As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/26/15  Stars Group Inc.                  40FR12B              110:26M                                    Donnelley … Solutions/FA

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Since it launched in 2001, PokerStars has become the first choice of players all over the world and it operates the world’s most popular online poker sites. PokerStars provides desktop client services and products to its customers which include real-money online poker cash games, tournaments and fast fold poker. PokerStars’ mobile apps are among the most popular poker apps on the iOS and Android platforms. PokerStars is home to the largest Internet poker events, including the two biggest online tournament series in the world - the World Championship of Online Poker (WCOOP) and the Spring Championship of Online Poker (SCOOP) – and the biggest weekly tournaments, the Sunday million and Sunday Warm-Up, plus thousands more every day of the week. More than 115 billion hands have been dealt on PokerStars, which is more than any other site. PokerStars also offers play-money chips for sale and use for online poker play on PokerStars.net and on the Facebook application PokerStars Play on Facebook. In the fourth quarter of 2014, PokerStars.es, the licensed PokerStars site for Spain, expanded its offering by providing table games with plans to launch casino games such as slots in 2015, with similar plans announced for PokerStars.it, the licensed brand in Italy.

Full Tilt is a leading gaming brand known for delivering some of the most innovative online poker games in the world. Through its revolutionary poker formats Rush Poker and Adrenaline Rush, Full Tilt Poker offers its players fast-paced, quick-fold gameplay on both desktop and mobile. In 2014, Full Tilt began expanding its game portfolio by offering a variety of online table and casino games on its global sites including a range of single- and multi-player variations of Blackjack and Roulette, online slots and Live Dealer games.

The B2C Business prides itself on complying with licensing frameworks and holds multiple online poker/gaming licenses. Both PokerStars and Full Tilt operate globally (.com websites) and in various European jurisdictions (.eu websites) under licenses from the Isle of Man and Malta governments respectively. The two brands have obtained a continuation license to operate in the United Kingdom and operate in Greece through partnership with a licensee. Additionally, PokerStars also holds separate government licenses in other European Union member states that have created independent regulatory and licensing schemes including Italy, France, Spain, Belgium, Estonia, Denmark, Bulgaria, and Schleswig Holstein in Germany. Amaya actively seeks to promote and inform relevant regulators on the benefits of tax efficient, responsible regulation of online poker and gaming.

B2B

Amaya is engaged in the design, development, manufacturing, distribution, sale and service of technology-based gaming solutions for the regulated gaming industry worldwide, primarily to land-based and online gaming operators and government bodies (the “B2B Business”). These business-to-business (“B2B”) solutions include technology, content and services for interactive gaming and electronic games and game systems for commercial, charitable and tribal casinos, as well as government lotteries and gaming agencies. Amaya’s Board of Directors has approved of a plan to dispose of Amaya’s B2B poker and gaming platform provider, Ongame Network Ltd. (“Ongame”). As a result, this entity’s assets and liabilities are classified separately as held for sale and its operating results are classified separately as discontinued operations in all periods presented. Amaya developed its portfolio of B2B solutions through both internal development and strategic acquisitions.

 

•

a USD$100 million five-year first lien revolving credit facility priced at Libor plus 4.00%, none of which was drawn at completion; and

 

•

a USD$800 million eight-year second lien term loan priced at Libor plus 7.00%, with a 1.00% floor (the “Second Loan”).

 

•

Approximately USD$213 million from cash on hand, which includes a USD$50 million deposit made on June 12, 2014, the date of the announcement of the Acquisition.

Both GSO and BlackRock participated in the debt financing.

In connection with the Transaction, and as consideration for GSO’s and BlackRock’s significant role in the financing of the Transaction, the Corporation granted 11 million common share purchase warrants to GSO (the “GSO Warrants”) and 1.75 million common share purchase warrants to BlackRock (the “BlackRock Warrants”, collectively with the GSO Warrants, the “Oldford Group Warrants”), each with an exercise price of C$0.01 and exercisable for a term of 10 years, as payment for a portion of the fees payable to the two parties.

Further details on the Acquisition, are included in public filings made on SEDAR, including press releases related to the Acquisition, the Corporation’s Management Information Circular related to its Annual and Special Meeting of Amaya Shareholders held July 30, 2014, and a Business Acquisition Report.

Addition to S&P/TSX Composite Index

On September 16, 2014, Amaya announced that it had been added to the S&P/TSX Composite Index, effective at the market open on Monday, September 22, 2014. The Company joins Canada’s other leading corporations on the approximately 250-company index, which represents the largest businesses on the Toronto Stock Exchange. The S&P/TSX Composite is the headline index for the Canadian equity market. It is the broadest in the S&P/TSX family and is the basis for multiple sub-indices.

