Activision Blizzard, Inc.
Activision Blizzard, Inc. (Form: 8-K/A, Received: 05/09/2016 17:48:00)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 8-K/A

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of report (Date of earliest event reported):  February 29, 2016

 

ACTIVISION BLIZZARD, INC.

(Exact Name of Registrant as Specified in Charter)

 

Delaware

 

001-15839

 

95-4803544

(State or Other Jurisdiction of
Incorporation)

 

(Commission File Number)

 

(IRS Employer
Identification No.)

 

3100 Ocean Park Boulevard,
Santa Monica, CA

 

90405

(Address of Principal Executive

 

(Zip Code)

Offices)

 

 

 

Registrant’s telephone number, including area code:  (310) 255-2000

 

 

(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):

 

o                  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o                  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o                  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o                  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 



 

Item 2.01.                                         Completion of Acquisition or Disposition of Assets.

 

On February 29, 2016, Activision Blizzard, Inc. (“ Activision Blizzard ”) filed a Current Report on Form 8-K (the “Initial 8-K”) to report the completion of its acquisition of King Digital Entertainment plc (“ King ”).  This amendment to the Initial 8-K is being filed by Activision Blizzard for the purpose of including the financial information described in Item 9.01 below that was previously omitted in accordance with Item 9.01(a) and Item 9.01(b) of Form 8-K.

 

Item 9.01.                                         Financial Statements and Exhibits.

 

(a)          Financial statements of businesses acquired.

 

The audited consolidated financial statements and footnotes of King as of and for the year ended December 31, 2015 are filed as Exhibit 99.2 and are incorporated herein by reference.

 

(b)          Pro forma financial information.

 

The following pro forma combined condensed consolidated financial statements of Activision Blizzard, reflecting the acquisition of King, are filed as Exhibit 99.3 and are incorporated herein by reference:

 

i.                   Unaudited pro forma condensed combined statement of operations for the year ended December 31, 2015;

 

ii.                Unaudited pro forma condensed combined balance sheet as of December 31, 2015.

 

(d)          Exhibits

 

23.1                         Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.

 

99.1                         Press Release dated February 23, 2016 (previously filed).

 

99.2                         Audited consolidated financial statements and footnotes of King, as of and for the year ended December 31, 2015.

 

99.3                         Unaudited pro forma condensed combined financial statements of Activision Blizzard, Inc., reflecting the acquisition of King Digital Entertainment plc.

 

2



 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: May 9, 2016

 

 

 

 

 

 

ACTIVISION BLIZZARD, INC.

 

 

 

 

 

By:

/s/ Chris B. Walther

 

 

Chris B. Walther

 

 

Chief Legal Officer

 

3



 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

23.1

 

Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.

 

 

 

99.1

 

Press Release dated February 23, 2016 (previously filed).

 

 

 

99.2

 

Audited consolidated financial statements and footnotes of King, as of and for the year ended December 31, 2015.

 

 

 

99.3

 

Unaudited pro forma condensed combined financial statements of Activision Blizzard, Inc., reflecting the acquisition of King Digital Entertainment plc.

 

4


Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-4 (No. 333-101304) and Form S-8 (Nos. 333-58922, 333-61573, 333-72014, 333-85383, 333-87810, 333-100114, 333-100115, 333-106487, 333-111131, 333-146431, 333-153661, 333-165123, 333-167428, 333-196956, 333-209825 and 333-209864) of Activision Blizzard, Inc. of our report dated February 8, 2016 relating to the financial statements of King Digital Entertainment PLC for the year ended December 31, 2015, which appears in this Form 8-K/A of Activision Blizzard, Inc.

 

 

/s/ PricewaterhouseCoopers LLP

 

 

 

London, United Kingdom

 

May 9, 2016

 

 


Exhibit 99.2

 

KING DIGITAL ENTERTAINMENT PLC

 

CONSOLIDATED FINANCIAL STATEMENTS AND FOOTNOTES

 

December 31, 2015, 2014 and 2013

 



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of:

 

King Digital Entertainment plc

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of King Digital Entertainment plc and its subsidiaries at December 31, 2015 and December 31, 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

 

London, United Kingdom

February 8, 2016

 

1



 

KING DIGITAL ENTERTAINMENT PLC

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In US$ thousands, except per share data)

 

 

 

 

 

Year Ended December 31,

 

 

 

Notes

 

2015

 

2014

 

2013

 

Revenue

 

6

 

$

1,999,490

 

$

2,260,241

 

$

1,884,301

 

Other income

 

 

 

13,079

 

9,163

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

636,295

 

716,743

 

584,358

 

Research and development

 

 

 

198,445

 

177,934

 

110,502

 

Sales and marketing

 

 

 

344,822

 

455,408

 

376,898

 

General and administrative

 

 

 

178,410

 

184,236

 

95,667

 

Total costs and expenses

 

7

 

1,357,972

 

1,534,321

 

1,167,425

 

Other gains (losses)

 

9

 

21,859

 

34,100

 

(870

)

Net finance costs

 

 

 

(667

)

(905

)

(1,731

)

Profit before tax

 

 

 

675,789

 

768,278

 

714,275

 

Income tax expense

 

10

 

159,010

 

193,427

 

146,681

 

Profit

 

 

 

$

516,779

 

$

574,851

 

$

567,594

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to the equity holders of the Company during the year

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

11

 

$

1.65

 

$

1.86

 

$

1.86

 

Diluted earnings per share

 

11

 

$

1.62

 

$

1.79

 

$

1.75

 

 

See accompanying notes to the consolidated financial statements.

 

2



 

KING DIGITAL ENTERTAINMENT PLC

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In US$ thousands)

 

 

 

Year Ended December 31,

 

 

 

2015

 

2014

 

2013

 

Profit for the year

 

$

516,779

 

$

574,851

 

$

567,594

 

Other comprehensive income:

 

 

 

 

 

 

 

Items that may be subsequently reclassified to profit

 

 

 

 

 

 

 

Exchange difference on translation of foreign subsidiaries, net of tax of $0

 

(18,603

)

(45,917

)

4,062

 

Total comprehensive income for the year

 

$

498,176

 

$

528,934

 

$

571,656

 

 

See accompanying notes to the consolidated financial statements.

