UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment
No. 1 to
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No.
1)
Filed by the Registrant
x
|
Filed by a Party other than the Registrant
¨
|
Check the appropriate box:
|
x
|
Preliminary Proxy Statement
|
|
¨
|
Confidential,
for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
|
|
¨
|
Definitive Proxy
Statement
|
|
¨
|
Definitive Additional
Materials
|
|
¨
|
Soliciting Material
Under Rule 14a-12
|
HYDRA
INDUSTRIES ACQUISITION CORP.
(Name of Registrant as Specified in Its Charter)
(Name of Persons(s)
Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|
¨
|
Fee computed
on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
|
|
(1)
|
Title of each class of securities to which
transaction applies: Common stock, $0.0001 par value per share, of Hydra Industries Acquisition Corp.
|
|
(2)
|
Aggregate number of securities to which
transaction applies: Up to 12,600,000 shares of Hydra Industries Acquisition Corp. common stock
|
|
(3)
|
Per unit price or other underlying value
of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and
state how it was determined): $10.00
|
|
(4)
|
Proposed maximum aggregate value of transaction:
$131,476,000 (includes $53,200,000 of estimated cash consideration)
|
|
(5)
|
Total fee paid: $13,240
|
|
x
|
Fee paid previously
with preliminary materials.
|
|
¨
|
Check box if any
part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the
filing for which the offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the date of its filing.
|
|
(1)
|
Amount Previously Paid:
|
|
(2)
|
Form, Schedule or Registration Statement
No.:
|
|
(3)
|
Filing Party:
|
|
(4)
|
Date Filed:
|
HYDRA INDUSTRIES ACQUISITION CORP.
250 West 57th Street, Suite 2223
New York, New York
10107
NOTICE OF SPECIAL MEETING IN LIEU
OF 2016 ANNUAL MEETING OF STOCKHOLDERS OF
HYDRA INDUSTRIES ACQUISITION CORP.
To Be Held on ,
2016
To the Stockholders of Hydra Industries Acquisition Corp.:
NOTICE IS HEREBY GIVEN that a special meeting
in lieu of the 2016 annual meeting (the “special meeting”) of Hydra Industries Acquisition Corp., a Delaware corporation
(“we,” “us,” “our,” “Hydra Industries” or the “Company”), will be
held on , 2016, at
Eastern time, at the offices of Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, New York 10036.
You are cordially invited to attend the special meeting for the following purposes:
|
(1)
|
The Business Combination Proposal — to consider and vote
upon a proposal to approve a share sale agreement, dated as of July 13, 2016, as it may
be amended (the “Sale Agreement”), by and among the Company and those persons
identified on Schedule 1 thereto (the “Selling Group”), DMWSL 633 Limited
(“Target Parent”), DMWSL 632 Limited and Gaming Acquisitions Limited and
the transactions contemplated thereby, which provides for the acquisition by us of all
of the outstanding equity and shareholder loan notes of Inspired Gaming Group (“Inspired”)
and its affiliates (together with Inspired, the “Inspired Group”) through
the purchase of all of the outstanding equity and shareholder loan notes of the Target
Parent. Inspired, through its subsidiaries, conducts its business under the “Inspired
Gaming Group” name. We refer to Target Parent and its consolidated subsidiaries
(including the Inspired Group) collectively as “Target,” and we refer to
such acquisition and the other transactions contemplated by the Sale Agreement collectively
as the “Business Combination.”
|
The Charter Proposals — to
approve and adopt separate proposals for amendments to the Company’s amended and restated certificate of incorporation (the
“existing charter”), in each case effective upon the closing of the Business Combination, to:
|
(2)
|
Proposal 2 — increase the Company’s authorized
common stock (“Proposal 2”);
|
|
(3)
|
Proposal 3 — provide for the declassification of our
board of directors and make certain related changes (“Proposal 3”);
|
|
(4)
|
Proposal 4 —provide for certain changes, including changing
the Company’s name from “Hydra Industries Acquisition Corp.” to “Inspired
Entertainment, Inc.” and making the Company’s corporate existence perpetual,
which our board of directors believes are necessary or appropriate to address the circumstances
and needs of the Company following the Business Combination (“Proposal 4”);
|
|
(5)
|
Proposal 5 –provide the Company with the ability to restrict
securities ownership by persons who fail to comply with informational or other regulatory
requirements under applicable gaming laws, who are found unsuitable to hold the Company’s
securities by gaming authorities or who could by holding its securities cause the Company
or any affiliate to fail to obtain, maintain, renew or qualify for a license, contract,
franchise or other regulatory approval from a gaming authority (“Proposal 5”
and each of Proposals 2, 3, 4 and 5, a “Charter Proposal,” and collectively,
the “Charter Proposals”);
|
The Corporate Governance Proposals
– to approve and adopt separate proposals related to the corporate governance of Hydra Industries:
|
(6)
|
Proposal 6 — to consider and vote upon a proposal to
elect six new directors, effective upon the closing of the Business Combination, to serve
on our board of directors until the 2017 annual meeting of stockholders and until their
respective successors are duly elected and qualified. Pursuant to the Sale Agreement,
it is a condition to the institutional sellers’ obligation to consummate the Business
Combination that three individuals designated by their representative, Vitruvian Directors
I Limited, have been duly elected or appointed to the board of directors of the Company.
[___], [___] and [___] have been so designated. Our board of directors has nominated
for election to the board at the special meeting each of these designees, as well as
Luke Alvarez, the current CEO of Inspired and prospective CEO of the Company following
the Business Combination, and [___] and [___], each to take office immediately upon the
closing of the Business Combination (the “Director Election Proposal”). Messrs.
Dannhauser, Miller, Shea and Stevens, who currently serve on our board, have submitted
prospective resignations from their positions as directors, effective immediately upon
the closing of the Business Combination. A. Lorne Weil, our current CEO and Chairman
of the Board, will continue as a director. This proposal is conditioned upon the approval
of Proposal 3, but is not conditioned upon the approval of the Business Combination Proposal.
However, if the Business Combination Proposal is not approved, the proposed amendments
to the Company’s existing charter, including Proposal 3, will not be implemented,
the prospective resignations submitted by four of our current directors will not become
effective, and the election of the six new directors will not take effect. For a description
of the Stockholders Agreement which is to be executed and delivered at the closing of
the Business Combination as described in Schedule 4 to the Sale Agreement, which provides,
among other things, for the composition of the board of directors following the Business
Combination, see “Management After the Business Combination – Stockholders
Agreement.”
|
|
(7)
|
Proposal 7 — to consider and vote upon a proposal to
approve and adopt, effective upon the closing of the Business Combination, the Inspired
Entertainment, Inc. 2016 Long-Term Incentive Plan (the “Incentive Plan Proposal”);
and
|
|
(8)
|
Proposal 8 — to consider and vote upon a proposal to
adjourn the special meeting to a later date or dates, if necessary, to permit further
solicitation and vote of proxies if, based upon the tabulated vote at the time of the
special meeting, there are not sufficient votes to approve the Business Combination Proposal,
the Charter Proposals or the Director Election Proposal (the “Adjournment Proposal”).
|
Only holders of record of our common stock
at the close of business on , 2016 are entitled
to notice of the special meeting and to vote at the special meeting and any adjournments or postponements of the special meeting.
A complete list of our stockholders of record entitled to vote at the special meeting will be available for ten days before the
special meeting at our principal executive offices for inspection by stockholders during ordinary business hours for any purpose
germane to the special meeting.
Pursuant to the existing charter, we are
providing our public stockholders with the opportunity to redeem their public shares, upon the closing of the transactions contemplated
by the Sale Agreement, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account
described below as of two business days prior to the consummation of the Business Combination, including interest income (net
of taxes payable), divided by the number of then outstanding shares of common stock that were sold as part of the units in our
initial public offering that closed on October 29, 2014 (the “IPO”). For illustrative purposes, based on funds in
the trust account of approximately $80 million on June 30, 2016, the estimated per share redemption price would have been approximately
$10.00.
Public stockholders may elect to redeem their shares even if they vote for the Business Combination Proposal
. A
public stockholder, together with any of his, her or its affiliates or any other person with whom it is acting in concert or as
a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended), will be restricted from
redeeming in the aggregate his, her or its shares or, if part of such a group, the group’s shares, of 25% or more of the
outstanding public shares (the “25% threshold”). Holders of our outstanding public warrants, rights and units do not
have redemption rights in connection with the Business Combination. Holders of outstanding units must separate the underlying
public shares, public rights and public warrants prior to exercising redemption rights with respect to the public shares. The
holders of shares of Hydra common stock issued prior to our IPO, which we refer to as “founder shares,” have agreed
to waive their redemption rights with respect to any shares of our capital stock they may hold in connection with the consummation
of the Business Combination, and, as described above, the founder shares will be excluded from the pro rata calculation used to
determine the per-share redemption price. Currently, our CEO, A. Lorne Weil, Hydra Industries Sponsor LLC, which we refer to as
our “Hydra Sponsor” and certain of its affiliates and our independent directors own approximately 20.0% of our issued
and outstanding shares of common stock, including all of the founder shares.
Approval of the Business Combination Proposal,
the Incentive Plan Proposal and the Adjournment Proposal requires the affirmative vote of a majority of the votes cast by stockholders
present in person or represented by proxy at the special meeting. Approval of the Charter Proposals requires the affirmative vote
of holders of a majority of our outstanding shares of common stock. Approval of the Director Election Proposal requires the affirmative
vote of the holders of a plurality of the shares of our common stock represented in person or by proxy and entitled to vote thereon
at the special meeting. The board of directors of Hydra Industries has already approved the Business Combination.
Each redemption of shares of Hydra Industries
common stock by our public stockholders will decrease the amount in our trust account, which holds approximately $80 million as
of June 30, 2016. If the Company’s available cash at closing is insufficient to pay all liabilities and obligations of the
Company and Target due and required to be paid at closing or by reason of closing, Target may, at its option, elect to not consummate
the Business Combination.
Your attention is directed to the proxy
statement accompanying this notice (including the annexes thereto) for a more complete description of the proposed Business Combination
and related transactions and each of our proposals. We encourage you to read this proxy statement and the accompanying Annual
Report on Form 10-K for the year ended December 31, 2015 carefully. If you have any questions or need assistance voting your shares,
please call our proxy solicitor, [____].
|
By Order of the Board of Directors,
|
|
|
, 2016
|
Sincerely,
|
|
|
|
/s/ A. Lorne Weil
|
|
A. Lorne Weil
|
|
Chairman of the Board and Chief Executive Officer
|
TABLE OF CONTENTS
SUMMARY
TERM SHEET
This Summary Term Sheet, together with
the sections entitled “Questions and Answers About the Proposals for Stockholders” and “Summary of the Proxy
Statement,” summarize certain information contained in this proxy statement, but do not contain all of the information that
is important to you. You should read carefully this entire proxy statement, including the attached Annexes, for a more complete
understanding of the matters to be considered at the special meeting. You should also read carefully the accompanying Annual Report
on Form 10-K for the year ended December 31, 2015. In addition, for definitions of terms commonly used throughout this proxy statement,
including this Summary Term Sheet, see the section entitled “Frequently Used Terms.”
|
·
|
Hydra Industries
is a special purpose acquisition company formed for the purpose of effecting a merger,
capital stock exchange, asset acquisition, stock purchase, reorganization or similar
business combination with one or more businesses.
|
|
·
|
There currently
are 10,000,000 shares of Hydra Industries common stock issued and outstanding, consisting
of 8,000,000 shares originally sold as part of units in Hydra Industries’ IPO and
2,000,000 founder shares that were issued to our Sponsors prior to Hydra Industries’
IPO. The Company initially issued 2,875,000 founder shares, however, 300,000 of such
shares were forfeited as a result of the underwriters’ determination not to exercise
their over-allotment option and 575,000 of such shares were returned to the Company and
subsequently cancelled prior to the IPO.
|
|
·
|
In addition,
there currently are 15,500,000 warrants of Hydra Industries outstanding, consisting of
8,000,000 public warrants originally sold as part of units in Hydra Industries’
IPO and 7,500,000 private placement warrants issued to our Sponsors in a private placement
simultaneously with the consummation of Hydra Industries’ IPO. Each warrant entitles
the holder thereof to purchase one-half of one share of Hydra Industries’ common
stock at a price of $5.75 per half share ($11.50 per whole share). Warrants may be exercised
only for a whole number of shares of Hydra Industries’ common stock. No fractional
shares will be issued upon exercise of the warrants. The public warrants will become
exercisable thirty days after the completion of Hydra Industries’ initial business
combination and expire at 5:00 p.m., New York time, five years after such business combination
or earlier upon redemption or liquidation. Hydra Industries may redeem the public warrants
at a price of $0.01 per warrant, provided that the last sale price of Hydra Industries’
common stock equals or exceeds $24.00 per share for any 20 trading days within a 30 trading
day period ending on the third trading day before Hydra Industries sends the notice of
redemption to the warrant holders and certain other conditions are met. The private placement
warrants, however, are non-redeemable so long as they are held by our Sponsors or their
permitted transferees. For more information about Hydra Industries and its securities,
see the sections entitled “Information About Hydra Industries,” “Hydra
Industries Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and “Description of Securities.”
|
|
·
|
Target is a
global gaming technology company, supplying Virtual Sports and Server Based Gaming (“SBG”)
systems to regulated lottery, betting and gaming operators worldwide through an “omni-channel”
distribution strategy. Target provides end-to-end digital gaming solutions on its proprietary
and secure network that accommodates a wide range of devices, including land-based gaming
machine products, mobile devices such as smartphones and tablets, as well as PC and social
applications. Target believes this omni-channel distribution strategy, combined with
its common technology platform, allows it to keep pace with evolving requirements in
game play, security, technology and regulations in the global gaming and lottery industry.
For more information about Target, see the sections entitled “Information About
Target,” “Target Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Management After the Business Combination”
and “Risk Factors — Risk Factors Relating to Target’s Business and
Industry.”
|
|
·
|
Pursuant to
the Share Sale Agreement, dated as of July 13, 2016, as it may be amended (the “Sale
Agreement”), by and among the Company and those persons identified on Schedule
1 thereto (the “Selling Group”), DMWSL 633 Limited (“Target Parent”),
DMWSL 632 Limited and Gaming Acquisitions Limited and the transactions contemplated thereby,
we will consummate the acquisition of all of the outstanding equity and shareholder loan
notes of Inspired Gaming Group (“Inspired”) and its affiliates (together
with Inspired, the “Inspired Group”) through the purchase of all of the outstanding
equity and shareholder loan notes of the Target Parent.
|
|
·
|
Target Parent,
through its subsidiaries, conducts its business under the “Inspired Gaming Group”
name. We refer to Target Parent and its consolidated subsidiaries (including Inspired)
collectively as “Target,” and we refer to such sale and the other transactions
contemplated by the Sale Agreement collectively as the “Business Combination.”
