VGW HOLDINGS LIMITED AND CONTROLLED ENTITIES ABN

Transcription

1 VGW HOLDINGS LIMITED AND CONTROLLED ENTITIES ABN ANNUAL REPORT 2017

2 Contents Corporate directory 2 Directors report 3 Auditors independence declaration 11 Financial report Statement of profit and loss and other comprehensive income 12 Statement of financial position 13 Statement of changes in equity 14 Statement of cash flows 15 Notes to the financial statements 16 Directors declaration 39 Independent auditor s report to the members of VGW Holdings Limited 40 1

3 Corporate Directory Directors Nigel Blythe-Tinker Executive Chairman Laurence Escalante Executive Director Mats Johnson Executive Director Lorenzo Escalante Non-executive Director Kenneth Alexander Non-executive Director, appointed 1 January 2017 Mark Potts Non-executive Director, appointed 19 July 2017 Company secretary Registered office & principal place of business Rointon Nugara Level St Georges Terrace Perth, WA 6000 Telephone: Share register Auditor Solicitors Bankers Website Advanced Share Registry Services 110 Stirling Hwy, Nedlands WA 6009 Grant Thornton Level 17, 383 Kent Street, Sydney, NSW 2000 DLA Piper Australia Level 22 No.1 Martin Place Sydney NSW 2000 Commonwealth Bank of Australia 150 St Georges Terrace Perth, WA

4 Directors Report The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the consolidated entity or Group ) consisting of VGW Holdings Limited (referred to as the company or parent entity ) and the entities it controlled at the end of, or during, the year ended 30 June Principal Activities The principal activity of the Group during the financial year was the development and distribution of social casino games offering virtual currency gaming and cash prize contests. The majority of the Group s customers are based in North America. As of reporting date the majority of operations were conducted in Australia. The following significant changes in the nature of the principal activities occurred during the financial year: - The Company continued to develop its Maltese operations in preparation for transfer of its social gaming operations to Malta in anticipation of the granting of Malta gaming licenses; and - The Group launched its Poker product line in December Development of other new product lines commenced during the year. There were no other significant changes in the nature of the consolidated entity s principal activities during the financial year. Operating Results and Review of Operations for the year Key Operating Results The Group recorded consolidated revenue of $113.9m (2016: $38.3m). Review of operations The Company recorded significant growth in revenues, up $75.6 million to $113.9 million (2016: $38.3m). Its flagship Chumba Casino grew 148% to $95.1 million; whilst its Global Poker product, launched only in December 2016, contributed $18.9 million. Active playing customers grew from 89,402 to 233,292 over the period. These strong results were largely attributable to the significant increase and effectiveness of targeted marketing spend, which totaled $30.4 million (2016: $9.8m), the majority spent on Facebook advertising. Cost of sales increased in line with revenues, with sweepstakes paid of $62.3 million (2016: $20.4m), or 55% of revenue (2016: 53%). Merchant fees also increased in line with revenues; whilst revenue share associated with Global Poker were recorded. The Company continued its conservative approach to fully provisioning for cashable sweeps. Operating cost growth reflected the necessary expansion to support revenue growth. Employee costs grew significantly on the back of a large increase in headcount in both the Perth and Sydney offices. Key areas to benefit from this increase included technical operations and infrastructure, data and analytics, marketing and product development. Customer service headcount also grew to appropriately service the large increase in customers. In January 2017, the Company introduced a Long-Term Incentive Plan with the issue of options to directors and staff. The first tranche, valued at $2.8 million, was charged in full to the P&L. Costs associated with the Company's Malta expansion strategy, together with its plan to list on the Main Board of the Australian Securities Exchange, accounted for the increase in professional, consulting and compliance costs. The consolidated loss of the Group amounted to $8.7m (2016: $2.7m). 3