 

3



 

KING DIGITAL ENTERTAINMENT PLC

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

(In US$ thousands)

 

 

 

 

 

December 31,

 

 

 

Notes

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

12

 

$

1,107,386

 

$

963,972

 

Trade and other receivables

 

13

 

157,880

 

228,392

 

Income tax receivable

 

 

 

39,654

 

103,748

 

Total current assets

 

 

 

1,304,920

 

1,296,112

 

Non current assets

 

 

 

 

 

 

 

Intangible assets, net

 

14

 

104,744

 

48,587

 

Property, plant and equipment, net

 

15

 

56,541

 

34,310

 

Deferred tax assets

 

16

 

30,745

 

14,733

 

Income tax receivable

 

 

 

34,598

 

38,431

 

Other deposits

 

 

 

2,599

 

9,604

 

Total non current assets

 

 

 

229,227

 

145,665

 

Total assets

 

 

 

$

1,534,147

 

$

1,441,777

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Trade and other payables

 

17

 

101,323

 

137,638

 

Deferred revenue

 

 

 

56,274

 

34,310

 

Income tax liabilities

 

 

 

167,570

 

232,637

 

Provision for other liabilities

 

18

 

4,017

 

 

Total current liabilities

 

 

 

329,184

 

404,585

 

Non current liabilities

 

 

 

 

 

 

 

Deferred tax liabilities

 

16

 

3,634

 

669

 

Income tax liabilities

 

 

 

52,136

 

51,589

 

Provision for other liabilities

 

18

 

9,673

 

3,055

 

Other non current liabilities

 

 

 

4,356

 

13,000

 

Total non current liabilities

 

 

 

69,799

 

68,313

 

Total liabilities

 

 

 

$

398,983

 

$

472,898

 

Shareholders’ equity

 

 

 

 

 

 

 

Share capital

 

19

 

77

 

78

 

Other reserves

 

 

 

404,181

 

456,499

 

Retained earnings

 

 

 

730,906

 

512,302

 

Total shareholders’ equity

 

 

 

1,135,164

 

968,879

 

Total liabilities and shareholders’ equity

 

 

 

$

1,534,147

 

$

1,441,777

 

 

See accompanying notes to the consolidated financial statements.

 

4



 

KING DIGITAL ENTERTAINMENT PLC

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

(In US$ thousands)

 

 

 

 

 

Other Reserves

 

 

 

 

 

 

 

Share
capital

 

Other
reserves

 

Other
comprehensive
income -
translation
reserve

 

Share-based
payment
reserve

 

Retained
earnings

 

Total
shareholders’
equity

 

Balance as of January 1, 2013

 

$

25

 

$

3,695

 

$

(280

)

$

9,639

 

$

20,452

 

$

33,531

 

Profit for the year

 

 

 

 

 

567,594

 

567,594

 

Currency translation differences

 

 

 

4,062

 

 

 

4,062

 

Total comprehensive income for the year

 

 

 

4,062

 

 

567,594

 

571,656

 

Share-based payments

 

 

 

 

48,879

 

 

48,879

 

Issuance of shares

 

40

 

 

 

 

 

40

 

Dividends

 

 

 

 

 

(286,719

)

(286,719

)

Balance as of December 31, 2013

 

$

65

 

$

3,695

 

$

3,782

 

$

58,518

 

$

301,327

 

$

367,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2014

 

$

65

 

$

3,695

 

$

3,782

 

$

58,518

 

$

301,327

 

$

367,387

 

Profit for the year

 

 

 

 

 

574,851

 

574,851

 

Currency translation differences

 

 

 

(45,917

)

 

 

(45,917

)

Total comprehensive income for the year

 

 

 

(45,917

)

 

574,851

 

528,934

 

Share-based payments

 

 

 

 

107,511

 

 

107,511

 

Issuance of shares

 

55

 

12,317

 

 

(11,622

)

 

750

 

Cancellation of shares

 

(42

)

 

 

 

 

(42

)

Reorganization and initial public offering (1)

 

 

328,215

 

 

 

 

328,215

 

Dividends

 

 

 

 

 

(363,876

)

(363,876

)

Balance as of December 31, 2014

 

$

78

 

$

344,227

 

$

(42,135

)

$

154,407

 

$

512,302

 

$

968,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2015

 

$

78

 

$

344,227

 

(42,135

)

$

154,407

 

$

512,302

 

$

968,879

 

Profit for the year

 

 

 

 

 

516,779

 

516,779

 

Currency translation differences

 

 

 

(18,603

)

 

 

(18,603

)

Total comprehensive income for the year

 

 

 

(18,603

)

 

516,779

 

498,176

 

Share-based payments

 

 

 

 

86,288

 

 

86,288

 

Repurchase of shares

 

(1

)

(125,728

)

 

 

 

(125,729

)

Issuance of shares

 

 

31,867

 

 

(26,142

)

 

5,725

 

Dividends

 

 

 

 

 

(298,175

)

(298,175

)

Balance as of December 31, 2015

 

$

77

 

$

250,366

 

$

(60,738

)

$

214,553

 

$

730,906

 

$

1,135,164

 

 

The amounts above are shown net of income tax expense.

 


(1) Refer to note 2 for details on the reorganization that occurred during the year ended December 31, 2014.

 

See accompanying notes to the consolidated financial statements.

 

5



 

KING DIGITAL ENTERTAINMENT PLC

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In US$ thousands)

 

 

 

Year Ended December 31,

 

 

 

2015

 

2014

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

Profit for the year

 

$

516,779

 

$

574,851

 

$

567,594

 

Adjustments to reconcile profit to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

27,359

 

14,845

 

6,363

 

Equity settled share-based payments

 

83,345

 

116,877

 

19,263

 

Unrealized foreign currency exchange (gain) loss

 

(7,752

)

(32,835

)

1,362

 

Loss on disposal of property, plant and equipment & intangible assets & derecognition of intangible assets

 

3,486

 

1,055

 

169

 

Impairment charge

 

2,875

 

 

 

Net finance costs

 

667

 

905

 

1,731

 

Income tax expense

 

159,010

 

193,427

 

146,681

 

Change in fair value of contingent consideration

 

(20,000

)

(4,000

)

 

Change in deferred revenue

 

21,964

 

23,368

 

5,261

 

Change in provisions

 

10,635

 

(15,513

)

15,513

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Trade receivables

 

78,141

 

4,020

 

(180,221

)

Prepayments, other receivables, current and non current assets

 

(3,974

)

(15,505

)

(12,581

)

Trade payables

 

(14,740

)

(5,488

)

17,677

 

Accrued expenses and other liabilities

 

(16,058

)

(44,130

)

125,425

 

Cash generated from operations

 

841,737

 

811,877

 

714,237

 

Interest received

 

278

 

275

 

150

 

Finance costs paid

 

(783

)

(1,020

)

(1,881

)

Income tax paid, net of refunds

 

(165,051

)

(149,847

)

(26,964

)

Net cash provided by operating activities

 

676,181

 

661,285

 

685,542

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of intangible assets

 

(13,589

)

(9,729

)

(7,611

)

Purchase of property, plant and equipment

 

(47,996

)

(31,274

)

(15,347

)

Purchase of business, net of cash acquired

 

(44,574

)

(17,969

)

 

Net cash used in investing activities

 

(106,159

)

(58,972

)

(22,958

)

Cash flows from financing activities

 

 

 

 

 

 

 

Payment of dividends

 

(298,175

)

(363,876

)

(286,719

)

Proceeds from initial public offering

 

 

329,404

 

 

Repurchase of the company’s share capital

 

(125,729

)

(1,240

)

 

Proceeds from issuance of share capital

 

 

 

40

 

Proceeds from exercise of share options and employee share plan

 

5,725

 

3,062

 

 

Net cash used in financing activities

 

(418,179

)

(32,650

)

(286,679

)

Net increase in cash and cash equivalents

 

151,843

 

569,663

 

375,905

 

Cash and cash equivalents at the beginning of the year

 

963,972

 

408,695

 

27,912

 

Exchange gains (losses) on cash and cash equivalents

 

(8,429

)

(14,386

)

4,878

 

Cash and cash equivalents at the end of the year

 

$

1,107,386

 

$

963,972

 

$

408,695

 

 

See accompanying notes to the consolidated financial statements.