For more information about the transactions contemplated by the Sale Agreement, which
is referred to herein as the “Business Combination,” see the section entitled
“The Business Combination Proposal” and the copy of the Sale Agreement attached
to this proxy statement as Annex A.
|
|
·
|
The Sale Agreement
reflects a transaction value for the Business Combination of £200 million (equivalent
to approximately $264 million based on the USD/GBP exchange rate of $1.32/£1.00
as of the July 13, 2016 date of the Sale Agreement), plus an earn-out of up to 2.5 million
Hydra shares, subject to certain customary anti-dilution adjustments (having a value
of up to $25 million at an assumed value of $10.00 per share). The transaction is expected
to represent approximately £96 million of equity value after adjusting for the
maintenance of debt and certain other liabilities (equivalent to approximately $126 million
based on the USD/GBP exchange rate of $1.32/£1.00 as of July 13, 2016). Exclusive
of the potential earn-out, the consideration to be paid for the equity and shareholder
loan notes of the Target Parent and the Inspired Group will be the aggregate of the Base
Consideration (as defined below), less a fixed amount of Accruing Negative Consideration
(£21,500 per day from but excluding July 2, 2016 through and including the closing
of the Business Combination).
|
|
·
|
The “Base
Consideration” to be paid for the equity and shareholder loan notes pursuant to
the Sale Agreement will equal (i) £100,363,394, plus (ii) any amount by which the
Company’s transaction expenses (“Purchaser Costs”) referred to in Schedule
6 to the Sale Agreement exceeds £8,237,909, minus (iii) certain expenses of the
Selling Group noticed by its representatives, not to exceed £3,000,000, minus (iv)
certain excess interest payments owing on the Inspired Group’s existing financing
arrangements.
|
|
·
|
The Selling
Group will be paid the Base Consideration, adjusted for the Accruing Negative Consideration
(the “Completion Payment”), partially in cash (the “Cash Consideration”),
to the extent available after the payment of transaction expenses and working capital
adjustments, if any, and partially in newly-issued shares of Company common stock (“Purchaser
Shares”) at a value of $10.00 per share (the “Stock Consideration”),
as follows:
|
|
·
|
The
Cash Consideration represents the cash Hydra Industries will have available at closing
to pay the Completion Payment. The Cash Consideration will equal (i) the Company’s
then current cash in trust (after any redemptions), the $
20,004,347
proceeds of a private placement to Macquarie Capital pursuant to the Contingent Forward
Purchase Contract, the form of which was included as Exhibit 10.12 to its registration
statement on Form S-1 (the “Macquarie Forward Purchase”) and any other available
funds, minus (ii) an agreed amount of Purchaser Costs (including expenses incurred in
connection with the preparation of the proxy statement and meetings with Hydra Industries
stockholders), minus (iii) an agreed amount of the Selling Group’s transaction
expenses, minus (iv) the amount of repayment required under certain of the Inspired Group’s
financing arrangements, minus (v) £5 million for the purposes of retaining cash
on the Company’s balance sheet.
|
|
·
|
Upon closing of
the Business Combination, the Cash Consideration will be deposited into an account designated
by the Selling Group’s attorneys and the Company shall not be responsible for the
application of the funds to individual members of the Selling Group.
|
|
·
|
The Stock Consideration
will be the number of Purchaser Shares equal to the amount of the Completion Payment
minus the Cash Consideration, divided by $10.00 per share, and is currently estimated
to be approximately 7.3 million shares of our common stock, assuming, for illustrative
purposes only, no redemption of shares by our existing public stockholders and closing
of the Business Combination as of September 24, 2016. The Stock Consideration will fluctuate
if either of these assumptions should change. For example, should redemption of shares
by our existing public stockholders reach 5.7 million shares, or 71.1% of the common
shares sold through our IPO, and assuming that the Business Combination closed as of
September 24, 2016, it is estimated that the Stock Consideration would be approximately
12.6 million shares of our common stock.
|
|
·
|
The
earn-out
payment
of up to 2.5 million Hydra Industries shares, subject to certain customary anti-dilution
adjustments (having a value of up to $25 million at an assumed value of $10.00 per share)
(the “Earn-out Consideration”) shall be paid to the Selling Group exclusively
in Purchaser Shares and will be determined based on the Inspired Group’s performance
in certain jurisdictions through September 30, 2018 pursuant to a formula set forth in
Schedule 5 to the Sale Agreement. For a more detailed discussion of the Earn-out Consideration,
see the section entitled “The Business Combination Proposal — The Sale Agreement
— Consideration.”
|
|
·
|
The Cash Consideration
is anticipated to be funded through a combination of (i) cash held in our trust account
after redemptions (as described herein), (ii) the proceeds of the Macquarie Forward Purchase
and (iii) additional funds, if any, otherwise available at closing. If the Company’s
available cash at closing is insufficient to pay all liabilities and obligations of the
Company and Target due and required to be paid at closing or by reason of closing, the
Selling Group may elect to not consummate the Business Combination. At June 30, 2016,
the balance in our trust account was approximately $80 million. For additional information
regarding sources and uses for funding the Total Consideration, see “The Business
Combination Proposal — Sources and Uses for the Business Combination.” For
more information on the Company’s shares, see the section entitled “The Business
Combination Proposal — Total Shares of Hydra Common Stock to be Issued in the Business
Combination.” For more information about the Sale Agreement and related transaction
agreements, see the section entitled “The Business Combination Proposal —
The Sale Agreement.”
|
|
·
|
It
is anticipated that, following completion of the Business Combination and if there are
no redemptions, Hydra Industries’ existing public stockholders will retain an ownership
interest of approximately 42% in Hydra and our initial stockholders and affiliates will
retain an ownership interest of approximately 23% in Hydra Industries.
If
any of Hydra’s existing public stockholders exercise their redemption rights, the
ownership interest in Hydra Industries of Hydra Industries’ public stockholders
will decrease. These ownership percentages with respect to Hydra following the Business
Combination do not take into account (i) the issuance of any shares upon completion of
the Business Combination under the Company’s proposed 2016 Long- Term Incentive
Plan (the “Incentive Plan”) or (ii) the 17,500,000 warrants to purchase up
to a total of 8,750,000 shares of Hydra Industries common stock that will remain outstanding
following the Business Combination. If the actual facts are different than these assumptions
(which they are likely to be), the percentage ownership retained by Hydra Industries’
existing stockholders in Hydra Industries will be different. See “Summary of the
Proxy Statement — Impact of the Business Combination on Hydra’s Public Float”
for further information.
|
|
·
|
Our management
and board of directors considered various factors in determining whether to approve and
recommend to our stockholders the Sale Agreement and the transactions contemplated thereby,
including determining that the value of the Business Combination is equal to at least
80% of the balance in the trust account (excluding deferred underwriting discounts and
commissions of $2,800,000 payable to the underwriters of our IPO and taxes payable on
interest earned). For more information about our decision-making process, see the section
entitled “The Business Combination Proposal — Hydra Industries’ Board
of Directors’ Reasons for the Approval of the Business Combination.”
|
|
·
|
Pursuant to
our existing amended and restated certificate of incorporation (the “existing charter”),
in connection with the Business Combination, holders of our public shares may elect to
have their shares redeemed for cash at the applicable redemption price per share calculated
in accordance with the existing charter. As of June 30, 2016, this would have amounted
to approximately $10.00 per share. If a holder exercises its redemption rights, then
such holder will be exchanging its shares of our common stock for cash and will no longer
own shares of the Company and will not participate in the future growth, if any, of the
Company. Such a holder will be entitled to receive cash for its public shares only if
it (i) affirmatively votes for or against the Business Combination Proposal and (ii)
properly demands redemption and delivers its shares (either physically or electronically)
to our transfer agent at least two business days prior to the special meeting. See the
section entitled “Special Meeting in Lieu of 2016 Annual Meeting of Hydra Industries
Stockholders— Redemption Rights.”
|
|
·
|
In addition
to voting on the Business Combination Proposal, at the special meeting, the stockholders
of Hydra Industries will be asked to vote:
|
|
·
|
The Charter Proposals
— to approve and adopt separate proposals for amendments to the existing charter,
in each case effective upon the closing of the Business Combination:
|
|
·
|
Proposal 2
— increase the Company’s authorized common stock (“Proposal 2”);
|
|
·
|
Proposal
3 — provide for the declassification of our board of directors and make certain
related changes (“Proposal 3”);
|
|
·
|
Proposal
4 —provide for certain additional changes, including changing the Company’s
name from “Hydra Industries Acquisition Corp.” to “Inspired Entertainment,
Inc.” and making the Company’s corporate existence perpetual, which our board
of directors believes are necessary or appropriate to address the circumstances and needs
of the Company following the Business Combination (“Proposal 4”); and
|
|
·
|
Proposal 5
– provide the Company with the ability to restrict securities ownership by persons
who fail to comply with informational or other regulatory requirements under applicable
gaming laws, who are found unsuitable to hold the Company’s securities by gaming
authorities or who could by holding its securities cause the Company or any affiliate
to fail to obtain, maintain, renew or qualify for a license, contract, franchise or other
regulatory approval from a gaming authority (“Proposal 5” and each of Proposals
2, 3, 4 and 5, a “Charter Proposal,” and collectively, the “Charter
Proposals”), all as reflected in the proposed second amended and restated certificate
of incorporation of the Company (the “proposed charter”) attached hereto
as
Annex C
;
|
|
·
|
In addition
to voting on the Business Combination Proposal and Charter Proposals, at the special
meeting, the stockholders of Hydra Industries will be asked to vote:
|
|
·
|
The Corporate
Governance Proposals – to approve and adopt separate proposals related to the corporate
governance of Hydra Industries:
|
|
·
|
Proposal 6
— to consider and vote upon a proposal to elect six new directors, effective upon
the closing of the Business Combination, to serve on our board of directors until the
2017 annual meeting of stockholders and until their respective successors are duly elected
and qualified. Pursuant to the Sale Agreement, it is a condition to the institutional
sellers’ obligation to consummate the Business Combination that three individuals
designated by their representative, Vitruvian Directors I Limited, have been duly elected
or appointed to the board of directors of the Company. [___], [___] and [___] have been
so designated. Our board of directors has nominated for election to the board at the
special meeting each of these designees, as well as Luke Alvarez, the current CEO of
Inspired and prospective CEO of the Company following the Business Combination, and [___]
and [___], each to take office immediately upon the closing of the Business Combination
(the “Director Election Proposal”). Messrs. Dannhauser, Miller, Shea and
Stevens, who currently serve on our board, have submitted prospective resignations from
their positions as directors, effective immediately upon the closing of the Business
Combination. A. Lorne Weil, our current CEO and Chairman of the Board, will continue
as a director. This proposal is conditioned upon the approval of Proposal 3, but is not
conditioned upon the approval of the Business Combination Proposal. However, if the Business
Combination Proposal is not approved, the proposed amendments to the Company’s
existing charter, including Proposal 3, will not be implemented, the prospective resignations
submitted by four of our current directors will not become effective, and the election
of the six new directors will not take effect. For a description of the Stockholders
Agreement which is to be executed and delivered at the closing of the Business Combination
as described in Schedule 4 to the Sale Agreement, which provides, among other things,
for the composition of the board of directors following the Business Combination, see
“Management After the Business Combination – Stockholders Agreement.”
|
|
·
|
Proposal 7
— to consider and vote upon a proposal to approve and adopt, effective upon the
closing of the Business Combination, the Incentive Plan (the “Incentive Plan Proposal”);
and
|
|
·
|
Proposal 8
— to consider and vote upon a proposal to adjourn the special meeting to a later
date or dates, if necessary, to permit further solicitation and vote of proxies if, based
upon the tabulated vote at the time of the special meeting, there are not sufficient
votes to approve the Business Combination Proposal, the Charter Proposals or the Director
Election Proposal (the “Adjournment Proposal”).
|
|
·
|
The transactions
contemplated by the Sale Agreement will be consummated only if the Business Combination
Proposal and, unless waived, the Director Election Proposal and the Charter Proposals
are approved at the special meeting. In addition, (i) the Incentive Plan Proposal is
conditioned on the approval of the Business Combination Proposal, (ii) the Charter Proposals
are conditioned on the approval of the Business Combination Proposal and (iii) the Director
Election Proposal is conditioned on the approval of Proposal 3. The Adjournment Proposal
is not conditioned on the approval of any other proposal set forth in this proxy statement.
|
|
·
|
Upon the closing
of the Business Combination, and the effectiveness of Proposal 3 of the Charter Proposals,
we anticipate increasing the size of our board of directors from five to seven directors.
Four incumbent directors of Hydra Industries, Messrs. Dannhauser, Miller, Shea and Stevens,
have submitted their prospective resignations from our board of directors effective immediately
upon closing of the Business Combination]. Concurrently, we are nominating Luke Alvarez,
[___],[___], [___],[___] and [___] for election to our Board, effective immediately upon
the closing of the Business Combination. If all director nominees are elected and the
Business Combination is consummated, our board of directors will consist of one existing
Hydra Industries director, A. Lorne Weil, along with six newly elected directors, including
Luke Alvarez, who shall also continue as the CEO of Inspired and become CEO of Hydra
Industries, as well as [___],[___],[___],[___] and [___]. See the sections entitled “Director
Election Proposal” and “Management After the Business Combination.”
|
|
·
|
Unless waived
by the parties to the Sale Agreement, in accordance with applicable law, the closing
of the Business Combination is subject to a number of conditions set forth in the Sale
Agreement including, among others, receipt of the requisite stockholder approval contemplated
by this proxy statement. For more information about the closing conditions to the Business
Combination, see the section entitled “The Business Combination Proposal —
The Sale Agreement — Conditions to Closing of the Business Combination.”
|
|
·
|
The Sale Agreement
may be terminated at any time prior to the consummation of the Business Combination upon
agreement of the parties thereto, or by the Selling Group or the Company acting alone,
in specified circumstances. For more information about the termination rights under the
Sale Agreement, see the section entitled “The Business Combination Proposal—
The Sale Agreement — Termination.”
|
|
·
|
The proposed
Business Combination involves numerous risks. For more information about these risks,
see the section entitled “Risk Factors.”
|
|
·
|
In considering
the recommendation of Hydra Industries’ board of directors to vote FOR the proposals
presented at the special meeting, you should be aware that our executive officers and
members of our board of directors have interests in the Business Combination that are
different from, or in addition to, the interests of our stockholders generally. The members
of our board of directors were aware of these differing interests and considered them,
among other matters, in evaluating and negotiating the transaction agreements and in
recommending to our stockholders that they vote in favor of the proposals presented at
the special meeting. These interests include, among other things:
|
|
·
|
the fact that
our Sponsors and our independent directors paid an aggregate of $3,775,000 for their
founder shares and placement warrants and such securities should have a significantly
higher value at the time of the Business Combination;
|
|
·
|
the fact that
certain directors and officers may enter into employment agreements with the Company
after the consummation of the Business Combination;
|
|
·
|
the Macquarie
Forward Purchase;
|
|
·
|
the fact that
A. Lorne Weil, our Chairman and Chief Executive Officer and the managing member of our
Hydra Sponsor, has agreed that he will be liable to us, and our Macquarie Sponsor has
agreed to indemnify Mr. Weil for 50% of any such liability, if and to the extent any
claims by a vendor for services rendered or products sold to us, or the Target, reduce
the amount of funds in the Trust Account to below $10.00 per public share or such lesser
amount per public share held in the Trust Account as of the date of the liquidation of
the trust account, due to reductions in value of the trust assets other than due to the
failure to obtain such waiver, in each case net of the amount of interest which may be
withdrawn to pay taxes, except as to any claims by a third party who executed a waiver
of any and all rights to seek access to the Trust Account and except as to any claims
under our indemnity of the underwriters of our IPO against certain liabilities, including
liabilities under the Securities Act;
|
|
·
|
the
fact that our directors and officers will lose their entire investment in the Company
if the Business Combination is not completed;
|
|
·
|
the continuation
of one of our five existing directors as a director of the Company; and
|
|
·
|
the continued
indemnification of current directors and officers of the Company and the continuation
of directors’ and officers’ liability insurance after the Business Combination.
|
These interests may influence our directors
in making their recommendation that you vote in favor of the approval of the Business Combination. These interests were considered
by our Board when our Board approved the Business Combination.