Launch of Spin & Go’s on PokerStars.com

Following successful launches in Spain, France and Italy, PokerStars launched “Spin & Go’s” to players on its global .com network on September 29. Full Tilt rolled out its version, Jackpot Sit and Go’s, on its global .com site earlier in the summer of 2014. The speedy, mobile-friendly poker variant has proven to be an instant hit, demonstrating that product innovation can attract new poker players and increase the amount of play from existing customers.

Spin & Go’s and Jackpot Sit & Go’s are fast-paced, three-handed hyper-turbo Sit & Go tournaments, which give players of all levels the chance to win multiples of their buy-in in a matter of minutes. The B2C Business believes the new variant will help attract new recreational players to the platform, reactivate players in its database, and excite current players.

Strategic Review of Cadillac Jack

On October 20, Amaya announced that it had initiated a strategic review process to explore alternatives for Amaya’s B2B land-based gaming solutions business, Cadillac Jack Inc. (“Cadillac Jack”). The strategic review will consider various alternatives for the company identified by Amaya’s and Cadillac Jack’s executive management, with the fundamental objective of expediting Cadillac Jack’s growth strategy and maximizing value for Amaya’s shareholders. Amaya has engaged

 

regulated U.S. online gaming market in New Jersey and to improve Amaya’s InterCasino offering (“WagerLogic”) prior to the announced sale of that asset in October, 2013. As the Corporation intended to acquire a B2C poker business, Amaya subsequently deemed Ongame to be a non-core B2B business and classified it as held for sale in December, 2013. In January, 2014, Amaya entered into a letter of intent to acquire the B2C poker brands PokerStars and Full Tilt.

Ongame is classified as discontinued operations for all periods in the MD&A and financial statements for the three and nine months ending September 30, 2014.

Outlook

With the Corporation’s Acquisition of Oldford Group, the Corporation’s primary revenue provider beginning in the third quarter of 2014 is the B2C Business.

This transaction resulted in Amaya becoming the world’s largest publicly traded online gaming company and provides Amaya with a premier, scalable gaming platform. It significantly diversifies us both geographically and in gaming verticals. The Corporation anticipates the transaction will be highly accretive to our earnings and provide strong cash flow. The B2C Business is the owner and operator of PokerStars, which is the world’s largest online gaming brand. Over the past 14 years, the business has become the world’s largest poker business, earning the loyalty of millions of players, not only having the highest liquidity but also a recognized dedication to game integrity, player protection, and responsible gaming as well as being an innovator in technology, game formats and marketing and loyalty programs. The business has developed a premium, robust software and scalable operating platform and has spearheaded industry leading practices in customer service, payment security, game integrity, player fund protection and responsible gaming. We believe its marketing investments are above those of anyone else in the online poker industry and it supports this effort through leading player loyalty programs.

PokerStars has 11 online gaming licenses in various global markets, including in France, Spain and Italy. With the continued trend toward regulation of online gaming around the world, the business in recent years has been developing and executing on growth initiatives to leverage its brand recognition and customer loyalty to diversify into other gaming verticals, notably casino, sportsbetting and social gaming, which represent a combined global market size of approximately $25 billion, according to industry estimates, significantly greater than its current addressable poker market. Additionally, the business does not currently operate in the United States of America (the “U.S.”). Amaya anticipates its regulatory track record in the U.S. has the potential to facilitate a speedier entry into the U.S. for the business. The U.S. Department of Justice in late 2012 issued an opinion on its stance on online gaming, to the effect that only sports betting is subject to the Federal Wire Act of 1961 and all other forms of online gambling are permitted. As a result, three states, New Jersey, Delaware and Nevada, have subsequently regulated online gaming. Amaya’s B2B Business subsequently received transactional waivers from the New Jersey Division of Gaming Enforcement to supply technology for real money online gaming websites operated by licensed permit holders in New Jersey. In late November 2013, real money online gaming went live in New Jersey, the third and thus far largest U.S. state to have approved it, following Nevada and Delaware.

Amaya intends to support the growth initiatives of the business, expansion into adjacent gaming verticals, growth in emerging markets, and expansion into new markets, and believes they have the potential to increase the size of the overall business as well as liquidity within the core B2C poker business.

Amaya’s strategy for its B2B Business consists of extending its market footprint by facilitating the delivery of gaming content across physical and interactive media. Amaya’s strategy is reinforced by its existing portfolio of developed and acquired technologies.

