Notes forming part of the consolidated financial statements

For the 6 months ended 30 June 2021

1. Accounting policies

General Information

Gaming Realms plc ("the Company") and its subsidiaries (together "the Group").

The Company is admitted to trading on AIM of the London Stock Exchange. It is incorporated and domiciled in the UK. The address of its registered office is Two Valentine Place, London, SE18QH.

The results for the six months ended 30 June 2021 and 30 June 2020 are unaudited.

Basis of preparation

The financial information for the year ended 31 December 2020 included in these financial statements does not constitute the full statutory accounts for that year. The Annual Report and Financial Statements for 2020 have been filed with the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Financial Statement for 2020 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

This interim report, which has neither been audited nor reviewed by independent auditors, was approved by the board of directors on 10 September 2021. The financial information in this interim report has been prepared in accordance with UK adopted international accounting standards. The accounting policies applied by the Group in this financial information are the same as those applied by the Group in its financial statements for the year ended 31 December 2020 and which will form the basis of the 2021 financial statements.

The consolidated financial statements are presented in Sterling.

Going concern

The Group meets its day-to-day working capital requirements from the cash flows generated by its trading activities and its available cash resources. 

The Group prepares cash flow forecasts and re-forecasts at least bi-annually as part of the business planning process.  A re-forecasting process has been completed for H2 2021 to 2023 in light of the economic uncertainty resulting from the ongoing COVID-19 pandemic.  These forecasts have been reviewed by the Directors and show that the Group will continue to have sufficient cash resources available to meet its liabilities as they fall due.

Accordingly, these financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assumes that the Group will realise its assets and discharge its liabilities in the normal course of business.

Adjusted EBITDA

EBITDA is a non-GAAP company specific measure defined as profit or loss before tax adjusted for finance income and expense, depreciation and amortisation.

Adjusted EBITDA excludes non-recurring material items which are outside the normal scope of the Group's ordinary activities. Adjusted EBITDA is considered to be a key performance measure by the Directors as it serves as an indicator of financial performance. The adjusting items are separately disclosed in order to enhance the reader's understanding of the Group's profitability and cash flow generation. Adjusting items include costs arising from a fundamental restructuring of the Group's operations and redundancy costs. 

2. Segment information

The Board is the Group's chief operating decision-maker. Management has determined the operating segments based on the information reviewed by the Board for the purposes of allocating resources and assessing performance.

The Group has two reportable segments.

·      Licensing - B2B brand and content licensing to partners in the US and Europe; and

·      Social publishing - provides B2C freemium games to the US and Europe.

Revenue

The Group has disaggregated revenue into various categories in the following table which is intended to:

·   Depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic date; and

·   Enable users to understand the relationship with revenue segment information provided below.

Adjusted EBITDA

3. Finance income and expense

4. Adjusted EBITDA

EBITDA and Adjusted EBITDA are non-GAAP measures and exclude exceptional items, depreciation, and amortisation. Exceptional items are those items the Group considers to be non-recurring or material in nature that may distort an understanding of financial performance or impair comparability.

Adjusted EBITDA is stated before exceptional items as follows:

Restructuring expenses

Restructuring costs of £25k (H1 2020: £251k) were incurred relating to restructuring and redundancy costs.

5. Earnings per share

Basic earnings per share is calculated by dividing the result attributable to ordinary shareholders by the weighted average number of shares in issue during the period.  The calculation of diluted EPS is based on the result attributable to ordinary shareholders and weighted average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares.  The Group's potentially dilutive securities consist of share options and a convertible loan (see Note 14).  The convertible loan is anti-dilutive and so is ignored in calculating diluted EPS.

6. Property, plant and equipment

7. Intangible assets

8. Other investments 

The other investment balance comprises a 6.6% interest in Ayima Group AB ("Ayima").  The shares of Ayima are quoted on AktieTorget, a Nordic stock exchange (www.aktietorget.se). The investment is remeasured each reporting period to fair value based on the quoted share price.

During the period the Group disposed of its entire shareholding in Ayima, generating cash proceeds on disposal of £0.4m bringing the investment balance to £Nil (31 December 2020: £401,291).

9. Trade and other receivables

All amounts shown fall due for payment within one year.