5 Directors Report Financial Position The net assets of the Group were $2.6m at 30 June 2017 (2016: $7.0m). The reduction is largely attributable to costs associated with the significant ramp up in operations as outlined in the Review of Operations section above. A small capital raising was completed in December 2016, and raised $1.3m to help fund operations. Despite the reduced net assets at the reporting date, the Directors believe the Company remains in a strong position to finance the expected expansion of its operations. Revenue and margin growth, together with a measured growth in operating costs, are in line with the Group's strategic goals and deliverables. Significant Changes in State of Affairs The following significant changes in the state of affairs of the Group occurred during the financial year: i. On 27 October 2016, 360 million Performance Shares (being the first three tranches as outlined in the terms of the Performance Shares Issue Agreement between the Group and Lance East Corporation Inc.) were converted to 360 million Ordinary Shares and issued to Lance East Corporation Inc., a related entity of Mr Laurence Escalante. ii. The Group established a subsidiary corporate Group in Malta as part of a strategic initiative to de-risk its current operations, and expand internationally. The Maltese Group applied for a number of remote gaming licences, which if granted, would enable the transfer of the parent entity's gold coin and sweepstakes operations to Malta. iii. In corollary to the establishment of the Malta corporate group, the Group is in the process of seeking to list on the Main Board of the Australian Securities Exchange. Events after the Reporting Period i. On 19 July 2017, Mr. Mark Potts was appointed to the Board as Non-executive Director. ii. On 16 August 2017, the Malta Gaming Authority granted the VGW Group, the Class 1 and Class 3 remote gaming licenses which the Group had applied for. This paves the way for the Maltese subsidiary corporate Group to become fully operational. iii. On 14 August 2017, the Group acquired certain assets of Open Wager, Inc. (OW), an entity incorporated in Nevada, USA but with principal operations in California and Colorado, providing social casino platform and content licensing, for a consideration of USD$0.53m. The asset purchase was as a result of OW's decision to terminate its operations. Further to the asset purchase, the Company then considered the possibility of engaging a number of OW's employees given their detailed knowledge of the acquired assets. All OW's employees were to be terminated as a result of its cessation of operations. Accordingly, the Company incorporated VGW US, Inc., a wholly owned subsidiary, on 28 August 2017, and on 1 September 2017, VGW US, Inc. employed the employees. The initial accounting for this asset acquisition is incomplete at the time the financial statements are authorized for issue. NB: in relation to both the terms of the Asset Purchase Agreement and the engagement of ex-ow employees, no liabilities, provisions or other obligations that may have been owed by OW, would be transferred or assumed by the Company. iv. From the Balance Sheet date to date of this report, the Company received $1.2m from the exercise of options which were issued between 23 June 2015 to 14 August

6 Directors Report Events after the Reporting Period (continued) Apart from the matters disclosed above, there are no other matters or circumstances that have arisen since the end of the year that have significantly affected or may significantly affect either: the entity s operations in the future financial years, the results of those operations in future financial years; or the entity s state of affairs in future financial years. Likely Future Developments Current areas of strategic focus of the Group include the following: Migrating current gaming operations to Malta and expand internationally; Monetizing the assets purchased from Open Wager, Inc.; Expanding product offering; and Listing on the Main Board of the Australian Securities Exchange The above are expected to assist in the achievement of the Group s long-term goals and development of new business opportunities. Environmental Legislation The Group s operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a State or Territory in Australia. 5

7 Directors Report Directors The directors of the Company at any time during or since the end of the financial year are: Name, qualifications and independence status Nigel BLYTHE-TINKER Executive Chairman VGW Holdings Limited Laurence ESCALANTE Executive Director VGW Holdings Limited Mats JOHNSON Executive Director VGW Holdings Limited Experience, special responsibilities and other directorships Nigel holds a Bachelor of Laws degree (LL.B) and is a Fellow of the Institute of Chartered Secretaries and Administrators (FCIS) of the United Kingdom. He has extensive UK and international corporate experience over thirty years covering M&A, corporate finance, restructuring, AIM and FTSE 100 flotations, and corporate governance. Nigel has held senior executive/legal and board positions within companies in the financial services, insurance, industrial and leisure and gaming sectors in mainly public listed companies. He was Group Company Secretary & Head of Legal at William Hill PLC. He was also Non-executive Chairman of Gaming VC Plc, a FTSE 100 listed company. Prior to joining VGW, Nigel held the role of Executive Chairman of Pentasia Limited, an i-gaming recruitment business. Director from 15 August Laurence is an entrepreneur in the gaming sector with financial planning and advisory experience. He studied Economics and Actuarial Studies at Macquarie University in Sydney and has 10 years financial planning experience as a technical and investment specialist, working as an advisor with AMP, ANZ, and boutique financial advisory firms. Laurence also has 12 years executive game development experience, founding Anino Mobile, the first independent game development studio in the Philippines. He is the founder and managing director of Lance East Corporation, an international investment company with a controlling interest in VGW Holdings Limited and business ventures in the Philippines. Director from 4 November Mats is a senior technology and online gaming executive with significant experience in establishing and growing both public and private online business globally. He has previously held roles as a Director at Coral Eurobet, General Manager at Centrebet and CEO at Playsafe. Mats has 15 years of digital and gaming sector expertise, alongside comprehensive M&A experience, having been actively involved in several successful exits of online gaming companies, including the 2.18Bn sale of Coral Eurobet to Gala Group. Director from 1 November