 

Financial Condition

The Corporation’s asset base increase of approximately $6,500,000,000 was driven by the acquisition of Oldford Group, proceeds of the sale of WagerLogic Malta Holdings Ltd. (“WagerLogic”) for aggregate gross proceeds of $62,500,000 (the “WagerLogic Sale”), an incremental facility of USD$80,000,000 to Cadillac Jack’s existing senior term loan, and mezzanine debt of USD$100,000,000.

Based on the Corporation’s current revenue expectations, strong cash flow conversion and the funds available from the USD $100 million five-year first lien revolving credit facility, Management believes the Corporation will have the cash resources to satisfy current working capital needs for at least the next 12 months.

 

Revenues by Geographic Area		For the nine month period ended September 30,
		2014 $				2013 $
Americas			127,693				78,189
Europe			168,187				30,620
Rest of world			23,434				—

The revenue increase in the Americas for the nine month period ended September 30, 2014 relative to the nine month period ended September 30, 2013 is primarily attributable to revenue generated by the B2C Business.

The revenue increase in the Europe for the nine month period ended September 30, 2014 relative to the nine month period ended September 30, 2013 is primarily attributable to revenue generated by the B2C Business.

The revenue increase in the Rest of world for the nine month period ended September 30, 2014 relative to the nine month period ended September 30, 2013 is attributable to revenue generated by the B2C Business.

 

SELLING

Sales and marketing expenses increased from $3.97 million for the three month period ended September 30, 2013, to $31.41 million for the three month period ended September 30, 2014, representing an increase of 691%. The increase was driven by advertising expenses incurred by the B2C Business during the three month period ended September 30, 2014.

Sales and marketing expenses increased from $10.83 million for the nine month period ended September 30, 2013, to $38.53 million for the nine month period ended September 30, 2014, representing an increase of 256%. The increase was driven by advertising expenses incurred by the B2C Business during the nine month period ended September 30, 2014.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased from $25.84 million for the three month period ended September 30, 2013, to $154.34 million for the three month period ended September 30, 2014, representing an increase of 497%. The increase was driven by (i) a growing employee base due to the Diamond Game and Oldford Group acquisitions; (ii) increased amortization of intangibles and property and equipment (iii) gaming duty and processor costs incurred by the B2C Business in connection with generating B2C revenue; (iv) increase in repairs and maintenance in connection with servicing profit sharing arrangement revenue; and, (v) higher consulting and professional fees. A number of B2B-related intangible and tangible assets have been determined to be redundant to the Company’s core operations, notably its B2C Business. Impairment losses of approximately $9.04 million and a loss on disposal of assets of approximately $4.19 million were recognized in the third quarter of 2014.

General and administrative expenses increased from $76.56 million for the nine month period ended September 30, 2013, to $215.96 million for the nine month period ended September 30, 2014, representing an increase of 182%. The increase was driven by (i) a growing employee base due to the Diamond Game and Oldford Group acquisitions; (ii) increased amortization of intangibles and property and equipment (iii) gaming duty and processor costs incurred by the B2C Business in connection with generating B2C revenue; (iv) increase in repairs and maintenance in connection with servicing profit sharing arrangement revenue; (v) higher consulting and professional fees ;and, (vi) impairment losses and loss on disposal of assets related to its B2B Business.

FINANCIAL

Financial expenses increased from $0.85 million for the three month period ended September 30, 2013, to $15.84 million for the three month period ended September 30, 2014. The increase is primarily attributable to interest on the First and Second Lien Term Loans, Cadillac Jack’s refinanced senior secured term loan and mezzanine debt financing incurred during the three month period ended September 30, 2014.

Financial expenses increased from $14.37 million for the nine month period ended September 30, 2013, to $25.65 million for the nine month period ended September 30, 2014. The increase is primarily attributable to interest on the First and Second Lien Term Loans, Cadillac Jack’s refinanced senior secured term loan and mezzanine debt financing incurred during the nine month period ended September 30, 2014.

ACQUISITION RELATED EXPENSES

Acquisition related expenses increased from $0.85 million for the three month period ended September 30, 2013, to $12.13 million for the three month period ended September 30, 2014. The increase is driven by professional fees incurred in connection with the Oldford Group acquisition during the three month period ended September 30, 2014.

