INNOVA Announces Q1 Financial Results

INNOVA Announces Q1 Financial Results

“In Q1-2017, we generated strong Adjusted EPS growth as the LT-3’s deployed over the past year ramped up to higher levels of ARPU and our initiatives to maximize efficiency continued to drive profitability,” said Richard Weil, Chairman and CEO of INNOVA. “Our business is on track to reach an inflection point in 2017, where recurring revenue will generate more than enough cash to fund maintenance capital expenditures and drive positive free cash flow. While the process for new deployment mandates sometimes takes time, we are currently engaged in several late stage discussions with both existing and new customers to drive LT-3 deployments over the next 12 months. We are in a solid competitive position, with unique and innovative products that face limited competition, a solid base of recurring revenue and a strong balance sheet.”

Subsequent Highlights

On April 19, 2017, Pollard Banknote Limited (“Pollard Banknote“), through its wholly-owned subsidiary 10188557 Canada Inc., made an unsolicited offer to acquire all of the outstanding common shares of INNOVA (the “Shares“) for cash consideration of $2.10 per Share (the “Pollard Banknote Offer“).

On May 4, 2017, the board of directors of INNOVA (the “Board of Directors“) unanimously recommended that shareholders reject the Pollard Banknote Offer and not tender their Shares thereto.  A copy of the directors’ circular (the “Directors’ Circular“) prepared in connection with the Board of Directors’ recommendation to INNOVA’s shareholders is available under INNOVA’s issuer profile on SEDAR at www.sedar.com. Shareholders are strongly encouraged to read the Directors’ Circular carefully and in its entirety, as it contains important information regarding INNOVA, Pollard Banknote and the Pollard Banknote Offer, including a detailed discussion of the reasons for the recommendation of the Board of Directors.

To ensure that the best interests of INNOVA and its shareholders are served, a special committee of independent directors of INNOVA (the “Special Committee“) is currently overseeing a process (the “Strategic Review Process“) aimed at exploring and considering the full range of potential value-enhancing strategic alternative transactions to the Pollard Banknote Offer that may be available to INNOVA, including, but not limited to, soliciting expressions of interest regarding an acquisition of all of the Shares.

Since the launch of the Strategic Review Process, INNOVA and its financial advisor have approached, or have been approached by, a number of third parties who have expressed interest in considering transactions involving the Company. INNOVA has entered into confidentiality agreements with 10 interested parties and has provided each of them with a confidential information memorandum containing detailed information regarding INNOVA and its business and a financial model based on projections provided by the Company’s senior management team in order to assist these interested parties in assessing potential alternative transactions to the Pollard Banknote Offer that may be in the best interests of INNOVA and its shareholders. Discussions remain ongoing with these parties and several other parties who have expressed an interest in considering potential value-enhancing alternative transactions to the Pollard Banknote Offer.

While there can be no assurances that a transaction superior to the Pollard Banknote Offer will emerge from the Strategic Review Process, the Board of Directors believes that INNOVA and its business may be very attractive to parties other than Pollard Banknote. The Pollard Banknote Offer is open for acceptance until August 3, 2017 and remains subject to numerous conditions. Accordingly, INNOVA’s shareholders should be patient and understand that tendering their Shares to the Pollard Banknote Offer before the Special Committee and its advisors have had an opportunity to fully explore all available alternatives to the Pollard Banknote Offer may preclude a financially superior transaction from emerging.

Selected Unaudited Condensed Consolidated Financial Information

Selected Unaudited Condensed Consolidated Financial Information (continued)

Revenue

Compared to the same period in 2016, revenue increased by $0.3 million or 6% in Q1-2017 due mainly to an increase in LT-3 revenue of $0.5 million or 10%, partially offset lower alternative gaming product (AGP) revenue of $0.2 million or 52%. LT-3 revenue growth was primarily attributable to seasonal upticks in machine performances and higher average machine deployments relative to Q1-2016, most significantly in Missouri and Maryland. The lower AGP revenue is primarily attributable to the removal of 117 machines from operation relative to the end of the same period in 2016.

The increase in LT-3 WPU and ARPU was primarily attributable to LT-3 deployments into comparably higher-performance locations in Missouri, and improvements resulting from additional game features in Ontario, offsetting the decrease in the fixed fee revenue components of some contracts. The significant increase in AGP WPU is primarily due to the removal of relatively lower performing AGP machines.

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

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

For the three month period ended March 31, 2017, the Company recognized $385,902 of EBITDA support compensation as part of other non-operating income (Q1-2016: $380,850). Outstanding accounts receivable from Amaya as of March 31, 2017 was $1,089,826 (Q1-2016: $703,924).