FREQUENTLY
USED TERMS
Unless otherwise stated or unless the
context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “Hydra
Industries” refer to Hydra Industries Acquisition Corp., and the terms “combined company” and “post-combination
company” refer to Hydra Industries and its subsidiaries, including Inspired, following the consummation of the Business
Combination.
In this document:
“Accruing Negative Consideration”
means an amount equal to £21,500 per day from but excluding July 2, 2016 through and including the closing of the Business
Combination
“Base Consideration” means
an amount equal to (i) £100,363,394.31,
plus
(ii) any amount by which the Company’s transaction expenses (“Purchaser
Costs”) referred to in Schedule 6 to the Sale Agreement exceeds £8,237,909.41,
minus
(iii) certain expenses
of the Selling Group noticed by the Institutional Vendors’ Representative, not to exceed £3,000,000,
minus
(iv) certain excess interest payments owing on the Inspired Group’s existing financing arrangements.
“Business Combination” means
the acquisition by us of all of the equity and shareholder loan notes of Target Parent and the Inspired Group
“Completion Payment” means
the aggregate of the Base Consideration and the Accruing Negative Consideration.
“Cash Consideration” means
an amount equal to
(i) the Company’s then current
cash in trust (after any redemptions), the $20,004,347 proceeds of the Macquarie Forward Purchase and any other available funds,
minus (ii) an agreed amount of Purchaser Costs (including expenses incurred in connection with the preparation of the proxy statement
and meetings with Hydra Industries stockholders), minus (iii) an agreed amount of the Selling Group’s transaction expenses,
minus (iv) the amount of repayment required under certain of the Inspired Group’s financing arrangements, minus (v) £5
million for the purposes of retaining cash on the Company’s balance sheet.
“Exchange Act” means the Securities
Exchange Act of 1934, as amended.
“Earn-out Consideration” means
an amount of Purchaser Shares, not to exceed 2,500,000 Purchaser Shares, to be determined based on Inspired’s performance
in certain jurisdictions through September 30, 2018 pursuant to a formula set forth in Schedule 5 to the Sale Agreement.
“existing charter” means our
amended and restated certificate of incorporation filed with the Secretary of State of the State of Delaware on October 24, 2014.
“founder shares” means the
2,875,000 shares of Hydra Industries common stock issued to our Sponsors in a private placement prior to our IPO, 300,000 of which
were forfeited as a result of the underwriters’ overallotment option in our IPO not being exercised and 575,000 of which
were returned to Hydra Industries and subsequently cancelled prior to the consummation of the IPO.
“Hydra Industries” or “Hydra”
means Hydra Industries Acquisition Corp., a Delaware corporation.
“Hydra Industries common stock”
or “our common stock” means common stock, par value $0.0001 per share, of Hydra Industries.
“Hydra Sponsor” means Hydra
Industries Sponsor LLC.
“initial stockholders” means
our Sponsors and our officers, directors and advisors that hold founder shares.
“Inspired” means Inspired Gaming
Group Ltd. and its affiliates.
“IPO” means the initial public
offering of Hydra Industries units, each comprised of one share of common stock, one right and one warrant, consummated on October
29, 2014 with respect to 8,000,000 units at $10.00 per unit.
“Macquarie Forward Purchase”
means the purchase of 2,000,000 units and 500,000 shares of the Company’s common stock for an aggregate purchase price of
$20,004,347 by our Macquarie Sponsor pursuant to the Contingent Forward Purchase Contract, dated as of October 24, 2014, by and
between the Company and the Macquarie Sponsor.
“Macquarie Sponsor” means MIHI
LLC.
“Private Placement Warrants”
means the 7,500,000 warrants issued to our Sponsors in the private placement that occurred simultaneously with the consummation
of our IPO for a purchase price of $0.50 per placement warrant for a total purchase price of approximately $3,750,000, each of
which is exercisable for one-half of one share of Hydra Industries common stock at a price of $5.75 per half share ($11.50 per
whole share), in accordance with its terms. Warrants may be exercised only for a whole number of shares of Hydra Industries’
common stock. No fractional shares will be issued upon exercise of the warrants.
“Proposed Charter” means the
proposed second amended and restated certificate of incorporation of Hydra Industries, which will become the Company’s certificate
of incorporation upon the approval of the Charter Proposals and the Business Combination Proposal and the consummation of the
Business Combination. A copy of the proposed charter is attached hereto as
Annex C
.
“Public Shares” means shares
of Hydra Industries common stock issued in our IPO (whether they were purchased in the IPO or thereafter in the open market).
“Public Stockholders” means
holders of public shares, including the initial stockholders to the extent the initial stockholders hold public shares, provided
that the initial stockholders will be considered a “public stockholder” only with respect to any public shares held
by them.
“Public Warrants” means the
warrants issued in Hydra Industries’ IPO, each of which is exercisable for one-half of one share of Hydra Industries common
stock, in accordance with its terms.
“Purchase Price” means (i)
the Base Consideration,
minus
(ii) the Accruing Negative Consideration,
plus
(iii) the Earn-out Consideration.
“Purchaser Shares” means shares
of our common stock issued as Stock Consideration.
“Rights” means the right,
underlying each of our units, to receive one-tenth (1/10) of one share of our common stock upon consummation of the Business Combination,
even if the holder of such right redeemed all shares of common stock held by it in connection with the Business Combination.
“Sale Agreement” means the
Sale Agreement, dated as of July 13, 2016, as it may be amended, by and among the Company, the Selling Group, the Target Parent,
DMWSL 632 Limited and Gaming Acquisitions Limited.
“Securities Act” means the
Securities Act of 1933, as amended.
“Selling Group” means those
persons identified in Schedule 1 to the Sale Agreement.
“Special Meeting” means the
special meeting in lieu of the 2016 annual meeting of stockholders of Hydra Industries that is the subject of this proxy statement.
“Sponsors” means Hydra Industries
Sponsor LLC, a Delaware limited liability company, and MIHI LLC, a Delaware limited liability company (each individually, a “Sponsor”).
“Stock Consideration” means
the Total Consideration minus the Cash Consideration, divided by $10.00 per share.
“Target” means DMWSL 633 Limited
and its consolidated subsidiaries (including Inspired).
“Target Parent” means DMWSL
633 Limited.
“Total Consideration” means
(i) the Base Consideration,
minus
(ii) the Accruing Negative Consideration.
“Warrants” means the Private
Placement Warrants and the Public Warrants, taken together.
QUESTIONS
AND ANSWERS ABOUT THE PROPOSALS FOR STOCKHOLDERS
The following questions and answers
briefly address some commonly asked questions about the proposals to be presented at the special meeting, including with respect
to the proposed Business Combination. The following questions and answers do not include all the information that is important
to our stockholders. We urge stockholders to read carefully this entire proxy statement, including the annexes and the other documents
referred to herein. You should also read carefully the accompanying Annual Report on Form 10-K for the year ended December 31,
2015.
|
Q:
|
Why am I receiving this proxy statement?
|
|
A:
|
Our stockholders are being asked to consider and vote upon a proposal,
which we refer to as the “Business Combination Proposal,” to approve a sale
agreement (the “Sale Agreement”) providing for the acquisition by us of all
of the outstanding equity and shareholder loan notes of Inspired Gaming Group (“Inspired”)
through the purchase of all of the outstanding equity and shareholder loan notes of Target
Parent. Target Parent, through its subsidiaries, conducts its business under the “Inspired
Gaming Group” name. We refer to Target Parent and its consolidated subsidiaries
(including Inspired) hereafter collectively as “Target,” and we refer to
such acquisition and the other transactions contemplated by the Sale Agreement collectively
as the “Business Combination.”
|
The Sale Agreement reflects a transaction value for
the Business Combination of £200 million (equivalent to approximately $264 million based on the USD/GBP exchange rate of
$1.32/£1.00 as of the July 13, 2016 date of the Sale Agreement), plus an earn-out of up to 2.5 million Hydra shares, subject
to certain customary anti-dilution adjustments (having a value of up to $25 million at an assumed value of $10.00 per share).
The transaction is expected to represent approximately £96 million of equity value after adjusting for the maintenance of
debt and certain other liabilities (equivalent to approximately $126 million based on the USD/GBP exchange rate of $1.32/£1.00
as of July 13, 2016). Exclusive of the potential earn-out, the consideration to be paid for the equity and shareholder loan notes
of the Target Parent and the Inspired Group will be the aggregate of the Base Consideration (as defined below), less a fixed amount
of Accruing Negative Consideration (£21,500 per day from but excluding July 2, 2016 through and including the closing of
the Business Combination).
The “Base Consideration” to be paid for
the equity and shareholder loan notes pursuant to the Sale Agreement will equal (i) £100,363,394, plus (ii) any amount by
which the Company’s transaction expenses (“Purchaser Costs”) referred to in Schedule 6 to the Sale Agreement
exceeds £8,237,909, minus (iii) certain expenses of the Selling Group noticed by its representatives, not to exceed £3,000,000,
minus (iv) certain excess interest payments owing on the Inspired Group’s existing financing arrangements.
Upon closing of the Business Combination, the Cash
Consideration will be deposited into an account designated by the Selling Group’s attorneys and the Company shall not be
responsible for the application of the funds to individual members of the Selling Group.
The Stock Consideration will be the number of Purchaser
Shares equal to the amount of the Completion Payment minus the Cash Consideration, divided by $10.00 per share, and is currently
estimated to be approximately 7.3 million shares of our common stock, assuming, for illustrative purposes only, no redemption
of shares by our existing public stockholders and closing of the Business Combination as of September 24, 2016. The Stock Consideration
will fluctuate if either of these assumptions should change. For example, should redemption of shares by our existing public stockholders
reach 5.7 million shares, or 71.1% of the common shares sold through our IPO, and assuming that the Business Combination closed
as of September 24, 2016, it is estimated that the Stock Consideration would be approximately 12.6 million shares of our common
stock.
The earn-out payment of up to 2.5 million Hydra shares,
subject to certain customary anti-dilution adjustments (having a value of up to $25 million at an assumed value of $10.00 per
share) (the “Earn-out Consideration”) shall be paid to the Selling Group exclusively in Purchaser Shares and will
be determined based on the Inspired Group’s performance in certain jurisdictions through September 30, 2018 pursuant to
a formula set forth in Schedule 5 to the Sale Agreement.
The Cash Consideration is anticipated to be funded
through a combination of (i) cash held in our trust account after redemptions (as described herein), (ii) the proceeds of the
Macquarie Forward Purchase and (iii) additional funds, if any, otherwise available at closing. If the Company’s available
cash at closing is insufficient to pay all liabilities and obligations of the Company and Target due and required to be paid at
closing or by reason of closing, the Selling Group may elect to not consummate the Business Combination. At June 30, 2016, the
balance in our trust account was approximately $80 million. For additional information regarding sources and uses for funding
the Total Consideration, see “The Business Combination Proposal — Sources and Uses for the Business Combination.”
For more information on the Company’s shares, see the section entitled “The Business Combination Proposal —
Total Shares of Hydra Common Stock to be Issued in the Business Combination.” For more information about the Sale Agreement
and related transaction agreements, see the section entitled “The Business Combination Proposal — The Sale Agreement.”
It is anticipated that, following completion of the
Business Combination and if there are no redemptions, Hydra’s public stockholders will retain an ownership interest of approximately
42% in Hydra and our initial stockholders and affiliates will retain an ownership interest of approximately 23% in Hydra. If any
of Hydra’s stockholders exercise their redemption rights, the ownership interest in Hydra Industries of Hydra Industries’
public stockholders will decrease. These percentages are calculated based on a number of assumptions (as described below) and
are subject to adjustment in accordance with the terms of the Sale Agreement. A copy of the Sale Agreement is attached hereto
as
Annex A
.
Our common stock, units, rights and warrants are currently
listed on The NASDAQ Capital Market (“NASDAQ”) under the symbols “HDRA,” “HDRAU,” “HDRAR”
and “HDRAW,” respectively. We have applied to continue the listing of our common stock and warrants on NASDAQ under
the new symbols “INSE” and “INSEW,” respectively, upon the closing of the Business Combination. At the
closing, our units will separate into their component shares of Hydra common stock, par value $0.0001 per share (“Hydra
common stock”), and warrants to purchase one-half of one share of Hydra common stock, and cease separate trading. Upon consummation
of the Business Combination, holders of our rights will receive one-tenth (1/10) of one share of Hydra common stock in respect
of each right, with no fractional shares being issued, and such rights will cease to be outstanding.
This proxy statement and its annexes contain important
information about the proposed Business Combination and the other matters to be acted upon at the special meeting. You should
read this proxy statement and its annexes carefully and in their entirety. You should also carefully read the accompanying Annual
Report on Form 10-K for the year ended December 31, 2015.