 

6



 

KING DIGITAL ENTERTAINMENT PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015, 2014 and 2013

 

1. General information

 

King Digital Entertainment plc (KDE) and its subsidiaries (together, the Group or the Company) produce and distribute digital games on multiple platforms. The Company is incorporated under the laws of Ireland under the Irish Companies Act (2014). Its registered office is 6 th  Floor, 2 Grand Canal Square, Dublin 2, Ireland.

 

These consolidated financial statements are presented in U.S. dollars and all values are rounded to the nearest thousands ($000), except per share amounts or when otherwise indicated.

 

These financial statements were authorized by the Board of Directors (the Board) on February 3, 2016.

 

2. Corporate reorganization and initial public offering

 

On March 25, 2014, the Company engaged in a corporate reorganization, where the entire share capital of MIHC was acquired by KDE, a newly formed company. KDE became the ultimate parent company of the Group, by way of a share-for-share exchange at a ratio of 5-for-2 in which the existing shareholders of MIHC exchanged their shares in MIHC for shares having substantially the same rights in the Company.

 

On March 26, 2014, the Company completed an initial public offering (IPO) of its ordinary shares, which resulted in the sale of 15,533,334 ordinary shares by the Company and 6,666,666 ordinary shares held by certain of its shareholders at a price of $22.50 per ordinary share. The Company received net proceeds from the IPO of $329,403,764, based upon the price of $22.50 per ordinary share and after deducting underwriting discounts and commissions paid by the Company. Expenses of $3,025,765 directly attributable to this issue of new shares have been offset against shareholder’s equity. The Company received no proceeds from the sale of ordinary shares by the shareholders. Upon completion of the IPO, all of the Company’s outstanding share classes converted into ordinary shares, with the exception of Euro deferred shares.

 

3. Summary of significant accounting policies

 

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

 

Basis of preparation

 

The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Standards Interpretations Committee (IFRIC), collectively ‘IFRSs’. The consolidated financial statements have been prepared under the historical cost convention and using fair value for contingent consideration.

 

The preparation of financial statements in conformity with IFRSs as issued by the IASB requires the use of certain critical accounting estimates.

 

Certain comparative amounts have been reclassified to conform to the current year’s presentation.

 

7



 

New standards, amendments and interpretations adopted by the group

 

In 2015, no new standards, amendments and interpretations to existing standards were applicable for the Group’s accounting period beginning on January 1, 2015.

 

New standards, amendments and interpretations not yet adopted

 

A number of new standards and amendments to standards and interpretations are not yet effective, and have not been applied in preparing these consolidated financial statements. The Group has considered the impact of the new standards, amendments and interpretations and have concluded that they are either not relevant to the Group or that they would not have a significant impact on the Group’s financial statements, apart from additional disclosures, except for the following:

 

·           IFRS 9, ‘Financial Instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized costs, fair value through profit or loss and fair value through other comprehensive income. The basis of classification depends on the Group’s business model and the contractual cash flow characteristics of the financial asset. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss and fair value through other comprehensive income. The standard is effective for accounting periods beginning on January 1, 2018. The Group is continuing to assess IFRS 9’s full impact.

 

·           IFRS 15, ‘Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard is effective for the first interim period beginning on January 1, 2018. The Group is continuing to assess IFRS 15’s full impact.

 

·           IFRS 16 ‘Leases’ sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from 1 January 2019. A company can choose to apply IFRS 16 before that date but only if it also applies IFRS 15 Revenue from Contracts with Customers. The Group is continuing to asses IFRS 16’s full impact.

 

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.

 

Basis of consolidation

 

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Intercompany transactions, balances between Group companies are eliminated.

 

(a) Business combinations

 

The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for an acquisition is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. Subsequent changes to the fair value of the contingent consideration are recognized in the statement of operations within ‘Other gains (losses)’.

 

The excess of the consideration transferred over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill.

 

Accounting policies of subsidiaries are changed where necessary to ensure consistency with the policies adopted by the Group.

 

8



 

Segments

 

The Group has one reporting segment with one business activity, developing and monetizing digital games on multiple platforms. The Chief Operating Decision Maker (CODM) is the board of directors, which manages operations on a consolidated basis. When assessing performance and allocating resources the CODM reviews financial information presented on a consolidated basis.

 

Foreign currency translation

 

(a) Functional currency

 

Items included in the financial statements of each of the Group’s subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The Group monitors for significant and stable changes in an entity’s economic environment which may indicate a need to reassess the functional currency.

 

(b) Transactions and balances

 

Foreign currency transactions that are settled in a foreign currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.

 

Monetary items denominated in foreign currency are translated using the closing rate as at the reporting date. Non-monetary items measured at historical cost denominated in a foreign currency are translated using the exchange rate as at the date of initial recognition; non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rates at the date when the fair value was determined.

 

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of operations.

 

All foreign exchange gains and losses are presented net in the consolidated statement of operations within ‘Other gains (losses)’.

 

(c) Group companies

 

The operations and financial position of all the Group’s subsidiaries that have a functional currency different from the presentation currency are translated into the Group’s presentation currency as follows:

 

·           Assets and liabilities are translated at the closing rate at the date;

 

·           Income and expenses are translated at the average exchange rates unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions; and

 

·           All resulting exchange differences are recognized in other comprehensive income — translation reserve.

 

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, are recognized in ‘Other comprehensive income — Exchange difference on translation of foreign subsidiaries’. When a foreign operation is disposed of, or partially disposed of, such exchange differences are recognized in the consolidated statement of operations as part of the gain or loss on sale.

 

Property, plant and equipment

 

Property, plant and equipment are initially recorded at historical cost and are subsequently stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

 

The Company recognizes in the carrying amount of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the company and the cost of the item can be measured reliably. All other costs are expensed as incurred.

 

9



 

Depreciation is recorded using the straight-line method to allocate the cost less residual value over their estimated useful life of the asset. Leasehold improvements are depreciated over the lesser of the lease term or the estimated useful lives of the improvements. The estimated useful lives of property, plant and equipment are as follows:

 

·    Fixtures, fittings and office equipment

3 years

·    Computer hardware

2-3 years

·    Leasehold improvements

1-10 years

 

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

 

Intangible assets

 

(a) Domain names

 

Separately acquired domain names are shown at cost less accumulated amortization. Domain names acquired in a business combination are recognized at fair value at the acquisition date. Domain names are amortized using the straight-line method over their estimated useful lives of 20 years.

