,487)	(45,706)
Effects of foreign exchange (gain) loss	(210,125)	30,464	(273,938)	(504,798)
Other non-operating income	(432,314)	(232,950)	(774,985)	(614,286)
Income before income taxes	757,451	642,165	1,786,329	1,467,870
Current income tax expense	384	45,198	634,839	152,993
Deferred income tax expense	490,724	391,786	363,717	245,928
Net income and comprehensive income	266,343	205,181	787,773	1,068,949
Basic and diluted earnings per share	0.01	0.01	0.04	0.05

Unaudited Condensed Consolidated Interim Statements of Cash Flows
In US dollars

		For the three month period ended June 30,		For the six month period ended June 30,
		2017	2016	2017	2016
		$	$	$	$
Cash flows from operating activities
Net income		266,343	205,181	787,773	1,068,949
Adjustments to reconcile net income to net cash provided by operating activities:
	(Gain) loss on disposal of property, equipment and intangibles	(607)	6,305	43,969	5,818
	Depreciation and amortization expense	718,273	650,418	1,444,575	1,268,668
	Share based compensation expense	75,793	148,085	186,666	325,344
	Unrealized foreign exchange (gain) loss	(209,593)	26,388	(319,782)	(488,754)
	Deferred income tax expense	490,724	391,786	363,717	245,928
	Decrease in deferred revenue	(169,674)	(416,884)	(388,446)	(569,335)
	(Increase) decrease in long term prepaid expenses and deposits	(69,545)	(1,650)	(112,671)	865
	Income tax expense recognized in net income	384	45,198	634,839	152,993
	Interest expense	25,882	58,241	60,410	118,879
	Interest income	(19,929)	(21,195)	(40,487)	(45,706)
Changes in non-cash operating elements of working capital		(851,355)	819,438	(2,795,978)	(140,099)
Income taxes paid		(91,785)	(93,683)	(93,409)	(117,159)
Interest paid		(25,882)	(58,241)	(60,410)	(118,879)
Net cash inflow (outflow) from operating activities		139,029	1,759,387	(289,234)	1,707,512
Cash flows from investing activities
Purchase of property, equipment and intangibles		(444,807)	(1,332,687)	(731,596)	(1,875,450)
Proceeds from sale of equipment		607	-	607	487
Net cash outflow from investing activities		(444,200)	(1,332,687)	(730,989)	(1,874,963)
Cash flows from financing activities
Repurchase of shares		-	(57,036)	(9,273)	(57,036)
Repayment of debt		(98,202)	(91,535)	(194,692)	(181,476)
Repayment of equipment financing		(372,655)	(370,784)	(759,163)	(702,969)
Interest income		19,929	21,195	40,487	45,706
Net cash outflow from financing activities		(450,928)	(498,160)	(922,641)	(895,775)
Net decrease in cash		(756,099)	(71,460)	(1,942,864)	(1,063,226)
Cash – beginning of period		9,487,916	10,666,250	10,560,806	11,098,280
Effects of foreign exchange rate changes on cash		212,851	(28,201)	326,726	531,535
Cash – end of period		8,944,668	10,566,589	8,944,668	10,566,589

SOURCE INNOVA Gaming Group

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