Your vote is important. You are encouraged to submit your
proxy as soon as possible after carefully reviewing this proxy statement and its annexes.
|
Q:
|
What is being voted on at the special meeting?
|
|
A:
|
Below are proposals on which our stockholders are being asked to
vote.
|
|
1.
|
To approve the Sale Agreement and the other transactions contemplated
by the Sale Agreement (the “Business Combination Proposal”);
|
To approve and adopt the following
separate proposals for amendments to the Company’s existing charter, in each case effective upon the closing of the Business
Combination:
|
2.
|
To increase the Company’s authorized common stock (“Proposal
2”);
|
|
3.
|
To provide for the declassification of our board of directors
and make certain related changes (“Proposal 3”);
|
|
4.
|
To provide for certain additional changes, including changing
the Company’s name from “Hydra Industries Acquisition Corp.” to “Inspired
Entertainment, Inc.” and making the Company’s corporate existence perpetual,
which our board of directors believes are necessary or appropriate to address the circumstances
and needs of the Company following the Business Combination (“Proposal 4”);
|
|
5.
|
To provide the Company with the ability to restrict securities
ownership by persons who fail to comply with informational or other regulatory requirements
under applicable gaming laws, who are found unsuitable to hold the Company’s securities
by gaming authorities or who could by holding its securities cause the Company or any
affiliate to fail to obtain, maintain, renew or qualify for a license, contract, franchise
or other regulatory approval from a gaming authority (“Proposal 5”);
|
Each of Proposals 2, 3, 4 and 5,
a “Charter Proposal”, and collectively, the “Charter Proposals.”
|
6.
|
To elect six new directors, effective upon the closing of the
Business Combination, to serve as directors on our board of directors until the 2017
annual meeting of stockholders and until their respective successors are duly elected
and qualified (the “Director Election Proposal”);
|
|
7.
|
To approve and adopt, effective upon the closing of the Business
Combination, the Incentive Plan, a copy of which is attached hereto as
Annex D
(the “Incentive Plan Proposal”); and
|
|
8.
|
To adjourn the special meeting to a later date or dates, if
necessary, to permit further solicitation and vote of proxies if, based upon the tabulated
vote at the time of the special meeting, there are not sufficient votes to approve the
Business Combination Proposal, the Charter Proposals or the Director Election Proposal
(this proposal is referred to herein as the “Adjournment Proposal”). This
proposal will only be presented at the special meeting if there are not sufficient votes
to approve the Business Combination Proposal, the Charter Proposals or the Director Election
Proposal.
|
|
Q:
|
Are the proposals conditioned on one another?
|
|
A:
|
The transactions contemplated by the Sale Agreement will be consummated
only if the Business Combination Proposal and, unless waived, the Director Election Proposal
and Charter Proposals are approved at the special meeting. In addition, (i) the Incentive
Plan Proposal is conditioned on the approval of the Business Combination Proposal, (ii)
the Charter Proposals are conditioned on the approval of the Business Combination Proposal
and (iii) the Director Election Proposal in conditioned on the approval of Proposal 3.
The Adjournment Proposal is not conditioned on the approval of any other proposal set
forth in the proxy statement. It is important for you to note that in the event that
the Business Combination Proposal, the Charter Proposals or the Director Election Proposal
do not receive the requisite vote for approval, then (absent a waiver with respect to
the Director Election Proposal and Charter Proposals) we will not consummate the Business
Combination. If we do not consummate the Business Combination and fail to complete an
initial business combination by October 29, 2016 (subject to the requirements of law),
we will be required to dissolve and liquidate our trust account by returning the then
remaining funds in such account to the public stockholders.
|
|
Q:
|
Why is Hydra Industries providing stockholders with the
opportunity to vote on the Business Combination?
|
|
A:
|
Under the existing charter, we must provide all holders of public
shares with the opportunity to have their public shares redeemed upon the consummation
of our initial business combination either in conjunction with a tender offer or in conjunction
with a stockholder vote. We are seeking to obtain the approval of our stockholders for
the Business Combination Proposal in order, among other things, to allow our public stockholders
to effectuate redemptions of their public shares in connection with the closing of our
Business Combination.
|
|
Q:
|
What will happen in the Business Combination?
|
|
A:
|
At the closing of the Business Combination, the Company will purchase
all of the existing equity and shareholder loan notes of Target Parent from the Selling
Group in exchange for their respective portion of the Total Consideration (excluding
any potential Earn-out Consideration), consisting of the Cash Consideration and the Stock
Consideration, as determined in accordance with the Sale Agreement. If Inspired meets
certain performance targets in certain jurisdictions through September 30, 2018, pursuant
to a formula set forth in Schedule 5 to the Sale Agreement, all or part of the Earn-out
Consideration will be paid to the Selling Group in the form of Hydra shares.
|
|
Q:
|
What equity stake will (i) current Hydra Industries stockholders
hold in the Company after the closing of the Business Combination and (ii) Hydra Industries
hold in Target after the closing of the Business Combination?
|
|
A:
|
It is anticipated that, following completion of the Business
Combination and if there are no redemptions, Hydra Industries’ public stockholders
will retain an ownership interest of approximately 42% of Hydra Industries and our initial
stockholders and affiliates will retain an ownership interest of approximately 23% of
Hydra Industries. If any of Hydra Industries’ stockholders exercise their redemption
rights, the ownership interest in Hydra Industries of Hydra Industries’ public
stockholders will decrease. If 50% of Hydra Industries’ public stockholders exercise
their redemption rights, Hydra Industries’ public stockholders will retain an ownership
interest of approximately 23% of Hydra Industries and our initial stockholders and affiliates
will retain an ownership interest of approximately 23% of Hydra Industries. Upon the
closing of the Business Combination, Hydra Industries will own 100% of the outstanding
equity of Target Parent. These ownership percentages with respect to Hydra Industries
following the Business Combination do not take into account (i) the issuance of any shares
upon completion of the Business Combination under the proposed Incentive Plan or (ii)
any or all of the 17,500,000 warrants to purchase up to a total of 8,750,000 shares of
Hydra Industries common stock that will remain outstanding following the Business Combination.
If the actual facts are different than these assumptions (which they are likely to be),
the percentage ownership retained by Hydra Industries’ existing stockholders in
Hydra Industries will be different. If fewer than 50% of Hydra Industries’ public
stockholders exercise their redemption right, the percentage ownership retained by Hydra
Industries’ public stockholders would be more than 23%, while if more than 50%
of Hydra Industries’ public stockholders exercise their redemption rights, the
percentage ownership retained by Hydra Industries’ public stockholders would be
less than 23%. In addition, for example, if the Business Combination is consummated at
a later date so that the daily Accruing Negative Consideration under the Sale Agreement
is computed for a longer period, if certain expenses of the Selling Group are greater
than assumed, or if certain interest payments of the Inspired Group are greater than
assumed, the effect would be to decrease the aggregate consideration payable to the Selling
Group and increase the percentage ownership retained by Hydra Industries’ existing
stockholders; if certain expenses of the Company are greater than assumed, the effect
would be to increase the aggregate consideration payable to the Selling Group and decrease
the percentage ownership retained by Hydra Industries’ existing stockholders. See
“Summary of the Proxy Statement—Impact of the Business Combination on Hydra
Industries’ Public Float” for further information.
|
|
Q:
|
What conditions must be satisfied to complete the Business
Combination?
|
|
A:
|
There are a number of closing conditions in the Sale Agreement,
including that our stockholders have approved and adopted the Sale Agreement and, unless
waived, the Director Election Proposal and Charter Proposals. For a summary of the conditions
that must be satisfied or waived prior to completion of the Business Combination, see
the section entitled “The Business Combination Proposal — The Sale Agreement
— Conditions to Closing of the Business Combination.”
|
|
Q:
|
Why is Hydra Industries proposing the Charter Proposals?
|
|
A:
|
The proposed amended charter that we are asking our stockholders
to approve in connection with the Business Combination provides for an increase in the
number of authorized shares of our common stock, the declassification of our board of
directors and certain additional changes which our board of directors believes are necessary
or appropriate to address the circumstances and needs of the Company following the Business
Combination. Unless waived, approval of the Director Election Proposal and Charter Proposals
is a condition to the consummation of the Business Combination pursuant to the Sale Agreement.
|
|
Q:
|
Why is Hydra Industries proposing the Director Election
Proposal?
|
|
A:
|
Upon the closing of the Business Combination, four of Hydra Industries’
incumbent directors, Messrs. Dannhauser, Miller, Shea and Stevens, will resign, and the
size of our board of directors will be increased from five to seven directors. The Hydra
Industries board has nominated Luke Alvarez, [___], [___], [___], [___] and [___] to
serve as directors for a term expiring at the Company’s annual meeting in 2017.
See the section entitled “Director Election Proposal” for additional information.
|
|
Q:
|
Why is Hydra Industries proposing the Incentive Plan Proposal?
|
|
A:
|
The purpose of the Incentive Plan is to enable us to offer eligible
employees, directors and consultants cash and stock-based incentive awards in order to
attract, retain and reward these individuals and strengthen the mutuality of interests
between them and our stockholders. Stockholder approval and adoption of the Incentive
Plan will be effective only upon the closing of the Business Combination.
|
|
Q:
|
What happens if I sell my shares of Hydra Industries common
stock before the special meeting?
|
|
A:
|
The record date for the special meeting is earlier than the date
that the Business Combination is expected to be completed. If you transfer your shares
of Hydra Industries common stock after the record date, but before the special meeting,
unless the transferee obtains from you a proxy to vote those shares, you will retain
your right to vote at the special meeting. However, you will not be able to seek redemption
of your shares because you will no longer be able to deliver them for cancellation upon
consummation of the Business Combination. If you transfer your shares of Hydra Industries
common stock prior to the record date, you will have no right to vote those shares at
the special meeting or redeem those shares for a pro rata portion of the proceeds held
in our trust account.
|
|
Q:
|
What vote is required to approve the proposals presented
at the special meeting?
|
|
A:
|
Approval of the Business Combination Proposal, Incentive Plan Proposal
and Adjournment Proposal requires the affirmative vote of a majority of the votes cast
by stockholders present in person or represented by proxy at the special meeting. Accordingly,
a Hydra Industries stockholder’s failure to vote by proxy or to vote in person
at the special meeting or the failure of a Hydra Industries stockholder who holds his
or her shares in “street name” through a broker or other nominee to give
voting instructions to such broker or other nominee (a “broker non-vote”)
will result in that stockholder’s shares not being counted towards the number of
shares of Hydra Industries common stock required to validly establish a quorum, but if
a valid quorum is otherwise established, it will have no effect on the outcome of any
vote on the Business Combination Proposal, the Incentive Plan Proposal or the Adjournment
Proposal. Abstentions will be counted in connection with the determination of whether
a valid quorum is established, but will have no effect on the outcome of the Business
Combination Proposal, the Incentive Plan Proposal or the Adjournment Proposal.
|
The approval of the Charter Proposals
each require the affirmative vote of the holders of a majority of the outstanding shares of our common stock. Accordingly, a Hydra
Industries stockholder’s failure to vote by proxy or to vote in person at the special meeting, an abstention from voting
or a broker non-vote with regard to any such proposal will have the same effect as a vote “AGAINST” such proposal.
Directors are elected by a plurality
of all of the votes cast by holders of shares of our common stock represented in person or by proxy and entitled to vote thereon
at the special meeting. This means that the six nominees will be elected if they receive more affirmative votes than any other
nominee for the same position. Stockholders may not cumulate their votes with respect to the election of directors. Abstentions
and broker non-votes will have no effect on the election of directors.
|
Q:
|
May Hydra Industries or the Sponsors, Hydra Industries’
directors, officers, advisors or their affiliates purchase shares in connection with
the Business Combination?
|
|
A:
|
In connection with the stockholder vote to approve the proposed
Business Combination, our initial stockholders, directors, executive officers, advisors
or their affiliates may purchase shares in privately negotiated transactions or in the
open market either prior to or following the completion of the consummation of the Business
Combination. However, they have no current commitments, plans or intentions to engage
in such transactions and have not formulated any terms or conditions for any such transactions.
None of the funds in the trust account will be used to purchase shares in such transactions.
If they engage in such transactions, they will not make any such purchases when they
are in possession of any material nonpublic information not disclosed to the seller or
if such purchases are prohibited by Regulation M under the Exchange Act. We have an insider
trading policy which requires insiders to: (i) refrain from purchasing shares during
certain blackout periods and when they are in possession of any material nonpublic information
and (ii) clear all trades with our legal counsel prior to execution. We cannot currently
determine whether our insiders will make such purchases pursuant to a Rule 10b5-1 plan,
as it will be dependent upon several factors, including, but not limited to, the timing
and size of such purchases. Depending on such circumstances, our insiders may either
make such purchases pursuant to a Rule 10b5-1 plan or determine that such a plan is not
necessary.
|
|
Q:
|
How many votes do I have at the special meeting?
|
|
A:
|
Our stockholders are entitled to one vote at the special meeting
for each share of Company common stock held of record as of ,
2016, the record date for the special meeting. As of the close of business on the record
date, there were 10,000,000 outstanding shares of our common stock.
|
|
Q:
|
What constitutes a quorum at the special meeting?
|
|
A:
|
Holders of a majority in voting power of the Company’s common
stock issued and outstanding and entitled to vote at the special meeting, present in
person or represented by proxy, constitute a quorum. In the absence of a quorum, a majority
of our stockholders, present in person or represented by proxy, will have the power to
adjourn the special meeting. As of the record date for the special meeting, 5,000,001
shares of our common stock would be required to achieve a quorum.
|
|
Q:
|
How will Hydra Industries’ Sponsors, directors and
officers vote?
|
|
A:
|
In connection with our IPO, we entered into letter agreements (the
“2014 Letter Agreements”) with each of our initial stockholders, consisting
of the Sponsors, our directors, our executive officers and our advisor, pursuant to which
each agreed to vote any shares of Hydra Industries common stock owned by them in favor
of the Business Combination Proposal. None of our initial stockholders has purchased
any shares during or after our IPO in the open market and, with the exception of the
Macquarie Forward Purchase, neither we nor our initial stockholders have entered into
agreements, and are not currently in negotiations, to purchase shares. As of the date
hereof, our initial stockholders and affiliates own shares equal to 20.0% of our issued
and outstanding shares of common stock.
|
In addition, concurrently with
the execution of the Sale Agreement, our Sponsors entered into Voting and Support Letter Agreements with Target (the “Voting
and Support Agreements”), copies of which are attached hereto as
Annex E
. Pursuant to the Voting and Support Agreements,
the Sponsors, among other things, confirmed their obligations under the 2014 Letter Agreements to vote the shares of Hydra Industries
common stock held by them (representing as of the record date approximately [__]% of the voting power of the Company) in favor
of the Business Combination Proposal described in this proxy statement, and agreed that the Selling Group would be entitled to
enforce such obligations.
|
Q:
|
What interests do Hydra Industries’ current officers
and directors have in the Business Combination?
|
|
A:
|
Our directors and executive officers, as well as our nominees to
our board of directors, have interests in the Business Combination that are different
from or in addition to (and which may conflict with) your interests. These interests
include:
|
|
·
|
the fact that
our Sponsors and our independent directors paid an aggregate of $3,775,000 for their
founder shares and placement warrants and such securities should have a significantly
higher value at the time of the Business Combination;
|
|
·
|
the fact that
certain directors and officers may enter into employment agreements with the Company
after the consummation of the Business Combination;
|
|
·
|
the Macquarie
Forward Purchase;
|
|
·
|
the fact that
A. Lorne Weil, our Chairman and Chief Executive Officer and the managing member of our
Hydra Sponsor, has agreed that he will be liable to us, and our Macquarie Sponsor has
agreed to indemnify Mr. Weil for 50% of any such liability, if and to the extent any
claims by a vendor for services rendered or products sold to us, or the Target, reduce
the amount of funds in the Trust Account to below $10.00 per public share or such lesser
amount per public share held in the Trust Account as of the date of the liquidation of
the trust account, due to reductions in value of the trust assets other than due to the
failure to obtain such waiver, in each case net of the amount of interest which may be
withdrawn to pay taxes, except as to any claims by a third party who executed a waiver
of any and all rights to seek access to the Trust Account and except as to any claims
under our indemnity of the underwriters of our IPO against certain liabilities, including
liabilities under the Securities Act;
|
|
·
|
the
fact that our directors and officers will lose their entire investment in the Company
if the Business Combination is not completed;
|
|
·
|
the continuation
of one of our five existing directors as a director of the Company; and
|
|
·
|
the continued
indemnification of current directors and officers of the Company and the continuation
of directors’ and officers’ liability insurance after the Business Combination.
|
These interests may influence our directors in making their
recommendation that you vote in favor of the approval of the Business Combination. These interests were considered by our Board
when our Board approved the Business Combination.
|
Q:
|
What happens if I vote against the Business Combination
Proposal?
|
|
A:
|
If the Business Combination Proposal is not approved and
we do not otherwise consummate an alternative business combination and close such transaction
by October 29, 2016 (subject to the requirements of law), we will be required to dissolve
and liquidate our trust account by returning the then remaining funds (including interest
income, net of taxes payable and an amount up to $50,000 to pay dissolution expenses)
in such account to the public stockholders.
|
|
Q:
|
Do I have redemption rights?
|
|
A:
|
If you are a holder of public shares, you may redeem your public
shares for cash equal to a pro rata share of the aggregate amount on deposit in the trust
account which holds the proceeds of our IPO as of two business days prior to the consummation
of the Business Combination, less taxes payable or amounts released to us for working
capital, upon the consummation of the Business Combination. A public stockholder, together
with any of his, her or its affiliates or any other person with whom it is acting in
concert or as a “group” (as defined under Section 13 of the Exchange Act),
will be restricted from redeeming his, her or its shares or, if part of such a group,
the group’s shares, with respect to an aggregate of 25% or more of the outstanding
public shares. Our Sponsors and initial stockholders have agreed to waive their redemption
rights with respect to any shares of our capital stock they may hold in connection with
the consummation of the Business Combination, and the founder shares will be excluded
from the pro rata calculation used to determine the per-share redemption price. For illustrative
purposes, based on funds in the trust account of approximately $80 million on June 30,
2016, the estimated per share redemption price would have been approximately $10.00.