8 Directors Report Directors (continued) Name, qualifications and independence status Lorenzo ESCALANTE Non-executive Director VGW Holdings Limited Experience, special responsibilities and other directorships Lorenzo is an IT Business Intelligence specialist, with over 30 years experience in the corporate IT sector. He has a particular specialty in Business Objects business intelligence platform, having worked with BHP, AAPT, ING Australia, ANZ Wealth and LandCorp in their BI systems. Director from 5 August Kenneth ALEXANDER Non-executive Director VGW Holdings Limited Kenneth has extensive experience in the online real money gaming sector having served as Chief Executive of GVC Holdings PLC, a London Stock Exchange listed entity, since March 2007 He holds a Bachelor s degree in accountancy from Glasgow University and is a Chartered Accountant with the Institute Chartered Accountants of Scotland. Director from 1 January 2017 Mark POTTS Non-executive Director VGW Holdings Limited Mark is an experienced and leading global technology executive with more than 30 years experience in large corporations and start-ups. Mark is currently the Chief Technology Officer (CTO) at Advara and was the world-wide CTO and VP for Corporate Strategy at Hewlett-Packard Enterprise in the US. He currently holds numerous board positions including Resolute Mining, Decimal Software Ltd. and Ajilon Australia. Director from 19 July 2017 Company Secretary Mr Rointon Nugara continues as company secretary, a position held since Meetings of Directors Full Board Remuneration Committee Audit Committee Attended Held Attended Held Attended Held Nigel Blythe-Tinker Laurence Escalante Mats Johnson Lorenzo Escalante Kenneth Alexander Held represents the number of meetings held during the time the director held office or was a member of the relevant committee. Dividends No dividends were paid during the financial year (2016: nil). 7

9 Directors Report Options 1. Long-term Incentive Plan (LTIP) In January 2017, VGW established a Long-Term Incentive Plan (LTIP) which is part of VGW's reward strategy in support of the achievement of the Company s business strategy. In January and April 2017, 41,551,257 options were granted as Tranche 1 with an exercise price of $0.20. These options vests immediately, therefore, there were no vesting conditions. Majority of the options have a two-year expiry period. 6,667,695 options representing Tranche 2 and 6,667,696 options representing Tranche 3 have been offered, conditional upon the approval of VGW s shareholders in its next annual meeting in November Tranches 2 and 3 are subject to the achievement of vesting conditions and performance hurdles. 2. Free-attaching options on the Pre-IPO Capital Raise In December 2016, VGW undertook a Pre-IPO capital raise. This involved the issue of shares at 16.2 cents per share together with one free-attaching option for every three pre-ipo shares issued at an exercise price of 20 cents per share. These options expire within two years from grant date. The Pre-IPO raise has generated a total of $1.3m. 3. Free-attaching options on Previous Capital Raise In the period between 23 June 2015 to 14 August 2015, VGW issued a combination of one share and one option for a total price of $0.05 (pre-consolidation), to unrelated parties on an arm s length basis. A total of 97,362,112 options over issued shares or interest in the Company were issued. The options were standard call options exercisable at $0.05 (pre-consolidation) per share over a two-year period Post consolidation, there were 299,999 options and 32,153,991 options with an exercise price of $0.15 which expires on 23 June 2017 and 24 August As of reporting date, under half of these options have not been exercised, therefore, have been forfeited. Directors Interest The relevant interest of each director or their associated entities in the share capital of the Company as at 30 June 2017 is as follows: VGW Holdings Limited Mr Nigel Blythe-Tinker Mr Laurence Escalante Mr Mats Johnson Mr Kenneth Alexander 6,535,802 ordinary shares 266,666,666 ordinary shares and 96,666,666 performance shares 308,643 ordinary shares 375,000 ordinary shares As at end of the financial year, 96,666,666 Performance Shares were on issue to Lance East Corporation, a related entity of Mr Laurence Escalante. These shares represent the final three (of six) tranches (Tranche D: 40,000,000; Tranche E: 40,000,000 and Tranche F: 16,666,666) issued to Lance East in August Subject to audit clearance of the 30 June 2017 Accounts, all three Tranches will be converted to an equal number of Ordinary Shares, as the relevant performance hurdles as outlined in the original Performance Shares Agreement, will have been met in the 2016/17 financial year. 8