 

(b) Computer software

 

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs shown at cost less accumulated amortization and are amortized over their estimated useful lives.

 

The estimated useful lives of computer software are as follows:

 

·    Computer software

2 years

 

(c) Internally generated software

 

Development costs that are directly attributable to the design and testing of the Group’s identifiable and unique games are recognized as intangible assets when the following criteria are met:

 

·

it is technically feasible to complete the software product so that it will be available for use;

 

 

·

management intends to complete the software product and use or sell it;

 

 

·

there is an ability to use or sell the software product;

 

 

·

it can be demonstrated how the software product will generate probable future economic benefits;

 

 

·

the expenditure attributable to the software product during its development can be reliably measured; and

 

 

·

the availability of adequate technical, financial and other resources to complete the development and use or sell the intangible asset.

 

Directly attributable costs that are capitalized as part of the software product include the software development employee costs.

 

Internally generated software development costs are shown at cost less accumulated depreciation and are recognized as assets and currently amortized using the straight-line method over their estimated useful lives of three years. In prior years the estimated useful lives for social and mobile games was 18 months.  Software abandoned in subsequent periods are derecognized and recognized as an expense in the statement of operations during the period.

 

10



 

Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

 

(d) Goodwill

 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets acquired at the date of acquisition.

 

(e) Patents

 

Patents have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of patents over their estimated useful lives, subject to any additional impairment that might arise.

 

The estimated useful lives of patents are as follows:

 

·    Patents

3 —16 years

 

Impairment

 

The carrying amounts of the Group’s non-financial assets, other than deferred tax assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If any such indication exists, the asset’s recoverable amount is estimated. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment.

 

Impairment losses are recognized in the statement of operations in the period in which they arise.

 

An impairment loss is recognized for the amount by which the asset’s carrying amount or its cash-generating unit (CGU) exceeds its recoverable amount. An impairment loss in respect of goodwill cannot be reversed. In respect to other assets, an impairment loss is reversed when there is indication that the impairment loss may no longer exist and there has been a change in the estimate used to determine the recoverable amount.

 

The recoverable amount is the higher of an asset’s fair value less costs to sell or value in use. In assessing value in use, the estimated future cash flows of the business are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which the asset belongs. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

 

For the purposes of impairment testing, goodwill acquired in a business combination is allocated to a group of CGUs that is expected to benefit from the synergies to the combination. Each group of CGUs to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes, which for the Group is at the reporting segment level.

 

Financial instruments

 

Financial assets and liabilities are recognized in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

 

(a) Trade and other receivables

 

Trade receivables comprise amounts due from customers for services performed in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets.

 

Trade and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment.

 

11



 

The Group considers that trade receivables are not impaired unless there are specific indicators of impairment. The Group manages credit limits and exposures actively such that there are no material past due amounts receivable from third parties as at the reporting date.

 

Based on the short term nature of trade and other receivables, the carrying amount approximates the fair value.

 

(b) Cash and cash equivalents

 

Cash and cash equivalents include cash at bank and in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less and balances held on behalf of customers (money players).

 

(c) Deposits

 

Deposits comprise of funds paid to secure leasehold rental properties of the Group. These funds are held with financial institutions and recognized initially at fair value plus transactions costs.

 

(d) Trade and other payables

 

Trade payables comprise obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers. They further include a liability relating to player balances for deposited funds that are yet to be spent on games within the Group’s online skill games. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.

 

Trade and other payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Based on the short term nature of trade and other payables the carrying amount approximates the fair value.

 

Share capital

 

Ordinary and deferred shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.

 

Provisions

 

Provisions are recognized when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably measured.

 

(a) Restoration

 

Provisions for restorations are for the rehabilitation of leasehold improvements at the end of the lease term and are recognized on a lease by lease basis, based on the Group’s best estimate of the likely cash outflow.

 

(b) Sales taxes

 

Provisions for sales taxes relate to probable payments due to tax authorities in countries where the Group operates and are based on the Group’s best estimate of the likely cash outflow, including associated penalties.

 

Current and deferred tax

 

The tax expense for the period comprises current and deferred tax. Tax is recognized in the statement of operations except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

 

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the year-end date in the countries where the company and its subsidiaries operate and generate taxable income. The Group evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

 

12



 

Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled.

 

Deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

 

Tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

 

Employee benefits

 

(a) Pension obligations

 

The Group operates a defined contribution pension plan. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separately administered fund. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

 

The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are earned. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.

 

Share-based payments

 

Equity-settled share-based awards

 

The Company has granted equity-settled share-based awards in the form of ordinary shares, options to purchase ordinary shares, restricted ordinary shares and restricted stock units. The Company receives services from employees as consideration for the awards. The fair value of the cost of these services is recognized as an expense over the period in which the services are rendered.

 

The fair value of equity-settled share-based awards is initially measured at grant date using an option-pricing or valuation model and is not subsequently remeasured.

 

The fair value of the equity-based awards is determined using a Black Scholes option pricing model. This model requires the use of the following assumptions: (i) fair value of our ordinary shares, (ii) exercise price, (iii) expected volatility of ordinary shares, (iv) expected term of the award, which is determined based on the expected period to settlement date, (v) expected dividend yield, which is based on historical trading information and expectation of regular dividend payments, and (vi) the risk-free interest rate, which is based on the implied yield of U.S. Treasury bonds with a term equal to the expected term.

 

Historically, the fair value of certain equity-based awards was determined using a Monte Carlo valuation model.

 

At the end of each reporting period, the group revises its estimates of the number of awards that are expected to vest based on the non-market vesting conditions and service conditions. It recognizes the impact of the revision to original estimates, if any, in the statement of operations, with a corresponding adjustment to equity.

 

Cash-settled share-based awards

 

The Company historically granted cash-settled share-based Discretionary Bonus Units (DBUs) to some employees. The Company recognized the cost of the services and the related liability as the employees render the service. The liability was measured at fair value using an option pricing model by reference to the terms and conditions on which the DBUs are granted and the extent to which the employees have rendered service up to the valuation date.

 

13



 

For more information about our share-based payments, refer to Note 20.

 

Revenue recognition

 

Our revenue is primarily derived from the sale of virtual items available for in-game purchase on third party social and mobile platforms, as well as from the provision of online skill games accessed on the Company’s website.

 

The Group recognizes revenue once we have transferred the risks and rewards of ownership, the amounts can be reliably measured and it is probable that future economic benefits will flow to the entity. Revenue is recorded at the fair value of consideration received or receivable net of sale tax, prizes, discounts and other promotions and after eliminating intra-group sales.

 

(a) Virtual currency and virtual items

 

The Company offers free to play games on social and mobile platforms. Customers purchase virtual currency and virtual items directly from the platform service providers who remit the payments to us net of a platform service charge.