Additionally, shares properly tendered for redemption will only be redeemed if the Business
Combination is consummated; otherwise holders of such shares will only be entitled
to a pro rata portion of the trust account (including interest but net of taxes payable
and dissolution expenses) in connection with the liquidation of the trust account. If
the Business Combination is not consummated, we may enter into an alternative business
combination and close such transaction by October 29, 2016 (subject to the requirements
of law).
|
|
Q:
|
As long as I vote on the Business Combination Proposal,
will how I vote affect my ability to exercise redemption rights?
|
|
A:
|
No. You may exercise your redemption rights whether you vote your
shares of Hydra Industries common stock for or against the Business Combination Proposal
or any other proposal described in this proxy statement. As a result, the Sale Agreement
can be approved by stockholders who will redeem their shares and no longer remain stockholders,
leaving stockholders who choose not to redeem their shares holding shares in a company
with a less liquid trading market, fewer stockholders, less cash and the potential inability
to meet the listing standards of NASDAQ.
|
|
Q:
|
How do I exercise my redemption rights?
|
|
A:
|
In order to exercise your redemption rights, you must (i) check
the box on the proxy card to elect redemption, (ii) check the box on the proxy card marked
“Shareholder Certification”, (iii) affirmatively vote either for or against
the Business Combination Proposal and, (iv) prior to ,
Eastern time on ,
2016 (two business days before the special meeting), (x) submit a written request to
our transfer agent that we redeem your public shares for cash, and (y) deliver your stock
to our transfer agent physically or electronically through Depository Trust Company,
or DTC. The address of Continental Stock Transfer & Trust Company, our transfer agent,
is listed under the question “Who can help answer my questions?” below.
|
Any demand for redemption, once
made, may be withdrawn at any time until the deadline for exercising redemption requests and thereafter, with our consent, until
the vote is taken with respect to the Business Combination. If you delivered your shares for redemption to our transfer agent
and decide within the required timeframe not to exercise your redemption rights, you may request that our transfer agent return
the shares (physically or electronically). You may make such request by contacting our transfer agent at the phone number or address
listed under the question “Who can help answer my questions?” below.
|
Q:
|
What are the federal income tax consequences of exercising
my redemption rights?
|
|
A:
|
Hydra Industries stockholders who exercise their redemption rights
to receive cash from the trust account in exchange for their shares of Hydra Industries
common stock generally will be required to treat the transaction as a sale of such shares
and recognize gain or loss upon the redemption in an amount equal to the difference,
if any, between the amount of cash received and the tax basis of the shares of Hydra
Industries common stock redeemed. Such gain or loss should be treated as capital gain
or loss if such shares were held as a capital asset on the date of the redemption. The
redemption, however, may be treated as a distribution if it does not effect a meaningful
reduction in the redeeming stockholder’s percentage ownership in Hydra Industries,
taking into account certain attribution rules. Any such distribution will be treated
as dividend income to the extent of our current or accumulated earnings and profits.
Any distribution in excess of our earnings and profits will reduce the redeeming stockholders’
basis in the Hydra Industries common stock, and any remaining excess will be treated
as gain realized on the sale or other disposition of the Hydra Industries common stock.
See the section entitled “The Business Combination Proposal—Material U.S.
Federal Income Tax Considerations for Stockholders Exercising Redemption Rights.”
|
|
Q:
|
If I am a Hydra Industries warrantholder or rightholder,
can I exercise redemption rights with respect to my warrants or rights?
|
|
A:
|
No. The holders of our warrants or rights have no redemption rights
with respect to our warrants or rights.
|
|
Q:
|
If I am a Hydra Industries unit holder, can I exercise
redemption rights with respect to my units?
|
|
A:
|
No. Holders of outstanding units must separate the underlying public
shares and public warrants prior to exercising redemption rights with respect to the
public shares.
|
If you hold units registered in
your own name, you must deliver the certificate for such units to Continental Stock Transfer & Trust Company, our transfer
agent, with written instructions to separate such units into public shares and public warrants. This must be completed far enough
in advance to permit the mailing of the public share certificates back to you so that you may then exercise your redemption rights
with respect to the public shares upon the separation of the public shares from the units. See “How do I exercise my redemption
rights?” above. The address of Continental Stock Transfer & Trust Company is listed under the question “Who can
help answer my questions?” below.
If a broker, dealer, commercial
bank, trust company or other nominee holds your units, you must instruct such nominee to separate your units. Your nominee must
send written instructions by facsimile to Continental Stock Transfer & Trust Company, our transfer agent. Such written instructions
must include the number of units to be split and the nominee holding such units. Your nominee must also initiate electronically,
using DTC’s deposit withdrawal at custodian (DWAC) system, a withdrawal of the relevant units and a deposit of an equal
number of public shares and public warrants. This must be completed far enough in advance to permit your nominee to exercise your
redemption rights with respect to the public shares upon the separation of the public shares from the units. While this is typically
done electronically the same business day, you should allow at least one full business day to accomplish the separation. If you
fail to cause your public shares to be separated in a timely manner, you will likely not be able to exercise your redemption rights.
|
Q:
|
Do I have appraisal rights if I object to the proposed
Business Combination?
|
|
A:
|
No. There are no appraisal rights available to holders of Hydra
Industries common stock in connection with the Business Combination.
|
|
Q:
|
What happens to the funds held in the trust account upon
consummation of the Business Combination?
|
|
A:
|
If the Business Combination is consummated, the funds held in the
trust account will be released (i) first, to pay Hydra Industries stockholders who properly
exercise their redemption rights, (ii) after all redemption payments are made, the remaining
cash balance will be used to pay an agreed amount of Purchaser Costs (including expenses
incurred in connection with the preparation of the proxy statement and meetings with
Hydra stockholders), an agreed amount of the Selling Group’s transaction expenses
and the amount of repayment required under certain of the Inspired Group’s financing
arrangements, and to retain £5 million of cash on the Company’s balance sheet,
(iii) after all redemption payments and such fees, costs and expenses are paid, and such
cash amount is retained on the balance sheet, the remaining cash balance will be paid
to existing holders of equity and shareholder loan notes of Target as a component of
the Cash Consideration of the Total Consideration.
|
|
Q:
|
What happens if the Business Combination is not consummated?
|
|
A:
|
There are certain circumstances under which the Sale Agreement may
be terminated. See the section entitled “The Business Combination Proposal—
The Sale Agreement — Termination” for information regarding the parties’
specific termination rights.
|
If we do not consummate the Business
Combination and fail to complete an initial business combination by October 29, 2016 (subject to the requirements of law), the
existing charter provides that we will (a) cease all operations except for the purpose of winding up, (b) as promptly as reasonably
possible but not more than ten business days thereafter, redeem the public shares, at a per share price, payable in cash, equal
to the aggregate amount then on deposit in the trust account, including interest (which interest shall be net of taxes payable
and working capital released to us, and less up to $50,000 of interest to pay dissolution expenses) divided by the number of then
outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including
the right to receive further liquidation distributions, if any), subject to applicable law, and (c) as promptly as reasonably
possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve
and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements
of other applicable law.
We expect that the amount of any
distribution our public stockholders will be entitled to receive upon our dissolution will be approximately the same as the amount
they would have received if they had redeemed their shares in connection with the Business Combination, subject in each case to
Hydra Industries’ obligations under the Delaware General Corporation Law (“DGCL”) to provide for claims of creditors
and other requirements of applicable law. Holders of our founder shares have waived any right to any liquidation distribution
with respect to those shares.
In the event of liquidation, there
will be no distribution with respect to Hydra Industries’ outstanding warrants to purchase common stock. Accordingly, the
warrants, as well as the rights to receive shares of our common stock upon consummation of an initial business combination, will
expire worthless.
|
Q:
|
When is the Business Combination expected to be completed?
|
|
A:
|
It is currently anticipated that the Business Combination will be
consummated promptly following the special meeting, provided that all other conditions
to the consummation of the Business Combination have been satisfied or waived. For a
description of the conditions to the completion of the Business Combination, see the
section entitled “The Business Combination Proposal — The Sale Agreement
— Conditions to Closing of the Business Combination.”
|
|
Q:
|
What do I need to do now?
|
|
A:
|
You are urged to read carefully and consider the information contained
in this proxy statement, including the annexes, and to consider how the Business Combination
will affect you as a stockholder. You should also carefully read the accompanying Annual
Report on Form 10-K for the year ended December 31, 2015. You should then vote as soon
as possible in accordance with the instructions provided in this proxy statement and
on the enclosed proxy card or, if you hold your shares through a brokerage firm, bank
or other nominee, on the voting instruction form provided by the broker, bank or nominee.
|
|
A:
|
If you were a holder of record of our common stock on ,
2016, the record date for the special meeting, you may vote with respect to the proposals
in person at the special meeting, or by completing, signing, dating and returning the
enclosed proxy card in the postage-paid envelope provided. If you hold your shares in
“street name,” which means your shares are held of record by a broker, bank
or other nominee, you should contact your broker, bank or nominee to ensure that votes
related to the shares you beneficially own are properly counted. In this regard, you
must provide the record holder of your shares with instructions on how to vote your shares
or, if you wish to attend the special meeting and vote in person, obtain a proxy from
your broker, bank or nominee.
|
|
Q:
|
What will happen if I abstain from voting or fail to vote
at the special meeting?
|
|
A:
|
At the special meeting, we will count a properly executed proxy
marked “ABSTAIN” with respect to a particular proposal as present for purposes
of determining whether a quorum is present. A failure to vote or an abstention will have
the same effect as a vote “AGAINST” the Charter Proposals, but will have
no effect on the other proposals. Additionally, if you abstain from voting or fail to
vote at the special meeting, you will not be able to exercise your redemption rights
(as described above).
|
|
Q:
|
What will happen if I sign and return my proxy card without
indicating how I wish to vote?
|
|
A:
|
Signed and dated proxies received by us without an indication of
how the stockholder intends to vote on a proposal will be voted “FOR” each
proposal described herein and in favor of all director nominees.
|
|
Q:
|
If I am not going to attend the special meeting in person,
should I return my proxy card instead?
|
|
A:
|
Yes. Whether you plan to attend the special meeting or not, please
read the enclosed proxy statement carefully, and vote your shares by completing, signing,
dating and returning the enclosed proxy card in the postage-paid envelope provided.
|
|
Q:
|
If my shares are held in “street name,” will
my broker, bank or other nominee automatically vote my shares for me?
|
|
A:
|
No. Under the rules of various national and regional securities
exchanges, your broker, bank or other nominee cannot vote your shares with respect to
non-discretionary matters unless you provide instructions on how to vote in accordance
with the information and procedures provided to you by your broker, bank or nominee.
We believe the proposals presented to the stockholders at the special meeting will be
considered non-discretionary and therefore your broker, bank or other nominee cannot
vote your shares without your instruction. If you do not provide instructions with your
proxy, your broker, bank or other nominee may deliver a proxy card expressly indicating
that it is NOT voting your shares; this indication that a broker, bank or nominee
is not voting your shares is referred to as a “broker non-vote.” Broker non-votes
will not be counted for the purpose of determining the existence of a quorum or for purposes
of determining the number of votes cast at the special meeting. Your broker, bank or
other nominee can vote your shares only if you provide instructions on how to vote. You
should instruct your nominee to vote your shares in accordance with directions you provide.
|
|
Q:
|
May I change my vote after I have mailed my signed proxy
card?
|
|
A:
|
Yes. You may change your vote by sending a later-dated, signed proxy
card to our secretary at the address listed below so that it is received by our secretary
prior to the special meeting or by attending the special meeting in person and voting.
You also may revoke your proxy by sending a notice of revocation to our secretary, which
must be received by our secretary prior to the special meeting.
|
|
Q:
|
What should I do if I receive more than one set of voting
materials?
|
|
A:
|
You may receive more than one set of voting materials, including
multiple copies of this proxy statement and multiple proxy cards or voting instruction
cards as well as the accompanying Annual Report on Form 10-K for the year ended December
31, 2015. For example, if you hold your shares in more than one brokerage account, you
will receive a separate voting instruction card for each brokerage account in which you
hold shares. If you are a holder of record and your shares are registered in more than
one name, you will receive more than one proxy card. Please complete, sign, date and
return each proxy card and voting instruction card that you receive in order to cast
your vote with respect to all of your shares.
|
|
Q:
|
Who will solicit and pay the cost of soliciting proxies?
|
|
A:
|
Hydra Industries will pay the cost of soliciting proxies for the
special meeting. Hydra Industries has engaged [______] to assist in the solicitation
of proxies for the special meeting. Hydra Industries has agreed to pay [Proxy Solicitor]
a fee of $[___] plus costs and expenses and a per call fee for any incoming or outgoing
stockholder calls for such services, which fee also includes [Proxy Solicitor] acting
as the inspector of elections at the special meeting. Hydra Industries will reimburse
[Proxy Solicitor] for reasonable out-of-pocket expenses and will indemnify [Proxy Solicitor]
and its affiliates against certain claims, liabilities, losses, damages and expenses.