10 Directors Report Directors Interest (continued) The relevant interest of each director or their associate entities in unissued ordinary shares of VGW Holdings Limited under option as at 30 June 2017 are: Date options granted Expiry date Exercise price Number of options Mr Nigel Blythe-Tinker 31 Jan Jan ,000,200 Mr Nigel Blythe-Tinker Mr Nigel Blythe-Tinker 31 Jan Aug Jan Aug , ,666 Mr Laurence Escalante 31 Jan Jan ,328,720 Mr Mats Johnson Mr Mats Johnson 31 Jan Dec Jan Dec ,169, ,880 Mr Lorenzo Escalante 31 Jan Jan ,846 Mr Kenneth Alexander 1 Jan Jan ,333 Auditor s Independence Declaration The lead auditor s independence declaration for the year ended 30 June 2017 has been received and can be found on page 11 of the financial report. Insurance of officers During the year, the Company paid a premium to insure officers of the Group. The officers of the Group covered by the insurance policy include all Directors. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else to cause detriment to the Group. Details of the amount of the premium paid in respect of insurance policies are not disclosed as such disclosure is prohibited under the terms of the contract. The Group has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify any current or former officer of the Group against a liability incurred as such by an officer. Indemnity of auditors The Group has agreed to indemnify its auditors, Grant Thornton, to the extent permitted by law, against any claim by a third party arising from the Group s breach of its agreement. The indemnity requires the Group to meet the full amount of any such liabilities including a reasonable amount of legal costs. A copy of the Auditor s Independence Declaration as required under s307c of the Corporations Act 2001 is included on page 11 of this financial report and forms part of this Directors Report. 9

11

12 Level 17, 383 Kent Street Sydney NSW 2000 Correspondence to: Locked Bag Q800 QVB Post Office Sydney NSW 1230 T F E info.nsw@au.gt.com W Auditor s Independence Declaration To the Directors of VGW Holdings Limited In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of VGW Holdings Limited for the year ended 30 June 2017, I declare that, to the best of my knowledge and belief, there have been: a no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b no contraventions of any applicable code of professional conduct in relation to the audit. GRANT THORNTON AUDIT PTY LTD Chartered Accountants R J Isbell Partner - Audit & Assurance Sydney, 4 October 2017 Grant Thornton Audit Pty Ltd ACN a subsidiary or related entity of Grant Thornton Australia Ltd ABN Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another s acts or omissions. In the Australian context only, the use of the term Grant Thornton may refer to Grant Thornton Australia Limited ABN and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. 11

13 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2017 Consolidated entity From continuing operations Note $ 000 $ 000 Revenue 3 113,934 38,299 Cost of Sales 3 (72,941) (23,359) Gross Profit 40,993 14,940 Finance income Finance costs 4 (61) (66) Other financial items 4 (1,180) (276) Other income Marketing and advertising fees 4 (30,394) (9,753) Legal and professional fees (5,049) (3,521) Employee benefits expense (6,819) (1,869) Share-based payments expense (2,794) - Depreciation and amortisation expense (1,065) (1,018) Technology and other communication expense (987) (383) Property and occupancy expense (473) (156) General and administration expense (1,200) (622) Total Expenses (49,726) (17,644) Loss before income tax (8,733) (2,704) Income tax (expense)/benefit Loss for the year attributable to members of the Group (8,733) (2,704) Other comprehensive income/(loss), net of income tax - - Total comprehensive income/(loss) for the year attributable to the owners of VGW Holdings Limited (8,733) (2,704) Earnings per share Cents Cents From continuing operations: - Basic loss per share 20 (2.15) (0.78) - Diluted loss per share 20 (2.15) (0.78) This Statement of Profit or Loss and Other Comprehensive Income is to be read in conjunction with the accompanying notes to the financial statements. 12

14 STATEMENT OF FINANCIAL POSITION AS OF 30 JUNE 2017 Consolidated entity Note $ 000 $ 000 Assets Current assets Cash and cash equivalents 7 7,433 4,489 Trade and other receivables 8 1, Other current assets 9 2, Total current assets 11,516 5,176 Non-current assets Property, plant and equipment Intangible assets 12 5,247 5,627 Total non-current assets 5,424 5,666 Total assets 16,940 10,842 Liabilities Current liabilities Trade and other payables 13 9,861 2,901 Provisions 14 4, Borrowings Total current liabilities 14,317 3,679 Non-current liabilities Convertible notes Total non-current liabilities Total liabilities 14,317 3,829 NET ASSETS 2,623 7,013 Equity Share capital 17 20,672 19,123 Convertible notes Reserves 19 2,794 - Accumulated losses (21,093) (12,360) TOTAL EQUITY 2,623 7,013 This Statement of Financial Position is to be read in conjunction with the accompanying notes to the financial statements. 13