 

Proceeds received from players predominantly relate to the sale of virtual currency. The price of virtual currency can vary based on volume discounts, other discounts and, at times, promotional free grants of virtual currency. Virtual currency can be redeemed for virtual items and cannot be withdrawn or transferred between games.

 

Amounts collected from the sale of virtual currency are deferred and recognized as the player uses the virtual items purchased with the virtual currency. Deferred revenue from the sale of virtual currency is measured by multiplying units of unredeemed virtual currency by the average unit price of virtual currency purchased in the period. The Group reassesses the average per unit price periodically. The Group does not defer revenue for unredeemed virtual currency associated with players who have never purchased virtual currency or virtual items.

 

Virtual items are classified into two categories, consumable or durable, depending on whether the virtual items’ value is consumed immediately or if the item has an ongoing value in game play.

 

Consumable virtual items provide a benefit to the player that is consumed through specific player actions, after which the consumable virtual items are no longer available for re-use in future game play. Consumable items can be purchased in a single item format or a multiple item pack. Revenue is deferred and recognized at the time that each item is consumed. Consumable items are valued based on the average unit price of virtual items purchased in the period. The Group reassesses the average per unit prices of virtual items periodically. Similar to the treatment of virtual currency, the Group does not defer revenue for unredeemed virtual items associated with players who have never purchased virtual currency or virtual items.

 

Durable virtual items are used by players from the time of purchase onward. They provide game enhancement throughout game play and do not expire. The Company recognizes revenue from the sale of durable virtual items ratably over the average life of durable virtual items that we estimate using average playing period of paying players on a game by game basis. The Company reassesses the estimated average playing periods of paying players on a periodic basis.

 

We are responsible for the operation and maintenance of our games on these platforms as well as setting the prices of our virtual currency and virtual items. On this basis, we have determined that we are the principal in the majority of our arrangements and recognize revenue from the sale of virtual items on a gross, as opposed to net, basis.

 

(b) Online skill games

 

The Group generates revenue from skill games on the royalgames.com website by retaining a commission from the amount that players pay to play. Players deposit funds into individual player accounts maintained by the Company and draw down on the balance of their player accounts to enter skill game tournaments. The revenue recognized is the commission charged on skill tournament entry fees where the players have concluded their participation in the skill tournament with a deduction of incentives or bonus money.

 

Other income

 

Other income consists of other operating income not directly related to the sale of virtual items and includes income from the funded design and development of our games for specific third party platforms. The Group recognizes other income once we have

 

14



 

transferred the risks and rewards of ownership or the service has been rendered, the amounts can be reliably measured and it is probable that future economic benefits will flow to the entity.

 

Cost of revenue

 

Amounts recorded as cost of revenue relate to direct expenses incurred in order to generate revenue from games. Cost of revenue primarily includes amounts charged by platform distribution partners, payments for third party licensed intellectual property usage related to audio content, fees paid to payment processing providers, salaries, benefits and share-based payments for customer support and infrastructure teams, as well as their related travel and entertainment and occupancy and facility costs.

 

Operating leases

 

Leases of assets in which a significant portion of the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. The Group leases certain property, plant and equipment. Payments made under operating leases net of any incentives received from the lessor, are charged to the statement of operations on a straight-line basis over the period of the lease.

 

Dividend distribution

 

Dividend distribution to the Group’s shareholders is recognized as a liability in the Group’s financial statements in the reporting period in which an obligation to pay a dividend is established.

 

4. Financial risk management

 

Financial risk factors

 

The Group’s activities potentially expose it to a variety of financial risks: market risk (including foreign exchange risk, cash flow and fair value interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.

 

A committee of the board of directors provides oversight of the overall risk management of the Group, including policies governing investment of excess liquidity. The Group did not make use of derivative financial instruments during the current and preceding financial periods.

 

(a) Market risk

 

(i) Foreign exchange risk

 

The Group operates internationally and is exposed to foreign exchange risk arising from financial instruments that are denominated in a currency other than the functional currency of the entity that holds the financial instrument. The exposure to foreign exchange risk is minimized by matching cash balances and trade receivables with trade payables of the same currency. In addition, intercompany payment terms are managed to reduce risk. The table below shows the Group’s sensitivity to foreign exchange rates on its pound sterling (GBP), euro (EUR) and Swedish krona (SEK) financial instruments. These three currencies are the significant non-functional currencies in which the Group’s financial instruments are denominated. The Group has considered movements in these currencies over the last three years and has concluded that a 10% movement in rates is a reasonable benchmark. Foreign exchange sensitivity on Group assets and liabilities other than financial instruments is not included and translation related risk is not taken into account.

 

At December 31, 2015, if the currencies had strengthened by 10% against the U.S. dollar with all other variables held constant, the impact on profits for the year would have been as follows:

 

Currency

 

Increase/(Decrease)
on Profit

 

(in thousands)

 

 

 

10% appreciation of SEK

 

$

(18,905

)

10% appreciation of GBP

 

(12,807

)

10% appreciation of EUR

 

5,934

 

 

15



 

If the currencies depreciated by 10% against the U.S. dollar, the impact on profits for the year would result in an equal and opposite effect.

 

(ii) Cash flow and fair value interest rate risk

 

The Group’s interest-bearing financial instruments are primarily comprised of money market investments. Interest rates on money market investments are minimal. Consequently, management considers the potential impact on profit or loss of a defined interest rate shift that is reasonably possible at the end of the reporting period to be immaterial.

 

(b) Credit risk

 

Credit risk is managed on a group basis. Credit risk arises from deposits held with banks, fixed income investments and trade and other receivables. The Group’s banks and investments are rated highly by rating agencies. Management considers credit risk in respect of receivables to be insignificant and does not expect any material losses from non-performance of trade and other receivables. Further disclosure in this regard is provided in Note 12 and Note 13 to the financial statements.

 

(c) Liquidity risk

 

The Group is exposed to liquidity risk in relation to meeting future obligations associated within its financial liabilities and commitments. Financial liabilities comprise amounts owed to customers, and trade and other payables. Liquidity risk is monitored at a Group level by ensuring that sufficient funds are available to each subsidiary in the appropriate currency within the Group. In addition to its cash and cash equivalents balance, the Group has a $150 million asset-based loan (“ABL”) revolving credit facility, which expires in 2018, from which no amount has been drawn.

 

Capital risk management

 

The Group’s objective when managing capital is to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

 

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets.

 

Total capital is shareholders’ equity as shown in the consolidated statement of financial position and is maintained in the context of the Group. In view of the nature of the Group’s activities the capital level as at the end of the reporting period is deemed adequate by the directors.

 

Fair value measurements

 

Fair value estimation

 

The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

 

·

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

 

 

·

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (Level 2).