 

September 30, 2014		On Demand $000’s				Less Than 1 year $000’s				1-3 years $000’s				4-5 years $000’s				More Than 5 years $000’s
Accounts payable and accrued liabilities			163,809				—				—				—				—
Other payables			—				108,640				13,233				—				—
Provisions			41,967				—				392,081				—				—
Customer deposits†			676,111				—				—				—				—
Income taxes payable			19,059				—				—				—				—
Holdback of purchase price			—				—				7,840				—				—
Equipment financing*			—				1,490				1,253				—				—
Long-term debt*			—				248,053				517,765				729,176				3,638,632
Commitments under lease agreements for premises, hardware support contracts, and purchase obligations			—				18,259				20,979				12,955				41,377
Total			900,946				376,442				953,151				742,131				3,680,009

 

*	Includes capital and interest

CREDIT FACILITY

The Corporation’s credit facility includes a revolving demand credit facility of $3 million. The revolving demand credit facility can be used for general working capital purposes. The facility bears interest at the bank’s prime rate plus between 1.25% and 2% depending on the Corporation’s fixed charge coverage ratio. To secure the full repayment of advances (June 30, 2014 - $nil), the Corporation has provided the Bank a first ranking security interest over all of the movable/personal property of the Corporation.

On August 1 2014, an additional credit facility of USD $100 million five-year first lien revolving credit facility priced at Libor plus 4.00% was obtained. The credit facility can be used for general working capital purposes.

As at September 30, 2014, the outstanding amount of the revolving demand credit facility is $nil (December 31, 2013- $nil) and the outstanding amount of the first lien revolving credit facility is $nil.

Under the terms of the credit facility arrangement with the Bank, the Corporation is required amongst other conditions, to maintain at all times certain ratios and a minimum level of net worth. As at September 30, 2014 and December 31, 2013, the Corporation was not in breach of the terms of the credit facility agreements.

LONG-TERM DEBT

The following is a summary of long-term debt outstanding at September 30, 2014 and December 31, 2013:

 

		September 30, 2014 $000’s				December 31, 2013 $000’s
Current portion			19,183				2,388
Long-term debt			3,374,793				192,799
			3,393,976				195,187

(a) Subordinated Debt

The Corporation fully repaid to the subordinated debt during the period ended September 30, 2014.

During the nine month period ended September 30, 2014, the Corporation incurred $10,000 (2013 – $23,000) in interest.

 

fees and expenses, and to be used to fund the ongoing working capital and other general corporate purposes of Cadillac Jack. On May 15, 2014, Cadillac Jack obtained an incremental USD$80 million term loan to Cadillac Jack’s existing USD$160 million senior term loan for the purpose of financing working capital expenses and general corporate purposes of the Corporation. The new aggregate principal amount of USD$240 million bears interest at a per annum rate equal to LIBOR plus 8.50% with a 1% LIBOR floor (the “Senior Facility”). The Senior Facility will mature over a 5-year term from the closing date and is secured by the assets of Cadillac Jack and its subsidiaries. The Senior Facility contains customary covenants, including, without limitation, maintenance and incurrence covenants based on certain agreed-upon leverage and coverage ratios for which the Corporation was in compliance with as of September 30, 2014.

During the nine month period ended September 30, 2014, the Corporation incurred $14,785,000 (2013 - $7,585,000) in interest of which $424,000 relates to interest accretion.

 

		September 30, 2014 $000’s				December 31, 2013 $000’s
Principal			267,423				170,176
Transaction costs			(4,375	)			(1,947	)
Accretion (effective interest rate of 9.90%)			437				13
Translation			(96	)			(64	)
Current portion (net of unamortized transaction costs of $740,000)			(1,950	)			(1,702	)
			261,439				166,476

Term loan principal repayments over the next five years amount to the following:

 

		$000’s
2015			2,690
2016			2,690
2017			2,690
2018			2,690
2019			256,663

(d) Other long-term debt

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.

The Corporation fully repaid the other long-term debt during the nine months ended September 30, 2014.

During the nine month period ended September 30, 2014, the Corporation incurred $13,000 (2013 – $29,000) in interest.

 

		September 30, 2014 $000’s				December 31, 2013 $000’s
Loan bearing interest at 6% per annum repayable in equal semi-annual instalments over a two year term			—				411
Current maturity			—				(411	)
			—				—

(e) Mezzanine subordinated unsecured term loan

On May 15, 2014 Cadillac Jack obtained mezzanine debt (the “Mezzanine Facility”) in the form of a subordinated term loan in the aggregate principal amount of USD$100 million, bearing interest at a per annum rate equal to 13%; provided, at the option of Cadillac Jack, interest accruing at a per annum rate of 7% may instead be paid in-kind in lieu of cash. The Mezzanine Facility will mature over a 6-year term from the closing date and is unsecured. Amaya has provided an unsecured

 

Term loan principal repayments over the next five years amount to the following:

 

		$000’s
2015			19,600
2016			19,600
2017			19,600
2018			19,600
2019+			1,881,600

During the nine month period ended September 30, 2014, the Corporation incurred $2,543,000 (2013 - nil) in interest of which $192,000 relates to interest accretion in relation to the EUR first lien term loan.