15 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2017 Consolidated entity Balance at 1 July 2015 Issue of share capital Employee shares exercised Transaction cash on share issue Loss for the year Share Capital Convertible Notes Share Option Reserve Accumulated Losses Total Equity $ 000 $ 000 $ 000 $ 000 $ , (9,656) 5,346 4, , (694) - - (400) (400) (2,704) (2,704) Balance as at 30 June , (12,360) 7,013 Balance at 1 July , (12,360) 7,013 Issue of share capital Employees Long-Term Incentive Plan Share Options Transaction costs on share issue Loss for the year 1, , ,794-2,794 (18) (18) (8,733) (8,733) Balance as at 30 June , ,794 (21, 093) 2,623 The Statement of Changes in Equity is to be read in conjunction with the accompanying notes to the financial statements. 14

16 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2017 Consolidated entity Cash flows from operating activities Note $ 000 $ 000 Receipts from customers 114,000 36,980 Payment to suppliers and employees (110,289) (35,736) Interest received Government grants received Net cash from operating activities 23 4,000 1,690 Cash flows from investing activities Payments for property, plant and equipment (178) (47) Payment for intangibles and development expenditure (513) (1,012) Investment in term deposit (1,507) - Net cash from investing activities (2,198) (1,059) Cash flows from financing activities Proceeds from issue of shares 1,362 3,834 Capital raising costs (18) (888) Redemption of convertible notes (150) - Net (repayments)/proceeds from borrowings (52) 104 Net cash from financing activities 1,142 3,050 Net increase in cash and cash equivalents 2,944 3,681 Cash and cash equivalents at beginning of year 4, Cash and cash equivalents at end of year 7,433 4,489 The Statements of Cash Flows are to be read in conjunction with the notes to the financial statements. 15

17 Note 1: Summary of Significant Accounting Policies Basis of Preparation The financial report includes the consolidated financial statements and notes of VGW Holdings Limited and controlled entities ( Group ). The Group has elected to adopt the Australian Accounting Standards Reduced Disclosure Requirements (established by AASB 1053 Application of Tiers of Australian Accounting Standards and AASB Amendments to Australian Accounting arising from Reduced Disclosure Requirements). These financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards Reduced Disclosure Requirements and the Corporations Act VGW Holdings Limited is a for-profit entity for the purpose of preparing financial statements. The consolidated financial statements for the year ended 30 June 2017 were approved and authorised for issue by the Board of Directors on 20 September New and revised standards that are effective for these financial statements A number of new and revised standards became effective for annual periods beginning on or after 1 July Information on the more significant standards is presented below. AASB Amendments to Australian Accounting Standards Clarification of Acceptable Methods of Depreciation and Amortisation. The amendments to AASB 116 prohibit the use of a revenue-based depreciation method for property, plant and equipment. Additionally, the amendments provide guidance in the application of the diminishing balance method for property, plant and equipment. The amendments to AASB 138 present a rebuttable presumption that a revenue-based amortisation method for intangible assets is inappropriate. This rebuttable presumption can be overcome (i.e. a revenue-based amortisation method might be appropriate) only in two (2) limited circumstances: i. the intangible asset is expressed as a measure of revenue, for example when the predominant limiting factor inherent in an intangible asset is the achievement of a revenue threshold (for instance, the right to operate a toll road could be based on a fixed total amount of revenue to be generated from cumulative tolls charged); or ii. when it can be demonstrated that revenue and the consumption of the economic benefits of the intangible asset are highly correlated. AASB is applicable to annual reporting periods beginning on or after 1 January The adoption of these amendments has not had a material impact on the Group. AASB Amendments to Australian Accounting Standards Equity Method in Separate Financial Statements. The amendments introduce the equity method of accounting as one of the options to account for an entity s investments in subsidiaries, joint ventures and associates in the entity s separate financial statements. AASB is applicable to annual reporting periods beginning on or after 1 January The adoption of these amendments has not had a material impact on the Group. 16