 

 

·

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

 

16



 

The following table presents the group’s financial liabilities that are measured at fair value:

 

 

 

As of December 31, 2014

 

(in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

Financial liabilities at fair value through profit and loss

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

13,000

 

$

13,000

 

Total liabilities

 

$

 

$

 

$

13,000

 

$

13,000

 

 

 

 

As of December 31, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

Financial liabilities at fair value through profit and loss

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

1,700

 

$

1,700

 

Total liabilities

 

$

 

$

 

$

1,700

 

$

1,700

 

 

There were no transfers between Levels 1 and 2 during the year.

 

The following table presents the changes in Level 3 instruments:

 

(in thousands)

 

Contingent consideration
in a business combination

 

As of January 1, 2014

 

$

 

Acquisition of Nonstop Games Oy

 

17,000

 

Remeasurement recognized in statement of operations

 

(4,000

)

As of December 31, 2014

 

$

13,000

 

 

 

 

 

As of January 1, 2015

 

$

13,000

 

Acquisition of Z2 Live, Inc.

 

8,700

 

Remeasurement recognized in statement of operations

 

(20,000

)

As of December 31, 2015

 

$

1,700

 

 

See note 24 for disclosures of the measurement of the contingent consideration.

 

17



 

5. Critical accounting estimates and judgments

 

Estimates and judgments are continually evaluated and are based on historical experience and other relevant factors, including expectations of future events that are believed to be reasonable under the circumstances.

 

In the opinion of the directors, the accounting estimates and judgments made in the course of preparing these financial statements are not difficult, subjective or complex to a degree which would warrant their description as critical in terms of the requirements of IAS 1 ‘Presentation of Financial Statements’, except as referred to below:

 

(a) Revenue recognition

 

In accordance with IAS 18 ‘Revenue’, we recognize revenue once all of the criteria are met:

 

·           the seller has transferred to the buyer the significant risks and rewards of ownership;

 

·           the seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

 

·           the amount of revenue can be measured reliably;

 

·           it is probable that the economic benefits associated with the transaction will flow to the seller, and

 

·           the costs incurred or to be incurred in respect of the transaction can be measured reliably.

 

We generate substantially all of our revenue through the sale of virtual goods. In the majority of our games, our players first purchase virtual currency that is later used to purchase virtual goods.

 

The Group initially defers proceeds related to the sale of virtual currency and virtual items. The Group recognizes revenue after the virtual currency is exchanged for virtual items and such items are used. The Group sells two types of virtual items: consumable and durable virtual items. The Group recognizes revenue related to consumable virtual items at the time of consumption. Revenue related to durable virtual items is deferred and recognized over the period in which the items are expected to be used. The Group has made the following judgments concerning the deferral of revenue:

 

(i)

The cost of a virtual currency unit is determined to be the average unit price of virtual currency purchased in the period. The Group monitors the average unit cost of virtual currency and reassesses the impact on revenue recognition on a periodic basis.

 

 

(ii)

Revenue for consumable virtual items is recognized at the time of consumption. Consumable items are valued based on the average unit price of virtual items purchased in the period.  The Group monitors the average unit cost of virtual items and reassesses the impact on revenue recognition on a periodic basis.

 

 

(iii)

Revenue on durable virtual items is deferred and recognized over the average playing period of paying players for each game, which is the best estimate of the average life of durable virtual items. The Group reassesses the estimated average life of durable virtual items on a periodic basis, as future player usage patterns and behavior may differ from historical patterns.

 

 

(iv)

Our virtual currency does not expire. Based on historical usage patterns, some virtual currency will never be used and is referred to as “breakage.” We estimate breakage revenue using payer activity to assess when the likelihood of a payer spending virtual currency is remote.

 

(b) Income taxes

 

The group is subject to income taxes in numerous jurisdictions. Judgment is required in determining the worldwide provision for income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain. The group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

 

18



 

6. Segments and geographical information

 

The Group has one reporting segment with one business activity: developing and monetizing digital games.

 

The following represents revenue based on geographic location of paying players:

 

 

 

Year Ended December 31,

 

(in thousands)

 

2015

 

2014

 

2013

 

United States

 

$

1,018,411

 

$

1,108,299

 

$

991,505

 

United Kingdom

 

177,637

 

202,381

 

181,318

 

Rest of world (1)

 

803,442

 

949,561

 

711,478

 

Total revenue

 

$

1,999,490

 

$

2,260,241

 

$

1,884,301

 

 


(1) No individual country exceeded 10% of our total revenue for any period presented.

 

The following represents non current assets excluding deferred tax by location:

 

 

 

December 31,

 

December 31,

 

(in thousands)

 

2015

 

2014

 

Malta

 

$

75,383

 

$

74,708

 

United States

 

57,318

 

 

United Kingdom

 

25,881

 

26,296

 

Rest of world

 

39,900

 

29,928

 

Non current assets

 

$

198,482

 

$

130,932

 

 

7. Costs and expenses

 

 

 

Year Ended December 31,

 

(in thousands)

 

2015

 

2014

 

2013

 

Payments to platform providers and partners

 

$

603,338

 

$

687,602

 

$

568,594

 

Marketing and advertising

 

300,883

 

422,140

 

362,478

 

Employee benefits expense (note 8)

 

273,782

 

295,584

 

151,884

 

Office, data center and related services

 

45,469

 

34,066

 

15,057

 

Rental payments

 

20,756

 

11,238

 

4,420

 

Depreciation and amortization

 

27,359

 

14,845

 

6,363

 

Impairment charge

 

2,875

 

 

 

Other expenses

 

83,510

 

68,846

 

58,629

 

Total costs and expenses

 

$

1,357,972

 

$

1,534,321

 

$

1,167,425

 

 

19



 

8. Employee benefits expense

 

 

 

Year Ended December 31,

 

(in thousands)

 

2015

 

2014

 

2013

 

Wages and salaries

 

$

136,008

 

$

119,440

 

$

67,616

 

Share-based payments

 

84,732

 

130,956

 

55,289

 

Social security costs

 

26,309

 

27,431

 

25,062

 

Pension costs - defined contribution plans

 

5,312

 

4,458

 

2,381

 

Post-acquisition compensation

 

12,631

 

6,669

 

 

Other charges

 

8,790

 

6,630

 

1,536

 

Total employee benefit expense

 

$

273,782

 

$

295,584

 

$

151,884

 

 

9. Other gains (losses), net

 

 

 

Year Ended December 31,

 

(in thousands)

 

2015

 

2014

 

2013

 

Foreign currency exchange gain (loss), net

 

$

1,859

 

$

29,100

 

$

(870

)

Remeasurement of contingent consideration

 

20,000

 

4,000

 

 

Other gain

 

 

1,000

 

 

Other gains (losses), net

 

$

21,859

 

$

34,100

 

$

(870

)

 

10. Income tax expense

 

 

 

Year Ended December 31,

 

(in thousands)

 

2015

 

2014

 

2013

 

Current tax:

 

 

 

 

 

 

 

Current tax on profit for the year

 

$

172,721

 

$

190,293

 

$

159,874

 

Adjustment in respect to prior years

 

1,472

 

(1,053

)

(1,609

)

Total current tax

 

$

174,193

 

$

189,240

 

$

158,265

 

Deferred tax:

 

 

 

 

 

 

 

Origination and reversal of temporary differences

 

(14,817

)

4,170

 

(11,584

)

Adjustment in respect to prior years

 

(366

)

17

 

 

Total deferred tax

 

$

(15,183

)

$

4,187

 

$

(11,584

)

Total income tax expense

 

$

159,010

 

$

193,427

 

$

146,681

 

 

20



 

Corporation tax is calculated at 35% (2014: 35%, 2013: 35%) of the estimated taxable profit for the year and at the prevailing rates of the jurisdictions in which we operate.