 

		September 30, 2014 $000’s				December 31, 2013 $000’s
Principal			282,867				—
Transaction costs			(9,632	)			—
Accretion (effective interest rate of 5.84%)			192				—
Translation			251				—
Current portion (net of unamortized transaction costs of $1,169,000)			(1,659	)			—
			272,019				—

Term loan principal repayments over the next five years amount to the following:

 

		$000’s
2015			2,829
2016			2,829
2017			2,829
2018			2,829
2019+			271,551

 

(ii)

a USD$800 million eight-year second lien term loan priced at Libor plus 7.00%, with a 1.00% floor

During the nine month period ended September 30, 2014, the Corporation incurred $11,700,000 (2013 - nil) in interest of which $750,000 relates to interest accretion.

 

		September 30, 2014 $000’s				December 31, 2013 $000’s
Principal			896,000				—
Transaction costs			(53,512	)			—
Accretion (effective interest rate of 5.64%)			750				—
Translation			(1,111	)			—
Current portion (net of unamortized transaction costs of $4,923,000)			(4,923	)			—
			837,204				—

Term loan principal repayments over the next five years amount to the following:

 

		$000’s
2015			—
2016			—
2017			—
2018			—
2019+			896,000

 

The use of cash for investing activities for the nine month period ending September 30, 2014 was $4,600.13 million as compared to $32.36 million for the nine month period ending September 30, 2013. During the nine month period ending September 30, 2014, the key expenditure driving the Corporation’s use of cash for investing activities was the acquisition of Oldford Group. During the nine-month period ended September 30, 2013, the key expenditures driving the Corporation’s use of cash for investing activities were: (i) continued investment in development of proprietary technology and gaming content; (ii) deployment of Cadillac Jack revenue producing assets; and (iii) acquisition of brand licensing capabilities.

Summary of Significant Accounting Policies

BASIS OF PRESENTATION

The interim consolidated financial statements have been prepared in accordance with IAS 34, Interim financial reporting, as issued by the IASB. The interim consolidated financial statements follow the same accounting policies as the most recent annual consolidated financial statements. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Financial Report for the fiscal year ended December 31, 2013.

PRINCIPLES OF CONSOLIDATION

A subsidiary is an entity controlled by the Corporation, i.e. the Corporation is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its current ability to direct the entity’s relevant activities (power over the investee).

The existence and effect of substantive potential voting rights that the Corporation has the practical ability to exercise (i.e. substantive rights) are considered when assessing whether the Corporation controls another entity.

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 September 30, 2014, the consolidated financial statements included 123 wholly owned subsidiaries.

Upon loss of control of a subsidiary, the Corporation’s profit or loss is calculated as the difference between (i) the fair value of the consideration received and of any investment retained in the former subsidiary and (ii) the previous carrying amount of the assets (including any goodwill) and liabilities of the subsidiary and any non-controlling interests.

ASSOCIATES

Associates are entities over which the Corporation has the power to participate in the financial and operating policy decisions of the entity, but which is not control or joint control. Associates are accounted for using the equity method of accounting.

Under the equity method, the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of comprehensive income of the associate. On acquisition of the investment, any difference between the cost of the investment and the investor’s share of the net fair value of the associate’s identifiable assets,

 

from ring/cash games and entry fees for tournaments. Revenue is measured at the fair value of the consideration derived. Revenue is only recognised when it is probable that the economic benefits will flow to the B2c Business and the amount of revenue can be measured reliably.

Multiple-element revenue arrangements

Certain contracts of the Corporation include license fees, training, installation, consulting, maintenance, product support services and periodic upgrades.

Where such agreements exist, the amount of revenue allocated to each element is based upon the relative fair values of the various elements. The fair values of each element are determined based on current market price of each of the elements when sold separately. Revenue is only recognized when, in Management’s judgment, the significant risks and rewards of ownership have been transferred or when the obligation has been fulfilled.

In addition to the aforementioned general policies, the following are the specific revenue recognition policies for each major category of revenue:

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 customer’s 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 leases and 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.

Software Licensing

Typically, license fees, including fees from master license agreements, most of which are contingent upon licensee’s customer usage, are calculated as a percentage of each licensee’s level of activity. The percentage is as established in the contracts and can vary depending on the contracts. The Corporation only reports its revenues (as opposed to licensee’s total revenues and deducting licensee’s percentage as a cost). The license fees are recognized on an accrual basis as earned.