18 1.2 Significant Accounting Policies Overall considerations The consolidated financial statements have been prepared using the significant accounting policies and measurement bases summarised below. a. Principles of Consolidation The consolidated financial statements incorporate all of the assets, liabilities and results of the Parent and its subsidiaries as at 30 June Subsidiaries are entities the parent controls. The parent controls an entity when it is exposed to, or has right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Details for the subsidiaries are provided in Note 10: Controlled Entities. The assets, liabilities and results of all subsidiaries are fully consolidated into the financial statements of the Group from the date on which control is obtained by the Group. The consolidation of a subsidiary is discontinued from the date that control ceases. Intercompany transactions, balances, unrealised gains or losses on transactions between the group entities are fully eliminated on consolidation. Accounting policies of subsidiaries have been changed and adjustments made where necessary to ensure uniformity of the accounting policies adopted by the Group. All subsidiaries have a reporting date of 30 June. b. Income Tax The income tax expense/(income) for the year comprises current income tax expense/(income). Current income tax expense charged to profit or loss is the tax payable on taxable income. Current tax liabilities/(assets) are therefore measured at the amounts expected to be paid to/(received from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year. Current and deferred income tax expense/(income) is charged or credited outside profit or loss when the tax relates to items that are recognised outside profit or loss. Except for business combinations, no deferred income tax is recognised from the initial recognition of an asset or liability where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the realised asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. VGW Holdings Limited and its wholly-owned Australian controlled entity have not elected to implement tax consolidation legislation. 17

19 Note 1: Summary of Significant Accounting Policies (continued) c. Property, Plant and Equipment Plant and equipment are measured on the cost basis and are therefore carried at cost less accumulated depreciation and any accumulated impairment losses. In the event the carrying amount of plant and equipment is greater than its estimated recoverable amount, the carrying amount is written down immediately to its estimated recoverable amount and impairment losses are recognised either in profit or loss or as a revaluation decrease if the impairment losses relate to a revalued asset. A formal assessment of recoverable amount is made when impairment indicators are present (refer to note 1(e) for details of impairment). The cost of fixed assets includes the expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised as expenses in profit or loss during the financial period in which they are incurred. The depreciable amount of all fixed assets is depreciated on a straight-line basis over the assets useful life to the Group commencing from the time the asset is held ready for use. Depreciation is recognised in profit or loss. The depreciation rate used for the class of depreciable assets are: - Office Equipment 1-5 years - Computer Equipment and Software 3 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Operating lease policy Where the Group is a lessee, payments on operating lease agreements are recognised as an expense on a straightline basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred. d. Financial Instruments Initial recognition and measurement Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the company commits itself to either purchase or sell the asset (i.e. trade date accounting is adopted). Financial instruments are initially measured at cost plus transaction costs, except where the instrument is classified at fair value through profit or loss in which case transaction costs are recognised immediately as expenses in profit or loss. Subsequent to initial recognition these instruments are measured as set out below. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at cost. Loans and receivables are included in current assets, except for those which are not expected to mature within 12 months after the end of the reporting period, which will be classified as non-current assets. Financial liabilities Non-derivative financial liabilities (excluding financial guarantees) are subsequently measured at amortised cost. 18

20 Note 1: Summary of Significant Accounting Policies (continued) d. Financial Instruments (continued) Other Other non-derivative financial instruments are measured at amortised cost using the effective interest method less any impairment losses. Derecognition Financial assets are derecognised when the contractual rights to receipt of cash flows expire or the asset is transferred to another party whereby the entity no longer has any significant involvement in the risks and benefits associated with the asset. Financial liabilities are derecognised when the related obligations are discharged or cancelled, or have expired. The difference between the carrying amount of the financial liability extinguished or transferred to another party and the fair value of consideration paid, including the transfer of non-cash assets or liabilities assumed, is recognised in profit or loss. e. Impairment All impairment losses are recognised in the statement of profit or loss and other comprehensive income. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to the statement of comprehensive income. f. Intangibles other than Goodwill Software and website development costs Software and website development costs are capitalised only when the company identifies that the project will deliver future economic benefits and these benefits can be measured reliably. Software development costs and have a finite life and are initially recorded at cost and amortised on a systematic basis over five to eight years matched to the future economic benefits over the useful life of the asset. g. Employee Benefits Short-term employee benefits Provision is made for the Group s obligation for short-term employee benefits. Short-term employee benefits are benefits (other than termination benefits) that are expected to be settled wholly within 12 months after the end of the annual reporting period in which the employees render the related service, including wages, salaries and annual leave. Short-term employee benefits are measured at the (undiscounted) amounts expected to be paid when the obligation is settled. The Group s obligations for short-term employee benefits such as wages, salaries and annual leave are recognised as part of current trade and other payables in the statement of financial position. Equity-settled compensation The Group operates an employee share and option plan. Share-based payments are amortised over the vesting periods. The corresponding amount is recorded to the share based payment reserve. 19