Hydra Industries will also reimburse banks, brokers and other custodians, nominees and
fiduciaries representing beneficial owners of shares of Hydra Industries’ common
stock for their expenses in forwarding soliciting materials to beneficial owners of Hydra
Industries’ common stock and in obtaining voting instructions from those beneficial
owners. Our directors and officers may also solicit proxies by telephone, by facsimile,
by mail, on the Internet or in person. They will not be paid any additional amounts for
soliciting proxies.
|
|
Q:
|
Who can help answer my questions?
|
|
A:
|
If you have questions about the proposals or if you need additional
copies of this proxy statement or the enclosed proxy card or the accompanying Annual
Report on Form 10-K for the year ended December 31, 2015, you should contact:
|
Martin E. Schloss, Executive Vice
President, General Counsel and Secretary
250 West 57th Street, Suite 2223
New York, New York 10107
Email: marty@hydramgmt.com
Tel: (646) 565-3861
You may also contact our proxy
solicitor at:
[Proxy Solicitor]
[Contact Information]
To obtain timely delivery, our
stockholders must request the materials no later than five business days prior to the special meeting.
You may also obtain additional
information about us from documents filed with the SEC by following the instructions in the section entitled “Where You
Can Find More Information.”
If you intend to seek redemption of your
public shares, you will need to send a letter requesting redemption and deliver your stock (either physically or electronically)
to our transfer agent at least two business days prior to the special meeting. If you have questions regarding the certification
of your position or delivery of your stock, please contact:
Continental Stock Transfer & Trust
Company
17 Battery Place
New York, New York 10004
Attn: [_____]
E-mail: [_____]
SUMMARY
OF THE PROXY STATEMENT
This summary highlights selected information
from this proxy statement and does not contain all of the information that is important to you. To better understand the Business
Combination and the proposals to be considered at the special meeting, you should read this entire proxy statement carefully,
including the annexes. See also the section entitled “Where You Can Find More Information.” This proxy statement also
includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking
Statements.” See “Target Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP
Measures” below for additional information.
Unless otherwise specified, all share
calculations do not take into account (i) the issuance of any shares upon completion of the Business Combination under the Company’s
proposed Incentive Plan, or (ii) any of the 17,500,000 warrants to purchase up to a total of 8,750,000 shares of Hydra Industries
common stock that will remain outstanding following the Business Combination (including 2,000,000 warrants issuable pursuant to
the Macquarie Forward Purchase). Unless otherwise specified, currency amounts have been converted to U.S. dollars based on a USD/GBP
exchange rate of $1.32/£1.00 as of the July 13, 2016 date of the Sale Agreement.
Parties to the Business Combination
Hydra Industries Acquisition Corp.
Hydra Industries is a Delaware special
purpose acquisition company incorporated on May 30, 2014 for the purpose of effecting a merger, capital stock exchange, asset
acquisition, stock purchase, reorganization or similar business combination involving Hydra Industries and one or more businesses.
Hydra Industries’ securities are
traded on The NASDAQ Capital Market (“NASDAQ”) under the ticker symbols “HDRA,” “HDRAU,” “HDRAR”
and “HDRAW.” We have applied to continue the listing of our common stock and warrants on NASDAQ under the new symbols
“INSE” and “INSEW”, respectively, upon the closing of the Business Combination.
The mailing address of Hydra Industries’
principal executive office is 250 West 57
th
Street, Suite 2223, New York, New York 10107 and its phone number is (646)
565-3861.
DMWSL 633 Limited
DMWSL 633 Limited (“Target Parent”)
is an English private limited company incorporated on March 3, 2010 with unrestricted objects under its constitution.
The mailing address of Target Parent’s
principal executive office is 3 The Maltings, Wetmore Road, Burton on Trent, Staffs, DE14 1SE, United Kingdom and its phone number
is 00 44 (0) 1283 512777.
Inspired Business Overview
Inspired is a global
gaming technology company, supplying Virtual Sports and Server Based Gaming (“SBG”) systems to regulated lottery,
betting and gaming operators worldwide through an “omni-channel” distribution strategy. Inspired provides end-to-end
digital gaming solutions on its proprietary and secure network that accommodates a wide range of devices, including land-based
gaming machine products, mobile devices such as smartphones and tablets, as well as PC and social applications. Inspired believes
this omni-channel distribution strategy, combined with its common technology platform, allows it to keep pace with evolving requirements
in game play, security, technology and regulations in the global gaming and lottery industry.
Global gaming and
lottery growth has been steady and resilient to economic cycles over the last decade. According to H2 Gambling Capital, it has
grown at a 3.8% compounded annual growth rate from 2005 to 2015, driven by increased consumer spend and the introduction of new
regulated markets.
During this period,
digital gaming and lottery (online and mobile) have grown at a faster pace. According to H2 Gambling Capital, it has grown at
a 10.6% compound annual growth rate, driven by rapid growth in the deployment of digital games and technologies such as Virtual
Sports and digital SBG terminals into land-based venues in markets such as the U.K. and Italy, where regulators have supported
the transition to digital, online and retail channels. According to H2 Gambling Capital, Digital now accounts for over 30% of
gaming revenues in the U.K. and 9% of gaming revenues in Italy.
Inspired believes
that the overall global gaming and lottery industry will continue to grow steadily, with more robust growth in mobile and land-based
digital gaming and lottery markets. Inspired believes the industry is content driven and, much like music, videogames and motion
pictures, will continue to be transformed by the propagation of digitally-networked technologies.
Target Organizational Structure
The following diagram illustrates the organizational
structure of the Company immediately following the Business Combination.
Redemption Rights
Pursuant to the existing charter, in connection
with the Business Combination, holders of our public shares may elect to have their shares redeemed for cash at the applicable
redemption price per share calculated in accordance with the existing charter. As of June 30, 2016, this would have amounted to
approximately $10.00 per share. If a holder exercises its redemption rights, then such holder will be exchanging its shares of
Hydra Industries common stock for cash and will no longer own shares of Hydra Industries common stock and will have no right to
participate in, or have any interest in, the future growth of the Company, if any. Such a holder will be entitled to receive cash
for its public shares only if it (i) affirmatively votes for or against the Business Combination Proposal and (ii) properly requests
redemption and delivers its shares (either physically or electronically) to our transfer agent at least two business days prior
to the special meeting in accordance with the procedures described herein. See the section entitled “Special Meeting in
Lieu of 2016 Annual Meeting of Hydra Industries Stockholders—Redemption Rights” for the procedures to be followed
if you wish to redeem your shares for cash.
Impact of the Business Combination on Hydra Industries’
Public Float
It is anticipated that, following completion
of the Business Combination and if there are no redemptions, Hydra Industries’ public stockholders will retain an ownership
interest of approximately 42% in Hydra Industries and our initial stockholders and affiliates will retain an ownership interest
of approximately 23% in Hydra Industries. If Hydra Industries’ stockholders exercise their redemption rights, the ownership
interest in Hydra Industries of Hydra Industries’ public stockholders will decrease. Upon completion of the Business Combination,
Hydra Industries will own 100% of the outstanding equity and shareholder loan notes of Target. If the actual facts are different
than these assumptions (which they are likely to be), the percentage ownership retained by Hydra Industries’ existing stockholders
in Hydra Industries will be different. If the Company’s available cash at closing is insufficient to pay all liabilities
and obligations of the Company and Target due and required to be paid at closing or by reason of closing, the Selling Group may
elect to not consummate the Business Combination. At June 30, 2016, the balance in our trust account was approximately $80 million.
The following table illustrates varying
potential future ownership levels in Hydra Industries assuming varying illustrative levels of redemptions by Hydra Industries’
public stockholders (and assuming consummation of the Business Combination as of September 24, 2016):
|
|
Assumed % of Hydra
Industries Public Shares
Redeemed (and Proceeds Remaining in Trust Account After Redemption)
|
|
|
|
0% redeemed
|
|
|
25% redeemed
|
|
|
50% redeemed
|
|
|
75% redeemed
|
|
|
|
($80 million
remaining in trust)
|
|
|
($60 million
remaining in trust)
|
|
|
($40 million
remaining in trust)
|
|
|
($20 million
remaining in trust)
|
|
Hydra Industries public stockholders
|
|
|
42.2
|
%
|
|
|
32.6
|
%
|
|
|
23.0
|
%
|
|
|
13.9
|
%
|
Hydra Industries founders*
|
|
|
7.6
|
%
|
|
|
7.6
|
%
|
|
|
7.6
|
%
|
|
|
7.9
|
%
|
Hydra Industries Board
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
Macquarie Sponsor
|
|
|
14.5
|
%
|
|
|
14.5
|
%
|
|
|
14.5
|
%
|
|
|
15.0
|
%
|
Existing Target equity and shareholder loan note holders
|
|
|
35.2
|
%
|
|
|
44.8
|
%
|
|
|
54.4
|
%
|
|
|
62.7
|
%
|
* Includes 390,000 founder shares transferred from our Sponsors
to our officers and an advisor in connection with the IPO.
Ownership of Hydra Industries Following the Business
Combination
It is anticipated that, following completion
of the Business Combination and if there are no redemptions, our existing public stockholders will retain an ownership interest
of approximately 42% in Hydra Industries and our initial stockholders and affiliates will retain an ownership interest of approximately
23% in Hydra Industries. If any of our existing public stockholders exercise their redemption rights, the ownership interest in
Hydra Industries of Hydra Industries’ public stockholders will decrease and the ownership interest in Hydra Industries of
the Selling Group will increase. These illustrative ownership percentages with respect to Hydra Industries following the Business
Combination do not take into account (i) the issuance of any shares upon completion of the Business Combination under the Company’s
proposed 2016 Long-Term Incentive Plan (the “Incentive Plan”) or (ii) the 17,500,000 warrants to purchase up to a
total of 8,750,000 shares of Hydra Industries common stock that will remain outstanding following the Business Combination. If
the actual facts are different than these assumptions (which they are likely to be), the percentage ownership retained by our
existing stockholders in Hydra Industries will be different.
Approval and Adoption of the Proposals Related to the
Proposed Charter
At the special meeting, the Company’s
stockholders will be asked to approve and adopt separate proposals for amendments to the existing charter to:
|
·
|
Proposal 2 —
increase the Company’s authorized common stock ;
|
|
·
|
Proposal 3 —
provide for the declassification of our board of directors and make certain related changes;
|
|
·
|
Proposal 4 —provide
for certain additional changes, including changing the Company’s name from “Hydra
Industries Acquisition Corp.” to “Inspired Entertainment, Inc.” and
making the Company’s corporate existence perpetual, which our board of directors
believes are necessary or appropriate to address the circumstances and needs of the Company
following the Business Combination; and
|
|
·
|
Proposal 5 —
provide the Company with the ability to restrict securities ownership by persons who
fail to comply with informational or other regulatory requirements under applicable gaming
laws, who are found unsuitable to hold the Company’s securities by gaming authorities
or who could by holding its securities cause the Company or any affiliate to fail to
obtain, maintain, renew or qualify for a license, contract, franchise or other regulatory
approval from a gaming authority.
|
For more information, see the section entitled
“The Charter Proposals.”
Appraisal Rights
Appraisal rights are not available to our
stockholders in connection with the Business Combination.
Reasons for the Business Combination
We were organized for the purpose of effecting
a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one
or more businesses. We have sought to capitalize on the ability of our management team to identify, acquire and partner with management
to operate a business, focusing on the international gaming industry. The Business Combination was the result of a thorough search
for a potential transaction utilizing the extensive network and investing and operating experience of our management team and
board of directors. The terms of the Business Combination were the result of thorough negotiations between the representatives
of Hydra Industries and Target.
From the date of our IPO through execution
of the Sale Agreement on July 13, 2016, we identified and preliminarily evaluated more than 140 potential acquisition target companies,
conducted initial business and financial due diligence or had meaningful discussions with representatives of 12 potential acquisition
targets (other than Inspired), provided an initial non-binding indication of interest to five potential acquisition targets (other
than Inspired) and submitted a letter of intent and commenced further due diligence with respect to two potential acquisition
targets (other than Inspired). In doing so, we followed the initial set of criteria and guidelines outlined below which we believed
were important in evaluating prospective targets. In reviewing the Target opportunity, our board considered the following factors
consistent with our strategy:
·
Middle-Market
Businesses
. We focused on the potential acquisition of one or more businesses which in our view would have an aggregate enterprise
value of approximately $250 million to $500 million, determined according to reasonably accepted valuation standards and methodologies,
including comparative analyses of selected companies and transactions we deemed comparable or relevant for such purposes, believing
that the middle market segment would provide the greatest number of opportunities for investment and would be the market most
consistent with our management team’s previous investment history. This segment is where we believed we had the strongest
network to identify opportunities and where our experience in developing companies would be most useful.
·
Businesses
with Proven Track Records and Strong Free Cash Flow Generation.
We focused on the potential acquisition of one or more businesses
that already had consistent, stable and increasing free cash flow. We focused on businesses that had a history of strong operating
and financial results, strong fundamentals, and predictable revenue streams.
·
Businesses
that Will Benefit from Being a Public Company.
We focused on the potential acquisition of one or more businesses that would
benefit from being publicly traded and could effectively utilize the broader access to capital and the public profile that are
associated with being a publicly traded company.
·
Experienced
Management Team.
We focused on the potential acquisition of one or more businesses with an experienced management team that
could provide a platform for us to further develop the management capabilities of the acquired business. We sought to partner
with a potential target’s management team and expected that the operating and financial abilities of our executive team
and board would complement their own capabilities.
·
Businesses
with a Catalyst that Will Significantly Improve Financial Performance.
We focused on the potential acquisition of one or more
established businesses where we believed that our operating expertise could serve as a catalyst for near term improvement in the
business performance or to help to develop the acquired business as a platform for long term growth.
Quorum and Required Vote
for Proposals for the Special Meeting
A quorum of Hydra Industries stockholders
is necessary to hold a valid meeting. A quorum will be present at the special meeting if a majority of the common stock outstanding
and entitled to vote at the special meeting is represented in person or by proxy. Abstentions will count as present for the purposes
of establishing a quorum. Broker non-votes will not be counted for purposes of establishing a quorum.
Approval of the Business Combination Proposal,
the Incentive Plan Proposal and the Adjournment Proposal requires the affirmative vote of a majority of the votes cast by stockholders
present in person or represented by proxy at the special meeting. Accordingly, a Hydra Industries stockholder’s failure
to vote by proxy or to vote in person at the special meeting or the failure of a Hydra Industries stockholder who holds his or
her shares in “street name” through a broker or other nominee to give voting instructions to such broker or other
nominee (a “broker non-vote”) will result in that stockholder’s shares not being counted towards the number
of shares of Hydra Industries common stock required to validly establish a quorum, but if a valid quorum is otherwise established,
it will have no effect on the outcome of any vote on the Business Combination Proposal, the Incentive Plan Proposal or the Adjournment
Proposal. Abstentions will also have no effect on the outcome of the Business Combination Proposal, the Incentive Plan Proposal
or the Adjournment Proposal.
