01—Abstract
Summary
Summary of the 40-F filed March 22, 2017. Cited figures are marked; the original filing is the authoritative source.
Amaya Inc. filed its annual report on Form 40-F for the fiscal year ended December 31, 2016.
The filing states that the company operates a Business-to-Consumer (B2C) gaming business centered on Rational Group, which offers real-money online poker, casino and sportsbook under brands including PokerStars, PokerStars Casino, BetStars and Full Tilt. Revenue for 2016 was $1,155.9 milliona, up from $1,072.3 million in 2015, while net earnings from continuing operations were $135.6 million, compared with a net loss from continuing operations of $20.0 million in 2015. Poker revenue declined to $846.1 million, while Casino & Sportsbook revenue rose to $264.1 million.
The company remained highly leveraged, with approximately $2.53 billionb of outstanding indebtedness at December 31, 2016 and estimated fiscal 2017 debt service of about $138 million. Deloitte LLP's attestation report states that the company did not maintain effective internal control over financial reporting as of December 31, 2016, citing material weaknesses related to derivative valuation and hedge accounting and foreign exchange rate information. The filing also discloses a $290 million damages order in the Kentucky Proceeding, trebled to approximately $870 million, which the company is appealing and calls frivolous, along with an AMF investigation, U.S. and Quebec class actions, and an ongoing foreign payments review.
In 2017 the company repriced its First Lien Term Loans, expecting interest savings of about $15.4 millionc over twelve months, and continued to pay down the deferred purchase price for the Rational Group Acquisition, with a remaining balance of approximately $122.5 million as of the filing date. Its Chief Financial Officer announced plans to retire later in 2017.
02—Key points
Key Highlights
- Revenue of $1,155.9 million in 2016, up from $1,072.3 million in 2015
- Net earnings from continuing operations of $135.6 million in 2016, versus a net loss from continuing operations of $20.0 million in 2015
- Poker revenue of $846.1 million (down from $887.2 million); Casino & Sportsbook revenue of $264.1 million (up from $136.3 million)
- Approximately $2.53 billion of outstanding indebtedness at December 31, 2016; estimated 2017 debt service of approximately $138 million
- Internal control over financial reporting was not effective as of December 31, 2016, with two material weaknesses identified by management and Deloitte
- Kentucky Proceeding: trial court damages order of approximately $290 million, trebled to approximately $870 million; the company is appealing and posted a $100 million supersedeas bond
- March 2017 repricing of First Lien Term Loans, with expected interest savings of approximately $15.4 million over the next twelve months
03—Questions
Frequently Asked Questions
How did Amaya's profitability change in 2016?
Net earnings from continuing operations were $135.6 million in 2016, compared with a net loss from continuing operations of $20.0 million in 2015. The filing attributes the change in part to lower financial expenses ($138.0 million versus $197.2 million) and lower gaming duty ($113.1 million versus $139.2 million), with an income tax expense of $4.0 million in 2016 compared with $14.4 million in 2015.
What is the status of the Kentucky legal proceeding?
The Commonwealth of Kentucky obtained a trial court order for damages of approximately $290 million, which was trebled to approximately $870 million, relating to alleged gambling losses of Kentucky residents who played real-money poker on PokerStars. Amaya believes the action is frivolous, has filed a notice of appeal to the Kentucky Court of Appeals, and posted a $100 million supersedeas bond. The filing notes that the company intends to seek recovery against the former owners of Oldford Group if any amounts are ultimately owed.
Why did management and the auditor conclude internal controls were ineffective?
Management identified material weaknesses in controls over derivative valuations and hedge accounting, and in controls over foreign exchange rate information obtained from a single source. Deloitte LLP issued an adverse opinion on internal control over financial reporting. The filing states that remediation steps were taken in the fourth quarter of 2016 and in the first quarter of 2017, with effectiveness expected to be assessed at the end of the second quarter of 2017.
What is the remaining obligation related to the Rational Group Acquisition?
The deferred purchase price was originally $400 million payable February 1, 2017. The company paid $200 million in November 2016 and approximately $75 million in January 2017 and, as of the filing date, the remaining balance was approximately $122.5 million. The company plans to pay the balance over the course of 2017 from unrestricted cash and operating cash flow.
What are the main regulatory and litigation risks disclosed?
The filing discloses that online gaming is heavily regulated, with licenses that can be revoked, suspended or not renewed, and that PokerStars and Full Tilt have historically faced exit from certain markets such as the United States. Other disclosed matters include an AMF investigation in Quebec related to former CEO David Baazov, a foreign payments review involving the historical B2B business under review with the RCMP, U.S. Department of Justice and SEC, and U.S. and Quebec securities class actions that the company believes are without merit.
04—Continue