21 Note 1: Summary of Significant Accounting Policies (continued) h. Provisions, Contingent Liabilities and Contingent Assets Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material. Any reimbursement that the Group can be virtually certain to collect from a third party with respect to the obligation is recognised as a separate asset. However, this asset may not exceed the amount of the related provision. No liability is recognised if an outflow of economic resources as a result of present obligation is not probable. Such situations are disclosed as contingent liabilities, unless the outflow of resources is remote in which case no liability is recognised. Effective 1 July 2016, the Company has adopted a policy of recognising a potential liability for cashable sweepstakes. i. Cash and Cash Equivalents Cash and cash equivalents comprise cash on hand and demand deposits held at call with banks and payment platforms such as Paypal, together with other short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. j. Revenue Facebook Revenue Revenue from Facebook is recognised on a gross basis before taking into account the service fee on revenue charged by Facebook. Chumba and Global Poker Revenue Revenues from player purchases on the Chumba and Global Poker websites are recognised gross of Paypal fees. The risks and rewards of the revenue earned lie with the Company and not with Paypal. This is in line with the agent vs principal guidance within AASB 118 Revenues. Paypal fees are included in cost of sales. Revenue is recognised when the right to receive the revenue has been established. The right to receive revenue is determined to be when gold coins are purchased. Interest income Interest income is reported on an accrual basis using the effective interest method. 20

22 Note 1: Summary of Significant Accounting Policies (continued) k. Trade and Other Receivables Current Trade and other receivables include amounts due from Facebook for player purchases made through Facebook in the ordinary course of business. Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost, less any provision for impairment. Trade receivables are generally due for settlement within 30 days. Due to their short-term nature, they are measured at amortised cost and are not discounted. Other receivables are recognised at amortised cost, less any provision for impairment. l. Trade and Other Payables Trade and other payables represent the liabilities for goods and services received by the Group during the reporting period that remain unpaid at the end of the reporting period. The balance is recognised as a current liability with the amounts normally paid within 30 days of recognition of the liability. m. Goods and Services Tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from the ATO are presented as operating cash flows included in payment to suppliers. n. Critical Accounting Estimates and Judgements The preparation of the financial statement requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates may differ to actual results. In preparing this consolidated interim financial statement, the significant judgements made by management in applying the Group s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statement as at and for the year ended 30 June The policy on Cashable sweepstakes has been retrospectively applied for the financial year commencing 1 July

23 Note 1: Summary of Significant Accounting Policies (continued) n. Critical Accounting Estimates and Judgements (continued) (i) Capitalisation of Software Development Costs Distinguishing the research and development phases of a new customised software project and determining whether the recognition requirements for the capitalisation of development costs are met requires judgement. After capitalisation, management monitors whether the recognition requirements continue to be met and whether there are any indicators that capitalised costs may be impaired. (ii) Business combinations Management uses valuation techniques in determining the fair values of the various elements of a business combination. Particularly, the fair value of contingent consideration is dependent on the outcome of many variables that affect future profitability. (iii) Useful lives of depreciable assets Management reviews its estimate of the useful lives of depreciable assets at each reporting date, based on the expected utility of the assets. Uncertainties in these estimates relate to technical obsolescence that may change the utility of certain software and IT equipment. o. Going Concern The consolidated financial statements have been prepared on a going concern basis, notwithstanding the loss for the year, accumulated losses to date and its net current liability position at 30 June A fundamental component of the ability to continue as a going concern is the Group s ability to achieve budgeted revenue growth whilst controlling expenditure. The Directors have prepared cash flow projections that support the ability of the Group to continue as a going concern, based on the following considerations: continued significant revenue growth as that experienced from FY2016 to FY2017 from the Group s existing products as well as new product launches; and expected net cash inflows from operations. In the event that the cash flow forecasts are not met, then this would place strain on cash reserves and the Group may need to consider mitigating actions to support ongoing operations. This gives rise to material uncertainty that may cast significant doubt upon the Group s ability to continue as a going concern. The Directors believe that the Group will be able to continue as a going concern and accordingly, the financial statements have been prepared on a going concern basis. 22