 

The tax on profit for the years differs from the theoretical amount that would arise by applying the basic tax rate to the accounting profit as follows:

 

 

 

Year Ended December 31,

 

(in thousands)

 

2015

 

2014

 

2013

 

Profit before tax

 

$

675,789

 

$

768,278

 

$

714,275

 

Profit on ordinary activities is multiplied by the corporation tax rate of 35% (2013: 35%, 2012: 35%)

 

236,527

 

268,897

 

249,996

 

Tax effects of:

 

 

 

 

 

 

 

Different tax rates for subsidiaries operating in other jurisdictions

 

(57,094

)

(63,712

)

(5,407

)

Expenditure not deductible for tax purposes

 

2,785

 

1,889

 

2,552

 

Tax refund on operating activities

 

(34,598

)

(39,226

)

(103,534

)

Prior year adjustments

 

1,106

 

(1,034

)

(1,609

)

Tax losses not recognized/(utilized)

 

 

259

 

 

Share-based payments

 

2,393

 

16,892

 

4,583

 

Non-recoverable withholding tax

 

9,189

 

9,462

 

 

Other

 

(1,298

)

 

100

 

Total income tax expense

 

$

159,010

 

$

193,427

 

$

146,681

 

 

The tax refund of $34.6 million (2014: $39.2 million, 2013: $103.5) represents the tax recoverable by the Company in accordance with applicable fiscal legalization on intra-group dividends declared during the year.

 

A certain degree of judgment is required in evaluating the group’s tax positions and determining the provision for income taxes. In addition, tax laws are dynamic and subject to change. As a result, our tax positions could be challenged and our income tax expense could increase in the future.

 

The Group operates throughout the world and strives to apply transfer pricing that adequately represents the composition of its operations. The Group is in discussions with certain tax authorities to confirm there is alignment with the Group’s approach and has included within ‘income tax liabilities’ an estimate of these uncertainties, which will only be resolved upon completion of these discussions. These estimates reflect an appropriate corresponding relief in the territories affected. The Group continues to believe that its position is robust and that it is appropriately provided for. It is not possible to estimate when the group will reach final settlement on its transfer pricing affairs. The total net estimate recorded for worldwide transfer pricing exposure for the year ended December 31, 2015 is $64.3 million (2014: $54.1 million).

 

The income tax (cost) benefit recognized directly into equity during the year is as follows (in thousands):

 

 

 

2015

 

2014

 

2013

 

Share option and award scheme

 

$

2,943

 

$

(10,580

)

$

29,616

 

Total

 

$

2,943

 

$

(10,580

)

$

29,616

 

 

21



 

11. Earnings per share

 

Basic earnings per share is calculated by dividing the profit attributable to ordinary equity holders of the Company by the weighted-average number of ordinary shares in issue during the year.

 

 

 

Year Ended December 31,

 

(in thousands, except per share data)

 

2015

 

2014

 

2013

 

Basic:

 

 

 

 

 

 

 

Profit attributable to equity holders of the Company ($)

 

516,779

 

574,851

 

567,594

 

Weighted-average number of shares in issue

 

312,428

 

309,120

 

305,468

 

Basic earnings per share ($)

 

1.65

 

1.86

 

1.86

 

Diluted:

 

 

 

 

 

 

 

Profit attributable to equity holders of the Company ($)

 

516,779

 

574,851

 

567,594

 

Weighted-average number of shares in issue

 

319,438

 

320,301

 

323,788

 

Diluted earnings per share ($)

 

1.62

 

1.79

 

1.75

 

 


(a)          The Company engaged in a corporate reorganization and share-for-share exchange at a ratio of 5-for-2 on March 25, 2014. The 2014 and 2013 share amounts have been adjusted retrospectively to reflect this exchange.

 

Share options, unvested shares and restricted share units on a weighted average basis have been included in the diluted earnings per share calculation.

 

 

 

Year Ended December 31,

 

(in thousands)

 

2015

 

2014

 

2013

 

Diluted

 

 

 

 

 

 

 

Weighted-average number of shares in issue

 

312,428

 

309,120

 

305,468

 

Adjusted for:

 

 

 

 

 

 

 

- Unvested restricted shares

 

993

 

5,469

 

12,183

 

- Share options

 

4,025

 

5,494

 

6,137

 

- Restricted stock units

 

1,992

 

218

 

 

Weighted-average number of shares for diluted earnings per share

 

319,438

 

320,301

 

323,788

 

 

The weighted-average number of shares summarized below were excluded from the calculations of diluted earnings per share because their effect would have been anti-dilutive for the periods presented.

 

 

 

Year Ended December 31,

 

(in thousands)

 

2015

 

2014

 

2013

 

Restricted shares

 

66

 

231

 

460

 

Share options

 

19,720

 

18,879

 

1,822

 

Restricted stock units

 

3,198

 

804

 

 

Weighted-average number of shares

 

22,984

 

19,914

 

2,282

 

 

22



 

12. Cash and cash equivalents

 

(in thousands)

 

2015

 

2014

 

Cash

 

$

1,105,243

 

$

961,345

 

Cash held on behalf of players

 

2,143

 

2,627

 

Total cash and cash equivalents

 

$

1,107,386

 

$

963,972

 

 

Cash held on behalf of customers from the Group’s online skill tournament business is subject to some restrictions over its use. An equal liability is recognized in the statement of financial position within trade and other payables (note 17).

 

As at December 31, 2015 and 2014, approximately 2% and 4%, respectively, of total cash and cash equivalents of the Group, was held in a currency other than the functional currency of each individual entity.

 

The credit ratings of the Group’s principal banking partners at December 31, 2015 and 2014, based on publicly reported Nationally Recognized Statistical Rating Organizations, are as follows (in thousands):

 

 

 

2015

 

2014

 

AAA

 

$

985,810

 

$

879,544

 

A+

 

7,355

 

4,258

 

A

 

999

 

68,881

 

A-

 

 

2,538

 

AA-

 

368

 

335

 

BBB+

 

57,953

 

7,818

 

BBB

 

49,428

 

 

BB+

 

4,786

 

 

Not rated

 

687

 

598

 

Total cash and cash equivalents

 

$

1,107,386

 

$

963,972

 

 

The Group continually monitors its credit risk with banking partners and did not incur any losses during 2014 and 2015 as a result of bank failures.