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 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. Finance income is subsequently recognized over the term of the applicable leases based on the effective interest rate method. Finance 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).

 

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 acquiree’s 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 Corporation’s share in the acquiree’s 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 acquisition-date 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 deferred payment arrangement. Acquisition related costs are expensed as incurred.

OPERATING SEGMENTS

Amaya has two reportable segments, Business–to-Consumer (“B2C”) and Business-to-Business (“B2B”). In the third quarter ended September 30, 2014, B2C consisted of Rational Group, while B2B consisted of Amaya’s B2B interactive gaming solutions, land-based gaming solutions, and lottery solutions.

Amaya’s primary business is its business-to-consumer (“B2C”) operation, Rational Group, which was acquired on August 1, 2014. The Corporation’s operating segments are organized around the markets they serve (B2C and B2B) serve and are reported in a manner consistent with the internal reporting provided to the Chairman and Chief Executive Officer, the Corporation’s chief operating decision-maker. 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.

FINANCIAL INSTRUMENTS

Financial assets

Financial assets are initially recognized at fair value and are classified either as “fair value through profit and loss”; “available-for-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.

Fair Value through Profit or Loss

Financial assets at fair value through profit or loss are financial assets held-for-trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or if so designated by Management. Financial assets classified at fair value through profit or loss are measured at fair value, with the realized and unrealized changes in fair value recognized each reporting period on the consolidated statement of comprehensive income (loss). The Corporation’s investment in Intertain is classified as fair value through profit or loss.

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

 

Corporation has determined the fair value of the liability component. Then, the proceeds were allocated between the liability and the equity components using the residual method. Any directly attributable transaction costs are allocated to the liability and the warrants in proportion to their initial carrying amounts.

Subsequent to initial recognition, the liability component of the convertible debentures is measured at amortized cost using the effective interest method. The warrants are not re-measured subsequent to initial recognition.

The Corporation’s compound financial instruments comprise of a mezzanine subordinated unsecured term loan which grants the lenders, in relation to the Mezzanine Facility, 4 million common share purchase warrants, entitling the holders thereof to acquire one common share of Amaya at a price per common share equal to CAD$19.17 at any time up to a period ending 10 years after the closing date. The liability component of the non-convertible debentures is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The Corporation has determined the fair value of the liability component. Then, the proceeds were allocated between the liability and the equity components using the residual method. Any directly attributable transaction costs are allocated to the liability and the warrants in proportion to their initial carrying amounts.

Subsequent to initial recognition, the liability component of the convertible debentures is measured at amortized cost using the effective interest method. The warrants 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.

Determination of fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When measuring the fair value of an asset or a liability, the Corporation uses market observable data to the extent possible. If the fair value of an asset or a liability is not directly observable, it is estimated by the Corporation (working closely with external qualified valuers) using valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs (e.g. by use of the market comparable approach that reflects recent transaction prices for similar items, discounted cash flow analysis, or option pricing models refined to reflect the issuer’s specific circumstances). Inputs used are consistent with the characteristics of the asset / liability that market participants would take into account.

For the Corporation’s financial instruments which are recognized in the statement of financial position at fair value, the inputs used in measuring fair values are classified in the following levels in the fair value hierarchy:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3 – Inputs for the asset or liability that are not based on observable market data.

 

ACQUISITION-RELATED INTANGIBLES

 

Software Technology		Straight-line		5years
Customer Relationships		Straight-line		15 years
Brands		N/A		Indefinite useful life

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.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed except in cases where development costs meet certain identifiable criteria for deferral. Development costs, which have probable future economic benefit, can be clearly defined and measured, and are incurred for the development of new products or technologies, are capitalized. These development costs net of related research and development investment tax credits are not amortized until the products or technologies are commercialized, at which time, they are amortized over the estimated life of the commercial production.

The amortization method and the life of the commercial production are assessed annually and the assets are tested for impairment.

IMPAIRMENT OF NON-CURRENT ASSETS

At the end of each reporting period, the carrying amounts of property and equipment and intangible assets with finite useful lives are assessed to determine if there is any evidence that an asset is impaired. If there is such evidence, the recoverable amount of the asset is estimated. The recoverable amount of intangible assets with indefinite useful lives or those are not ready for use is estimated on the same date each year.

The recoverable amount of an asset or a cash generating unit is the higher of value-in-use and fair value less costs to sell.