24 Note 1: Summary of Significant Accounting Policies (continued) p. Foreign Currency Transactions and Balances The consolidated financial statements are presented in Australian dollars ($AUD), which is also the functional currency of the Group. Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year-end exchange rate. Nonmonetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of monetary items are recognised in profit or loss, except where deferred in equity as a qualifying cash flow or net investment hedge. Exchange differences arising on the translation of non-monetary items are recognised directly in other comprehensive income to the extent that the underlying gain or loss is recognised in other comprehensive income; otherwise the exchange difference is recognised in profit or loss. q. New, revised or amended Accounting Standards and Interpretations Adopted A number of new standards. amendments to standards and interpretations are effective for annual periods beginning after 1 July 2016, and have not been applied in preparing these consolidated financial statements. Those which may be relevant to the Group are set out below: AASB 15 Revenue from Contracts with Customers, AASB 16 Leases; and AASB 9 Financial Instruments The entity is yet to undertake a detailed assessment of the impact of AASB 9, AASB 15 and AASB 16. However, based on the entity s preliminary assessment, the above Standards are not expected to have a material impact on the transactions and balances recognised in the financial statements when it is first adopted for the year ending 30 June 2018, 30 June 2019 and 30 June 2020, respectively. r. Rounding of Amounts The Company is a type of Company referred to in ASIC Corporations (Rounding in Financial/Directors Reports) Instrument 2016/191 and therefore the amounts contained in this report and in the financial report have been rounded to the nearest $1,000, or in certain cases, to the nearest dollar. 23

25 Note 2: Operating Segments As at the reporting date, the Group treats its operations as one business segment and reports accordingly. Management and the Board of Directors view and assess the Group as one business segment. Note 3: Revenue from Continuing Operations and Cost of Sales Revenue from Continuing Operations From Chumba website 90,620 34,108 From Facebook 4,435 4,191 From Global Poker website 18,879 - Total revenue 113,934 38,299 Cost of sales Sweepstakes paid 62,348 20,402 Revenue share 2,752 1,257 Merchant fees 4,454 1,116 Cashable sweepstakes 3, Total cost of sales 72,941 23,359 Gross Profit 40,993 14,940 24

26 Note 4: Other income (costs) and expenses $ 000 $ 000 Finance income Interest income Finance costs Interest expense (35) (41) Bank and other financial intermediary charges (26) (25) (61) (66) Other financial items Foreign currency realised gains/(loss) 34 (77) Foreign currency unrealised gains/(loss) (1,214) (199) (1,180) (276) Other income Export Marketing Development Grant Refund of gaming license application Marketing and advertisements Marketing Facebook (29,235) (9,580) Marketing Non-Facebook (1,159) (173) (30,394) (9,753) The Group spends heavily on marketing via Facebook to acquire and retain its customers, which drives revenue growth. Note 5: Income Tax Expense Current tax expense/(benefit) $ 000 $ 000 Current year (1,391) (689) Deferred tax expense Current year (253) (317) Tax losses recognised - - Expected income tax expense/(benefit) (1,644) (1,006) Income tax benefit not brought into account (1,644) 1,006 Actual tax benefit

27 Note 5: Income Tax Expense (continued) Numerical reconciliation between tax expense and pre-tax net profit $ 000 $ 000 Profit/(loss) before tax (8,733) (2,704) Income tax using the domestic corporation tax rate of 30% (2016:30%) (2,620) (811) (Decrease)/increase in income tax expense/(benefit) due to: R&D Tax Rebate Non-allowable items 1,229 (6) (1,391) (689) Deferred Tax Asset not brought to account (253) (317) Expected income tax expense/(benefit) on pre-tax net profit (1,644) (1,006) Income tax benefit not brought into account 1,644) 1,006 Actual tax benefit - - The franking account balance at the end of the year was Nil (2016: Nil). All unused tax losses were incurred by Australian entities. Net deferred tax assets have not been brought to account as it is not probable within the immediate future that tax profits will be available against which deductible temporary differences and tax losses can be utilised. Note 6: Key Management Personnel Compensation The totals of remuneration paid to KMP of the company during the year are as follows: $ 000 $ 000 Short-term employee benefits 2,299 1,544 Post-employment benefits Long Term Incentive Plan 1,800 - Total KMP compensation 4,218 1,637 Note 7: Cash and Cash Equivalents $ 000 $ 000 Cash at bank 5,608 3,945 Paypal account 1, Paypal bond ,433 4,489 The Paypal bond was backed by an on-demand guarantee provided through a US Dollar Bank Account into which US$250,000 has been deposited. The Paypal bond was subsequently released on 4 July The Paypal account is immediately accessible and has the same liquidity as cash, therefore classified as cash and cash equivalents. 26