 

13. Trade and other receivables

 

(in thousands)

 

2015

 

2014

 

Trade receivables

 

$

121,053

 

$

202,869

 

Prepayments and other receivables

 

36,827

 

25,523

 

Current trade and other receivables

 

$

157,880

 

$

228,392

 

 

Trade receivables relate to remittances from web and mobile platform providers. The Group assesses the credit quality of these platforms and have no concerns about the collectability of these balances.

 

At December 31, 2015 and 2014, respectively, the Group had 89% and 96%, respectively, of total trade receivables with three key platform service providers.

 

At December 31, 2015 and 2014, approximately 1%, of total trade receivables of the Group, was held in a currency other than the functional currency of each individual entity.

 

23



 

14. Intangible assets

 

(in thousands)

 

Goodwill

 

Patents

 

Domain
names

 

Computer
software

 

Internally
generated
software

 

Total

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 1, 2014

 

$

60

 

$

2,150

 

$

841

 

$

1,423

 

$

9,381

 

$

13,855

 

Additions

 

 

2,000

 

 

1,025

 

6,704

 

9,729

 

Acquisition of subsidiaries

 

32,117

 

 

 

4,017

 

444

 

36,578

 

Derecognition

 

 

 

 

 

(878

)

(878

)

Exchange differences

 

(408

)

 

(99

)

(159

)

(550

)

(1,216

)

As of December 31, 2014

 

$

31,769

 

$

4,150

 

$

742

 

$

6,306

 

$

15,101

 

$

58,068

 

Additions

 

 

 

 

2,885

 

10,704

 

13,589

 

Acquisition of subsidiaries

 

44,984

 

 

 

2,366

 

6,214

 

53,564

 

Derecognition

 

 

 

 

 

(1,439

)

(1,439

)

Exchange differences

 

(415

)

 

(76

)

(259

)

(276

)

(1,026

)

As of December 31, 2015

 

$

76,338

 

$

4,150

 

$

666

 

$

11,298

 

$

30,304

 

$

122,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 1, 2014

 

$

 

$

80

 

$

313

 

$

323

 

$

3,900

 

$

4,616

 

Charge for the year

 

 

228

 

41

 

1,876

 

3,120

 

5,265

 

Exchange differences

 

 

 

(42

)

(41

)

(317

)

(400

)

As of December 31, 2014

 

$

 

$

308

 

$

312

 

$

2,158

 

$

6,703

 

$

9,481

 

Charge for the year

 

 

613

 

35

 

3,191

 

5,146

 

8,985

 

Exchange differences

 

 

 

(33

)

(155

)

(266

)

(454

)

As of December 31, 2015

 

$

 

$

921

 

$

314

 

$

5,194

 

$

11,583

 

$

18,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying amount

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

$

31,769

 

$

3,842

 

$

430

 

$

4,148

 

$

8,398

 

$

48,587

 

As of December 31, 2015

 

$

76,338

 

$

3,229

 

$

352

 

$

6,104

 

$

18,721

 

$

104,744

 

 

Derecognition represents internally generated software abandoned during the year.

 

The amortization expense in 2015 of $9.0 million (2014: $5.3 million) is included in ‘Costs and expenses’, within general and administrative and research and development expenses.

 

24



 

15. Property, plant and equipment

 

(in thousands)

 

Fixtures, fittings
and office
equipment

 

Leasehold
improvements

 

Computer
hardware

 

Total

 

Cost

 

 

 

 

 

 

 

 

 

As of January 1, 2014

 

2,100

 

2,624

 

15,348

 

20,072

 

Additions

 

4,305

 

15,738

 

13,258

 

33,301

 

Disposals

 

(175

)

 

(52

)

(227

)

Exchange differences

 

(525

)

(1,015

)

(3,818

)

(5,358

)

As of December 31, 2014

 

5,705

 

17,347

 

24,736

 

47,788

 

Additions

 

11,555

 

21,594

 

14,847

 

47,996

 

Acquisition of subsidiaries

 

178

 

9

 

126

 

313

 

Impairment

 

 

(2,875

)

 

(2,875

)

Transfers

 

1,388

 

(3,831

)

2,443

 

 

Disposals

 

(1,391

)

(1,154

)

(72

)

(2,617

)

Exchange differences

 

(796

)

(1,184

)

(1,915

)

(3,895

)

As of December 31, 2015

 

$

16,639

 

$

29,906

 

$

40,165

 

$

86,710

 

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

 

 

 

 

As of January 1, 2014

 

$

429

 

$

188

 

$

5,197

 

$

5,814

 

Charge for the year

 

1,198

 

1,107

 

7,275

 

9,580

 

Disposals

 

(18

)

 

(31

)

(49

)

Exchange differences

 

(145

)

(84

)

(1,638

)

(1,867

)

As of December 31, 2014

 

$

1,464

 

$

1,211

 

$

10,803

 

$

13,478

 

Charge for the year

 

3,167

 

3,841

 

11,366

 

18,374

 

Disposals

 

(537

)

(4

)

(29

)

(570

)

Exchange differences

 

(141

)

(133

)

(839

)

(1,113

)

As of December 31, 2015

 

$

3,953

 

$

4,915

 

$

21,301

 

$

30,169

 

 

 

 

 

 

 

 

 

 

 

Carrying amount

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

$

4,241

 

$

16,136

 

$

13,933

 

$

34,310

 

As of December 31, 2015

 

$

12,686

 

$

24,991

 

$

18,864

 

$

56,541

 

 

The depreciation expense in 2015 of $18.4 million (2014: $9.6 million) is included in ‘Costs and expenses’ within general and administrative expenses.

 

The carrying amount of the Leasehold improvements has been reduced to its recoverable amount through recognition of an impairment charge. This charge has been included in ‘Costs and expenses’ within general and administrative expenses.

 

16. Deferred taxation

 

Deferred tax assets and liabilities are reflected in the consolidated statements of financial position, as follows:

 

 

 

December 31,

 

December 31,

 

(in thousands)

 

2015

 

2014

 

Deferred tax assets

 

$

30,745

 

$

14,733

 

Deferred tax liabilities

 

(3,634

)

(669

)

Net deferred assets

 

$

27,111

 

$

14,064

 

 

25



 

The deferred tax asset of $30.7 million includes $25.5 million expected to be realized in more than one year. The deferred tax liability of $3.6 million includes $2.4 million expected to be realized in more than one year.

 

Deferred tax assets are recognized for timing differences on share-based awards granted and other temporary differences, to the extent that the realization of the related tax benefit through future taxable profits is probable. Gross movement on the deferred income tax account is as follows:

 

(in thousands)

 

2015

 

2014

 

At January 1,

 

$

14,064

 

$

47,423

 

Recognized in the statement of operations:

 

 

 

 

 

- Intangibles

 

1,147

 

68

 

- Share options

 

12,878

 

(3,455

)

- Other