The approval of the Charter Proposals requires
the affirmative vote of the holders of a majority of the outstanding shares of our common stock. Accordingly, a Hydra Industries
stockholder’s failure to vote by proxy or to vote in person at the special meeting, an abstention from voting, or a broker
non-vote with regard to any Charter Proposal will have the same effect as a vote “AGAINST” such Charter Proposal.
Directors are elected by a plurality of
all of the votes cast by holders of shares of our common stock represented in person or by proxy and entitled to vote thereon
at the special meeting. This means that the six nominees will be elected if they receive more affirmative votes than any other
nominee for the same position. Stockholders may not cumulate their votes with respect to the election of directors. Abstentions
and broker non-votes will have no effect on the election of directors.
The transactions contemplated by the Sale
Agreement will be consummated only if the Business Combination Proposal and, unless waived, the Director Election Proposal and
Charter Proposals are approved at the special meeting. In addition, (i) the Incentive Plan Proposal is conditioned on the approval
of the Business Combination Proposal, (ii) the Charter Proposals are conditioned on the approval of the Business Combination Proposal
and (iii) the Director Election Proposal is conditioned on the approval of Proposal 3.
The Adjournment Proposal does not require
the approval of any other proposal to be effective. It is important for you to note that in the event that the Business Combination
Proposal and, unless waived, the Director Election Proposal and Charter Proposals do not receive the requisite vote for approval,
then we will not consummate the Business Combination. If we do not consummate the Business Combination and fail to complete an
initial business combination by October 29, 2016 (subject to the requirements of law), we will be required to dissolve and liquidate
our trust account by returning the then remaining funds in such account to the public stockholders.
Recommendation to Hydra Industries Stockholders
Our board of directors believes that
each of the Business Combination Proposal, the Charter Proposals, the Director Election Proposal, the Incentive Plan Proposal
and the Adjournment Proposal to be presented at the special meeting is in the best interests of the Company and our stockholders
and unanimously recommends that our stockholders vote “FOR” each of these proposals and “FOR” each of
the director nominees.
When you consider the recommendation of
our board of directors in favor of approval of these proposals, you should keep in mind that our directors, officers and nominees
to our board of directors have interests in the Business Combination that are different from or in addition to (and which may
conflict with) your interests as a stockholder. These interests include, among other things:
|
·
|
the fact that
our Sponsors and our independent directors paid an aggregate of $3,775,000 for their
founder shares and placement warrants and such securities should have a significantly
higher value at the time of the Business Combination;
|
|
·
|
the fact that
certain directors and officers may enter into employment agreements with the Company
after the consummation of the Business Combination;
|
|
·
|
the Macquarie
Forward Purchase;
|
|
·
|
the fact that
A. Lorne Weil, our Chairman and Chief Executive Officer and the managing member of our
Hydra Sponsor, has agreed that he will be liable to us, and our Macquarie Sponsor has
agreed to indemnify Mr. Weil for 50% of any such liability, if and to the extent any
claims by a vendor for services rendered or products sold to us, or the Target, reduce
the amount of funds in the Trust Account to below $10.00 per public share or such lesser
amount per public share held in the Trust Account as of the date of the liquidation of
the trust account, due to reductions in value of the trust assets other than due to the
failure to obtain such waiver, in each case net of the amount of interest which may be
withdrawn to pay taxes, except as to any claims by a third party who executed a waiver
of any and all rights to seek access to the Trust Account and except as to any claims
under our indemnity of the underwriters of our IPO against certain liabilities, including
liabilities under the Securities Act;
|
|
·
|
the
fact that our directors and officers will lose their entire investment in the Company
if the Business Combination is not completed;
|
|
·
|
the continuation
of one of our five existing directors as a director of the Company; and
|
|
·
|
the continued
indemnification of current directors and officers of the Company and the continuation
of directors’ and officers’ liability insurance after the Business Combination.
|
These interests may influence our directors
in making their recommendation that you vote in favor of the approval of the Business Combination. These interests were considered
by our Board when our Board approved the Business Combination.
Risk Factors
In evaluating the proposals set forth in
this proxy statement, you should carefully read this proxy statement, including the annexes, and especially consider the factors
discussed in the section entitled “Risk Factors” beginning on page [__].
SELECTED
HISTORICAL INFORMATION OF HYDRA INDUSTRIES
The following table sets forth selected historical Hydra financial
information. Our balance sheet data as of June 30, 2016 and 2015 and our income statement data for the six months ended June 30,
2016 and 2015 are derived from our unaudited financial statements included elsewhere in this proxy statement. Our balance sheet
data as of December 31, 2015 and 2014 and income statement data for the year ended December 31, 2015 and for the period from May
30, 2014 (inception) through December 31, 2014 are derived from our audited financial statements included elsewhere in this proxy
statement.
The following information is only a summary and should be read
in conjunction with our financial statements and related notes contained elsewhere in this proxy statement and information discussed
under “
Hydra’s Management’s Discussion and Analysis of Financial Condition and Results of Operations.
”
The historical results included below and elsewhere in this proxy statement are not indicative of our future performance.
|
|
Six Months Ended June
30,
|
|
|
Year Ended
December 31,
|
|
|
For the Period
from May 30,
2014
(inception)
Through
December 31,
|
|
(dollars in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
2014
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
$
|
1,492
|
|
|
$
|
2,090
|
|
|
$
|
3,530
|
|
|
$
|
142
|
|
Unrealized gain (loss) on securities
|
|
|
11
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
Interest income
|
|
|
58
|
|
|
|
13
|
|
|
|
14
|
|
|
|
—
|
|
Net loss
|
|
|
(1,423
|
)
|
|
|
(2,077
|
)
|
|
|
(3,526
|
)
|
|
|
(142
|
)
|
Basic and diluted loss per share
|
|
|
(0.47
|
)
|
|
|
(0.78
|
)
|
|
|
(1.27
|
)
|
|
|
(0.06
|
)
|
|
|
June 30,
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
217
|
|
|
$
|
256
|
|
|
$
|
1,123
|
|
Cash and securities held in Trust Account
|
|
|
80,031
|
|
|
|
80,009
|
|
|
|
80,005
|
|
Total assets
|
|
|
80,299
|
|
|
|
80,330
|
|
|
|
81,296
|
|
Common stock subject to redemption
|
|
|
68,461
|
|
|
|
69,884
|
|
|
|
73,410
|
|
Total stockholders’ equity
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF TARGET
The following table sets forth selected historical Target
financial information. Target’s balance sheet data as of September 26, 2015 September 27, 2014, September 28, 2013, September
29, 2012 and September 24, 2011 and income statement data for the fiscal periods ended September 26, 2015 September 27, 2014,
September 28, 2013, September 29, 2012 and September 24, 2011 are derived from its audited financial statements included elsewhere
in this proxy statement.
The following information is only a summary and should be read
in conjunction with Target’s financial statements and related notes contained elsewhere in this proxy statement and information
discussed under "
Target’s Management's Discussion and Analysis of Financial Condition and Results of Operations.
"
The historical results included below and elsewhere in this proxy statement are not indicative of Target’s future performance,
or our future performance following the Business Combination.
|
|
September
26, 2015
|
|
|
September
27, 2014
|
|
|
September
28, 2013
|
|
|
September
29, 2012
|
|
|
September
24, 2011
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
4,060
|
|
|
|
19,252
|
|
|
|
17,200
|
|
|
|
36,237
|
|
|
|
29,875
|
|
Accounts receivable, net
|
|
|
42,828
|
|
|
|
39,957
|
|
|
|
40,833
|
|
|
|
28,507
|
|
|
|
43,133
|
|
Property and equipment, net
|
|
|
75,786
|
|
|
|
73,006
|
|
|
|
73,725
|
|
|
|
101,176
|
|
|
|
82,710
|
|
Software development costs, net
|
|
|
30,463
|
|
|
|
21,771
|
|
|
|
20,473
|
|
|
|
18,059
|
|
|
|
15,100
|
|
Goodwill and intangibles
|
|
|
120,493
|
|
|
|
133,868
|
|
|
|
136,995
|
|
|
|
143,132
|
|
|
|
140,778
|
|
Total assets
|
|
|
293,326
|
|
|
|
312,048
|
|
|
|
319,953
|
|
|
|
356,133
|
|
|
|
329,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior bank debt
|
|
|
114,752
|
|
|
|
115,900
|
|
|
|
78,996
|
|
|
|
81,084
|
|
|
|
73,992
|
|
Shareholder loans
|
|
|
338,904
|
|
|
|
322,177
|
|
|
|
287,498
|
|
|
|
239,045
|
|
|
|
188,683
|
|
Total liabilities
|
|
|
521,235
|
|
|
|
487,016
|
|
|
|
417,249
|
|
|
|
407,111
|
|
|
|
345,304
|
|
Total stockholders' deficit
|
|
|
(227,909
|
)
|
|
|
(174,968
|
)
|
|
|
(97,296
|
)
|
|
|
(50,978
|
)
|
|
|
(16,057
|
)
|
Total liabilities and stockholders'
deficit
|
|
|
293,226
|
|
|
|
312,048
|
|
|
|
319,953
|
|
|
|
356,133
|
|
|
|
329,247
|
|
|
|
For the period ended
|
|
|
|
|
|
|
|
|
|
September 26,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 29,
|
|
|
September 24,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
127,573
|
|
|
|
146,798
|
|
|
|
114,481
|
|
|
|
130,995
|
|
|
|
120,808
|
|
Cost of sales (net of depreciation)
|
|
|
24,227
|
|
|
|
50,138
|
|
|
|
21,950
|
|
|
|
30,953
|
|
|
|
20,697
|
|
Net operating (loss)/profit
|
|
|
(1,960
|
)
|
|
|
(13,487
|
)
|
|
|
(2,255
|
)
|
|
|
5,020
|
|
|
|
13,553
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/profit from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,307
|
)
|
|
|
6,481
|
|
|
|
7,193
|
|
Gain on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
10,081
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,774
|
|
|
|
6,481
|
|
|
|
7,193
|
|
Net loss
|
|
|
(60,538
|
)
|
|
|
(68,550
|
)
|
|
|
(41,653
|
)
|
|
|
(31,017
|
)
|
|
|
(17,052
|
)
|
SELECTED UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS
We are providing the following unaudited pro forma
condensed combined financial information to aid you in your analysis of the financial aspects of the Business Combination.
The following unaudited pro forma condensed combined
balance sheet as of June 30, 2016 combines the unaudited historical condensed consolidated balance sheet of Target as of April
9, 2016 with the unaudited historical condensed balance sheet of Hydra as of June 30, 2016, giving effect to the Business Combination
as if it had been consummated as of that date.
The following unaudited pro
forma condensed combined income statement for the six months ended June 30, 2016 combines the unaudited historical condensed consolidated
statement of operations of Target for the twenty eight week period ended April 9, 2016 with the unaudited historical condensed
statement of operations of Hydra for the six months ended June 30, 2016, giving effect to the Business Combination as if it had
occurred on January 1, 2016.
The following unaudited pro forma condensed combined
income statement for the year ended December 31, 2015 combines the audited historical consolidated statement of operations of
Target for the fiscal period ended September 26, 2015 with the audited historical statement of operations of Hydra for the year
ended December 31, 2015, giving effect to the Business Combination as if it had occurred on January 1, 2015.
The unaudited pro forma condensed combined balance
sheet as of June 30, 2016, the unaudited pro forma condensed combined income statements for the six months ended June 30, 2016
and the unaudited pro forma condensed combined income statements for the year ended December 31, 2015 have been prepared assuming
the following circumstances: (1) no holders of Hydra common stock exercise their right to have their shares redeemed upon the
consummation of the Business Combination and (2) holders of no more than 6,108,323 shares of Hydra common stock elect to have
their shares redeemed upon consummation of the Business Combination at a redemption price of approximately $10.00 per share, which
represents the maximum redemption amount before no cash consideration would be paid to the Selling Group if the Business Combination
were consummated as of June 30, 2016.
The historical financial information has been adjusted
to give pro forma effect to events that are related and/or directly attributable to the Business Combination, are factually supportable
and are expected to have a continuing impact on the results of the combined company. The adjustments presented on the unaudited
pro forma condensed combined financial statements have been identified and presented to provide relevant information necessary
for an accurate understanding of the combined company upon consummation of the Business Combination.
The historical financial statements of Hydra and
Target have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The historical financial information of Target was
derived from the audited consolidated financial statements of Target as of September 26, 2015 and September 27, 2014 and for the
fiscal periods ended September 26, 2015, September 27, 2014 and September 28, 2013 included elsewhere in this proxy statement.
The historical financial information for Target as of April 9, 2016 and for the twenty eight week period ended April 9, 2016 has
been derived from Target’s unaudited financial statements. The historical financial information of Hydra was derived from
the audited financial statements of Hydra for the years ended December 31, 2015 and 2014 and the unaudited condensed financial
statements of Hydra for the six months ended June 30, 2016 and 2015 included elsewhere in this proxy statement. This information
should be read together with Target’s and Hydra’s audited and unaudited financial statements and related notes, “
Target’s
Management’s Discussion and Analysis of Financial Condition and Results of Operations
,”
“Hydra’s
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” and other financial information
included elsewhere in this proxy statement.
The unaudited pro forma condensed combined financial
information is for illustrative purposes only. The financial results may have been different had the companies always been combined.
You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical
results that would have been achieved had the companies always been combined or the future results that the combined company will
experience. Target and Hydra have not had any historical relationship prior to the Business Combination. Accordingly, no pro forma
adjustments were required to eliminate activities between the companies.