Assets that cannot be tested individually for the impairment test are grouped into the smallest group of assets that generates cash inflows through continued use that are largely independent of the cash inflows from other assets or groups of assets (“cash-generating unit” or “CGU”). For the impairment test of goodwill, goodwill has been allocated to one group of CGUs, so that the level at which the impairment is tested represents the lowest level at which Management monitors goodwill for internal Management purposes, in accordance with operating segment. Goodwill acquired in a business combination is allocated to the group of CGUs that is expected to benefit from synergies of the related business combination.

 

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 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 equity-settled 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.

EARNINGS PER SHARE

Basic earnings per common share are computed by dividing the earnings for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the treasury stock method by dividing the earnings for the period applicable to common shares by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued.

Dilutive earnings per share comprise of employee share-based compensation and broker warrants.

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.

 

ROYALTIES

The Corporation licenses various royalty rights from several owners of intellectual property rights. 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 straight-line 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.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements in conformity with IFRS requires Management to make estimates and assumptions that can have a significant effect on the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

Estimates and judgments are significant when:

 

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the outcome is highly uncertain at the time the estimates are made; or

 

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different estimates or judgments could reasonably have been used that would have had a material impact on the consolidated financial statements.

The consolidated financial statements include estimates based on currently available information and Management’s 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 Management’s 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 September 30, 2014, 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 arm’s 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 uses 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 September 30, 2014, was 12.00%. As at September 30, 2014, there was no need for impairment.

 

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 September 30, 2014 a valuation allowance of $5,574,000 (2013 – $4,314,532) was recorded.

Changes in the expected operating results, enacted tax rates, legislation or regulations, and the Corporation’s 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.

Deferred Development Costs

Amounts capitalized include the total cost of any external products or services and labour costs directly attributable to development. Management’s judgement is involved in determining the appropriate internal costs to capital i.e. The useful life represents Management’s view of the expected period over which the Corporation will receive benefits from the software 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.

Estimated useful lives of long-lived assets

Judgment is used to estimate each component of an asset’s useful life and is based on an analysis of all pertinent factors including, but not limited to, the expected use of the asset and in the case of an intangible asset, contractual provisions that enable renewal or extension of the asset’s legal or contractual life without substantial cost, and renewal history. If the estimated useful lives were incorrect, this could result in an increase or decrease in the annual amortization expense, and future impairment charges.

Recent Accounting Pronouncements

OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES (AMENDMENTS TO IAS 32)

Effective for annual periods beginning on or after January 1, 2014, on a retrospective basis. Early application is permitted. If an entity applies this amendment earlier than required, it shall disclose that fact and shall also make the disclosures required by Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) issued in December 2011.

The Corporation has not yet assessed the impact of the adoption of this standard on its consolidated financial statements.

 

An entity shall apply this Standard for annual reporting periods beginning on or after January 1, 2017. Earlier application is permitted. IFRS 15 will not however be available for earlier application by those entities reporting under Canadian GAAP until the necessary due process, translation and publication processes have been completed by the AcSB.

Off Balance Sheet Arrangements

The Corporation’s commitments under lease agreements for premises, hardware support contracts, and purchase obligations aggregate to approximately $93,750,000. The minimum annual payments are as follows:

 

		$000’s
Within one year			18,259
Later than one year but not later than 5 years			33,934
More than 5 years			41,377

OUTSTANDING SHARE DATA

As at November 13, 2014, the Corporation had a total of 132,559,035 common shares issued and outstanding, 1,139,356 preferred shares issued and outstanding, 10,255,415 options issued under the Corporation’s stock option plan, and 16,267,890 share purchase warrants issued and outstanding.

BUSINESS RISKS AND UNCERTAINTIES

The Corporation operates in a rapidly changing environment that involves numerous risks and uncertainties, many of which are beyond Amaya’s control and which could have a material effect on Amaya’s business, revenue, operating results and financial condition.

Each of these risk factors could materially adversely affect the Corporation’s business, revenue, operating results and financial condition, as well as materially adversely affect the value of an investment in the securities of the Corporation.

The Corporation’s current principal risks and uncertainties as identified by Management are described below:

 

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The manufacture and distribution of gaming solutions is subject to extensive scrutiny and regulation at all levels of government;

 

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Online, social, casual and mobile gaming is a relatively new industry that continues to evolve. The success of this industry and Amaya’s online business will be affected by future developments in social networks, mobile platforms, legal or regulatory developments which are beyond Amaya’s control;

 

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The Corporation and its licensees are subject to applicable laws in the jurisdictions in which they operate and future legislative and court decisions may have a material impact on operations and financial results;

 

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The Corporation’s Native American tribal customers that operate Class II games under the IGRA are subject to regulation by the NIGC. Any changes in regulations could cause the Corporation to modify its Class II games to comply with the new regulations, which may result in the Corporation’s products becoming less competitive;