10. Cash and cash equivalents

Restricted cash in previous periods relates to funds held in Swiss subsidiaries which are currently undergoing liquidation. The funds are restricted and are not included in the consolidated statement of cash flows.

11. Trade and other payables

The carrying value of trade and other payables classified as financial liabilities measured at amortised cost approximates fair value.

12. Share capital

The increase of 2,055,311 ordinary shares relates to the exercise of share options during the period.  The total amount received by the Company for the exercise price settlement was £318,221, which has been recorded as an increase in share capital and share premium as follows:

13. Share based payments

The share option and related charges income statement expense comprises:

IFRS 2 (Share-based payments) requires that the fair value of equity settled transactions are calculated and systematically charged to the statement of comprehensive income over the vesting period.  The total fair value that was charged to the income statement in the period in relation to equity-settled share-based payments was £271,859 (H1 2020: £40,075).

Where individual EMI thresholds are exceeded or when unapproved share options are exercised by overseas employees, the Group is subject to employer taxes payable on the taxable gain on exercise.  Since these taxes are directly related to outstanding share options, the income statement charge has been included within share option and related charges.  The Group uses its closing share price at the reporting date to calculate such taxes to accrue.  The tax related income statement charge for the period was £170,712 (H1 2020: £Nil).

On 5 January 2021, certain employees of the Group were granted a total of 350,000 share options, which vest in three equal tranches on 1 January 2022, 1 January 2023 and 1 January 2024.  The options have an exercise price of 22.4 pence per share.

14. Arrangement with Gamesys Group plc

In December 2017 the Group entered into a complex transaction with Gamesys Group plc and Group companies (together 'Gamesys Group').  The transaction includes a £3.5m secured convertible loan agreement alongside a 10-year framework services agreement for the supply of various real money services.  Under the framework services agreement the first £3.5m of services are provided free of charge within the first 5 years.

The convertible loan has a duration of 5 years and carried interest at 3-month LIBOR plus 5.5%.  It is secured over the Group's Slingo assets and business.  At any time after the first year, Gamesys Group plc may elect to convert all or part of the principal amount into ordinary shares of Gaming Realms plc at a discount of 20% to the share price prevailing at the time of conversion.  To the extent that the price per share at conversion is lower than 10p (nominal value), then the shares can be converted at nominal value with a cash payment equal to the aggregate value of the convertible loan outstanding multiplied by the shortfall on nominal value payable to Gamesys Group plc.  Under this arrangement the maximum dilution to Gaming Realms shareholders will be approximately 11% assuming the convertible loan is converted in full.

The option violates the fixed-for-fixed criteria for equity classification as the number of shares is variable and as a result is classified as a liability.

The fair value of the conversion feature is determined each reporting date with changes recognised in profit or loss.  The initial fair value was £0.6m based on a probability assessment of conversion and future share price.  This is a level 3 valuation as defined by IFRS 13.  The fair value as at 30 June 2021 was £0.6m (31 December 2020: £0.6m) based on revised probabilities of when and if the option will be exercised.  The key inputs into the valuation model included timing of exercise by the counterparty (based on a probability assessment) and the share price.

The initial fair value of the host debt was calculated as £2.7m, being the present value of expected future cash outflows.  The initial rate used to discount future cash flows was 14.1%, being the Group's incremental borrowing rate.  The rate was calculated by reference to the Group's cost of equity in the absence of reliable alternative evidence of the Group's cost of borrowing given it is predominantly equity funded.  Expected cash flows are based on the directors' judgement that a change in control event would not occur.  Subsequently the loan is carried at amortised cost.

The residual £0.2m of proceeds were allocated to the obligation of provide free services.

15. Related party transactions

Jim Ryan is a Non-Executive Director of the Company and the CEO of Pala Interactive, which has a real-money online casino and bingo site in New Jersey. During the period, total license fees earned by the Group were $24,862 (H1 2020: $22,592) with $12,668 due at 30 June 2021 (30 June 2020: $7,599).

Jim Ryan is a Non-Executive Director of Gamesys Group plc. In December 2017 the Group entered into a 10-year framework services agreement and a 5-year convertible loan agreement for £3.5m with Gamesys Group plc (see Note 14).

During the period £75,000 (H1 2020: £48,333) of consulting fees were paid to Dawnglen Finance Limited, a company controlled by Michael Buckley. No amounts were owed at 30 June 2021 (30 June 2020: £Nil).