 

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Any license, permit, approval or finding of suitability may be revoked, suspended or conditioned at any time. The loss of a license in one jurisdiction could trigger the loss of a license or affect Amaya’s eligibility for a license in another jurisdiction;

 

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The Corporation has experienced and expects to continue to experience rapid growth in the Corporation’s headcount and operations, placing significant demands on its operational and financial infrastructure. If the Corporation does not effectively manage its growth, its ability to develop and market its solutions could suffer, which could negatively affect its operating results;

 

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Contract awards by lottery authorities are sometimes challenged by unsuccessful bidders, which can result in costly and protracted legal proceedings that can result in delayed implementation or cancellation of the award. Further, there can be no assurance that the current contracts of Amaya will be extended or that Amaya will be awarded new contracts as a result of competitive bidding processes in the future;

 

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Some of the Corporation’s licensees rely on Internet service providers to allow the Corporation’s licensees’ customers and servers to communicate with each other. If Internet service providers experience service interruptions, communications over the Internet may be interrupted and impair the Corporation’s ability to carry on business. Further, there can be no assurance that the Internet infrastructure or the Corporation’s own network systems will continue to be able to meet the demand placed on it by the continued growth of the Internet, the overall online gaming industry or of the Corporation’s customers;

 

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Any disruption in the Corporation’s network or telecommunications services could affect the Corporation’s ability to operate its games or financial systems, which would result in reduced revenues and customer down time;

 

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In addition to regulations pertaining to the gaming industry in general and specifically to online gaming, the Corporation may become subject to any number of laws and regulations that may be adopted with respect to the Internet and electronic commerce. These laws could have a material adverse effect on Amaya’s business, revenues,operating results and financial condition;

 

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The Corporation’s ability to make scheduled payments on or to refinance its debt obligations and to make distributions to enable it to service its debt obligations depends on its financial and operating performance. If the Corporation’s cash flows and capital resources are insufficient to fund its debt service obligations, it may be forced to reduce or delay activities and capital expenditures, sell assets, seek additional capital, or restructure or refinance its indebtedness;

 

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As a supplier of gaming solutions, the Corporation must continually offer themes and products that appeal to gaming operators and players. The Corporation’s success depends in part on unpredictable and volatile factors that are beyond its control, such as customer preferences, competing games, travel activity and the availability of other entertainment activities;

 

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The Corporation is heavily dependent on the gaming industry. A decline in demand for the Corporation’s products in the gaming industry could adversely affect its business;

 

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From time to time, Amaya may be subject to litigation claims through the ordinary course of its business operations which could result in substantial costs and diversion of Amaya’s resources. This could cause a material adverse effect on its business, financial condition and results of operations;

 

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Achieving the benefits of the Oldford Group acquisition depends in part on successfully supporting the B2C Business’s growth initiatives and operations in a timely and efficient manner, as well as Amaya’s ability to realize the anticipated growth and development opportunities. The process will require the dedication of management effort, time and resources which may divert management’s focus and resources from other strategic opportunities and from operational matters during this process. These decisions will present challenges to management and special risks pertaining to possible unanticipated liabilities, unanticipated costs, and the potential loss of key employees. This process may result in the loss and the disruption of ongoing business, customer and employee relationships that may adversely affect Amaya’s ability to achieve the anticipated benefits of the acquisition and as a result of these factors, it is possible that the anticipated benefits of the acquisition and the growth of Amaya and the B2C Business will not be realized.

 

Cautionary Note Regarding Forward Looking Statements

Certain statements contained or incorporated by reference herein constitute forward-looking statements under Canadian securities legislation. These statements relate to future events or the Corporation’s future performance, business prospects or opportunities and product development. All such statements other than statements of historical fact are forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Corporation believes that the expectations reflected in those forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements contained or incorporated by reference herein should not be unduly relied upon. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained or incorporated by reference in this document.

These forward-looking statements involve risks and uncertainties relating to, among other things, the Corporation’s limited operating history, the heavily regulated industry, the significant barriers to entry to the market for the Corporation’s solutions, competition issues, the possibility that the Corporation be unable to complete future acquisitions and integrate those businesses successfully, , the impact of change in regulations or industry standards, international operations and risks of foreign operations. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, the risk factors described in this document as well as the Corporation’s other publicly disclosed documents.

Further Information

Additional information on the Corporation, including the Annual Information Form, may be obtained on SEDAR at www.sedar.com.

Montreal, Quebec

November 13, 2014

 

(Signed) “Daniel Sebag”

Daniel Sebag, CPA, CA Chief Financial Officer