Selected Unaudited Pro Forma
Financial Information
(dollars in thousands except
per share amounts)
|
|
Target
|
|
|
Hydra
|
|
|
Pro
Forma
Combined
Assuming No
Redemption
|
|
|
Pro Forma
Combined
Assuming
Maximum
Redemption
|
|
Statement of Operations Data –
For the Twenty Eight Weeks Ended April 9, 2016 (Target) and Six Months Ended June 30, 2016 (Hydra)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
63,624
|
|
|
$
|
—
|
|
|
$
|
63,624
|
|
|
$
|
63,624
|
|
Operating expenses
|
|
$
|
52,958
|
|
|
$
|
1,492
|
|
|
$
|
52,495
|
|
|
$
|
52,495
|
|
Operating (loss) income
|
|
$
|
1,010
|
|
|
$
|
(1,492
|
)
|
|
$
|
1,473
|
|
|
$
|
1,473
|
|
Net loss
|
|
$
|
(31,178
|
)
|
|
$
|
(1,423
|
)
|
|
$
|
(7,202
|
)
|
|
$
|
(7,340
|
)
|
Net loss per common share – basic and diluted
|
|
|
|
|
|
$
|
(0.47
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data – As of April 9, 2016 (Target)
and June 30, 2016 (Hydra)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
61,022
|
|
|
$
|
268
|
|
|
$
|
67,389
|
|
|
$
|
67,389
|
|
Total assets
|
|
$
|
264,265
|
|
|
$
|
80,299
|
|
|
$
|
270,632
|
|
|
$
|
270,632
|
|
Total current liabilities
|
|
$
|
68,363
|
|
|
$
|
4,038
|
|
|
$
|
55,641
|
|
|
$
|
61,581
|
|
Total liabilities
|
|
$
|
504,791
|
|
|
$
|
6,838
|
|
|
$
|
192,213
|
|
|
$
|
198,153
|
|
Total stockholders’ equity (deficit)
|
|
$
|
(240,526
|
)
|
|
$
|
5,000
|
|
|
$
|
78,419
|
|
|
$
|
72,479
|
|
|
|
Target
|
|
|
Hydra
|
|
|
Pro Forma
Combined
Assuming No
Redemption
|
|
|
Pro Forma
Combined
Assuming
Maximum
Redemption
|
|
Statement of Operations Data –
For the Year Ended September 26, 2015 (Target) and Year Ended December 31, 2015 (Hydra)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
127,573
|
|
|
$
|
—
|
|
|
$
|
127,573
|
|
|
$
|
127,573
|
|
Operating expenses
|
|
$
|
105,306
|
|
|
$
|
3,530
|
|
|
$
|
105,784
|
|
|
$
|
105,784
|
|
Operating loss
|
|
$
|
(1,960
|
)
|
|
$
|
(3,530
|
)
|
|
$
|
(2,438
|
)
|
|
$
|
(2,438
|
)
|
Net loss
|
|
$
|
(60,538
|
)
|
|
$
|
(3,526
|
)
|
|
$
|
(18,802
|
)
|
|
$
|
(19,078
|
)
|
Net loss per common share – basic and diluted
|
|
|
|
|
|
$
|
(1.27
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.95
|
)
|
COMPARATIVE PER
SHARE DATA
The following table sets forth the per share data
of Hydra and Target on a stand-alone basis and the unaudited pro forma condensed combined per share data for the six months ended
June 30, 2016 and the year ended December 31, 2015 after giving effect to the Business Combination, assuming (1) no holders of
the Company’s common stock exercise their right to have their shares redeemed upon the consummation of the Business Combination
and (2) holders of no more than 6,108,323 shares of Hydra common stock elect to have their shares converted upon consummation
of the Business Combination.
You should read the information in the following
table in conjunction with the selected historical financial information summary included elsewhere in this proxy statement, and
the historical financial statements of Hydra and Target and related notes that are included elsewhere in this proxy statement.
The unaudited Hydra and Target pro forma combined per share information is derived from, and should be read in conjunction with,
the unaudited pro forma condensed combined financial statements and related notes included elsewhere in this proxy statement.
The unaudited pro forma combined earnings per share
information below does not purport to represent the earnings per share which would have occurred had the companies been combined
during the periods presented, nor earnings per share for any future date or period. The unaudited pro forma combined book value
per share information below does not purport to represent what the value of Hydra and Target would have been had the companies
been combined during the period presented
|
|
Target
|
|
|
Hydra
|
|
|
Pro Forma
Combined
Assuming No
Redemption
|
|
|
Pro Forma
Combined
Assuming
Maximum
Redemption
|
|
|
|
(in thousands except share and per share amounts)
|
|
Twenty Eight Weeks Ended April 9, 2016 (Target) and
Six Months Ended June 30, 2016 (Hydra)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,178
|
)
|
|
$
|
(1,423
|
)
|
|
$
|
(7,202
|
)
|
|
$
|
(7,340
|
)
|
Stockholders’ equity (deficit) at June 30, 2016
|
|
$
|
(240,526
|
)
|
|
$
|
5,000
|
|
|
$
|
78,419
|
|
|
$
|
72,479
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
|
|
|
|
3,026,265
|
|
|
|
20,933,059
|
|
|
|
20,341,451
|
|
Basic and diluted net loss per share
|
|
|
|
|
|
$
|
(0.47
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.36
|
)
|
Stockholders’ equity per share - basic and diluted
– at June 30, 2016
|
|
|
|
|
|
$
|
1.65
|
|
|
$
|
3.75
|
|
|
$
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 9, 2016 (Target) and Year Ended
December 31, 2016 (Hydra)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(60,538
|
)
|
|
$
|
(3,526
|
)
|
|
$
|
(18,802
|
)
|
|
$
|
(19,078
|
)
|
Weighted average shares outstanding – basic and diluted
|
|
|
|
|
|
|
2,787,207
|
|
|
|
20,838,130
|
|
|
|
20,102,393
|
|
Basic and diluted net loss per share
|
|
|
|
|
|
$
|
(1.27
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.95
|
)
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this
proxy statement. These forward-looking statements relate to expectations for future financial performance, business strategies
or expectations for our business, and the timing and ability for us to complete the Business Combination. Specifically, forward-looking
statements may include statements relating to:
|
·
|
the benefits of
the Business Combination;
|
|
·
|
the future financial
performance of the Company following the Business Combination;
|
|
·
|
changes in the
market for Target’s products and services;
|
|
·
|
expansion plans
and opportunities, including future acquisitions or additional business combinations;
and
|
|
·
|
other statements
preceded by, followed by or that include the words “estimate,” “plan,”
“project,” “forecast,” “intend,” “expect,”
“anticipate,” “believe,” “seek,” “target”
or similar expressions.
|
These forward-looking statements are based
on information available as of the date of this proxy statement, and current expectations, forecasts and assumptions, and involve
a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing
our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events
or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as
may be required under applicable securities laws.
You should not place undue reliance on
these forward-looking statements in deciding how to grant your proxy or instruct how your vote should be cast or vote your shares
on the proposals set forth in this proxy statement. As a result of a number of known and unknown risks and uncertainties, our
actual results or performance may be materially different from those expressed or implied by these forward-looking statements.
Some factors that could cause actual results to differ include:
|
·
|
the occurrence
of any event, change or other circumstances that could give rise to the termination of
the Sale Agreement;
|
|
·
|
the outcome of
any legal proceedings that may be instituted against Target or Hydra Industries following
announcement of the proposed Business Combination and related transactions;
|
|
·
|
the inability
to complete the transactions contemplated by the proposed Business Combination due to
the failure to obtain approval of the stockholders of Hydra Industries, or to satisfy
other conditions to closing in the Sale Agreement;
|
|
·
|
the inability
to maintain the listing of the Company’s common stock on NASDAQ following the Business
Combination;
|
|
·
|
the risk that
the proposed Business Combination disrupts current plans and operations as a result of
the announcement and consummation of the transactions described herein;
|
|
·
|
the ability to
recognize the anticipated benefits of the Business Combination, which may be affected
by, among other things, competition and the ability of the business to grow and manage
growth profitably;
|
|
·
|
costs related
to the Business Combination;
|
|
·
|
changes in applicable
laws or regulations;
|
|
·
|
the possibility
that Target or Hydra Industries may be adversely affected by other economic, business,
and/or competitive factors; and
|
|
·
|
other risks and
uncertainties indicated in this proxy statement, including those described under “Risk
Factors,” or indicated in the accompanying Annual Report on Form 10-K for the year
ended December 31, 2015.
|
RISK
FACTORS
The following risk factors apply to
the business and operations of Target, Hydra Industries, the Business Combination and the business and operations of the combined
company following the completion of the Business Combination. These risk factors are not exhaustive, and investors are encouraged
to perform their own investigation with respect to the business, financial condition and prospects of Target. You should carefully
consider the following risk factors in addition to the other information included in this proxy statement, including matters addressed
in the section entitled “Cautionary Statement Regarding Forward-Looking Statements,” as well as in the accompanying
Annual Report on Form 10-K for the year ended December 31, 2015. We may face additional risks and uncertainties that are not presently
known to us, or that we currently deem immaterial, which may also impair our business. The following discussion should be read
in conjunction with the financial statements and notes to the financial statements included elsewhere in this proxy statement.
RISK FACTORS RELATING TO TARGET’S BUSINESS AND INDUSTRY
Target operates in highly competitive industries and its
success depends on its ability to effectively compete with numerous worldwide businesses.
Target faces competition from a number
of worldwide businesses, some of which have substantially greater financial resources and operating scale than it does. Such competition
could impact Target’s ability to win new contracts and renew existing contracts. Target continues to operate in a period
of intense price-based competition in some key markets, which could affect the profitability of the contracts it does win.
Moreover, Target’s businesses in
certain markets also face competition from suppliers or operators, who offer products for internet gaming in illegal, unregulated
or lightly regulated markets, but are still permitted to supply into certain regulated markets. As Target generally operates only
with regulated products in regulated markets, these competitors often have substantially greater financial resources which could
impact the Target’s ability to win new contracts and renew existing contracts that can affect its future profitability.
Target’s business is subject to evolving technology.
The markets for all of Target’s products
and services are affected by changing technology, new regulations and evolving industry standards. Target’s ability to anticipate
or respond to such changes and to develop and introduce new and enhanced products and services on a timely basis will be a significant
factor in its ability to expand, remain competitive, attract new customers and retain existing contracts.
There can be no assurance that Target will
achieve the necessary technological advances, have the financial resources, introduce new products or services on a timely basis
or otherwise have the ability to compete effectively in the markets it serves.
Target is heavily dependent on its ability to renew its
long-term contracts with its customers and it could lose substantial revenue if it is unable to renew certain of these contracts.
Generally, Target’s Virtual Sports
contracts are for initial terms of three to five years, with renewals at the customer’s option. SBG terminal contracts typically
are for terms of four to six years, but certain customers have options for early termination under certain circumstances and there
may be competitive pressure to renew or upgrade terminals during the life of the contract. This can adversely affect revenues
and / or return on capital and leave Target with surplus terminals. Certain key contracts in the UK and Italy are subject to renewal
or early termination options in the next two years.
There can be no assurance that Target’s
current contracts will be extended or that it will be awarded new contracts as a result of competitive bidding processes in the
future. The termination, expiration or failure to renew one or more of Target’s contracts could cause it to lose substantial
revenue. Additionally, certain customer contracts contain change of control provisions allowing the customer to terminate the
contract which may be triggered by completion of the Transaction.
Changes in applicable gambling regulations
or taxation regimes may affect the revenues or profits generated by the contracts which Target enters into with its customers.
Many of the contracts which Target has with its customers are on revenue-sharing terms, and therefore changes which adversely
affect Target's customers may also adversely affect Target. In addition, such changes may cause Target's customers to seek to
renegotiate their contracts or may alter the terms on which such customers are prepared to renew their contracts.
Target’s ability to bid on new contracts is dependent
upon its ability to fund any required up-front capital expenditures through Target’s cash from operations, incurrence of
indebtedness or raising additional equity capital.
Target’s SBG terminal contracts in
UK and in Italy often require significant up-front capital expenditures for terminal assembly, software customization and implementation,
systems and equipment installation and telecommunications configuration. Historically, Target has funded these up-front costs
through cash flows generated from operations, available cash on hand and borrowings under its credit facilities. Target’s
ability to continue to procure new contracts will depend on, among other things, its liquidity levels at the time or its ability
to obtain additional debt or equity funding at commercially acceptable terms to finance the initial up-front costs. If Target
does not have adequate liquidity or is unable to obtain other funding for these up-front costs on favorable terms or at all, it
may not be able to bid on certain contracts, which could restrict its ability to grow and have a material adverse effect on its
ability to retain existing contracts and therefore on future profitability.
Target’s business depends on the protection of its
intellectual property and proprietary information.
Target believes that its success depends,
in part, on protecting its intellectual property in the United Kingdom and in other countries. Target’s intellectual property
includes certain patents and trademarks relating to its systems, as well as proprietary or confidential information that is not
subject to patent or similar protection. Target’s intellectual property protects the integrity of its games, systems, products
and services, which is a core value of the industries in which it operates. Competitors may independently develop similar or superior
products, software, systems or business models. In cases where Target’s intellectual property is not protected by an enforceable
patent, or other intellectual property protection, such independent development may result in a significant diminution in the
value of its intellectual property.
There can be no assurance that Target will
be able to protect its intellectual property. Target enters into confidentiality or license agreements with its employees, vendors,
consultants and, to the extent legally permissible, its customers, and generally controls access to, and the distribution of,
its game designs, systems and other software documentation and other proprietary information, as well as the designs, systems
and other software documentation and other information it licenses from others. Despite Target’s efforts to protect these
proprietary rights, unauthorized parties may try to copy its gaming products, business models or systems, use certain of its confidential
information to develop competing products, or develop independently or otherwise obtain and use its gaming products or technology,
any of which could have a material adverse effect on its business. Policing unauthorized use of Target’s technology is difficult
and expensive, particularly because of the global nature of its operations. The laws of other countries may not adequately protect
Target’s intellectual property.
There can be no assurance that Target’s
business activities, games, products and systems will not infringe upon the proprietary rights of others, or that other parties
will not assert infringement claims against it. Any such claim and any resulting litigation, should it occur, could subject Target
to significant liability for damages and could result in invalidation of its proprietary rights, distract management, and/or require
it to enter into costly and burdensome royalty and licensing agreements. Such royalty and licensing agreements, if required, may
not be available on terms acceptable to Target, or may not be available at all. In the future, Target may also need to file lawsuits
to defend the validity of its intellectual property rights and trade secrets, or to determine the validity and scope of the proprietary
rights of others. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources.
Target also relies on certain products
and technologies that it licenses from third parties. There can be no assurance that these third-party licenses, or the support
for such licenses, will continue to be available to Target on commercially reasonable terms.
Target’s business competes on the basis of the stability,
security and integrity of its software, networks, systems, games and products.
Target believes that its success depends,
in part, on providing secure products and systems to its vendors and customers with high levels of uptime, quality and availability.
Attempts to penetrate security measures may come from various combinations of customers, retailers, vendors, players, employees
and others. Target’s ability to monitor and ensure quality of its products is periodically reviewed and enhanced. There
can be no assurance that Target’s business might not be affected by a security breach, virus, Denial of Service attack,
or technical error, failure or lapse which could have a material adverse impact on its business.
Additionally, Target maintains a large
number of games and terminals and jackpot systems, which rely on algorithms and software designed to pay out winnings to players
at certain ratios. Target’s systems, testing and processes to monitor and ensure the payout of games are periodically reviewed
and enhanced, and are additionally reviewed and tested by third-party expert test houses. There can be no assurance that Target’s
business might not be affected by a malicious or unintentional breach or technical error, failure or lapse which could have a
material adverse impact on payout ratios which would consequently have a material adverse effect on its business in the form of
lost revenues or penalty payments to players or customers. Gaming regulators may take enforcement action against the Target (including
the imposition of significant fines) where the payout ratios fall below the ratios advertised to customers, or the Target's software,
networks, systems, games and/or products otherwise suffer from technical error, failure or lapse.
Target’s industry is subject to strict government
regulations that may limit its existing operations and have a negative impact on its ability to grow.
In many jurisdictions, forms of wagering,
betting and lottery must be expressly authorized by law. Once authorized, such activities are typically subject to extensive and
evolving governmental regulation. Moreover, such gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore,
Target is subject to a wide range of complex gaming laws and regulations in the jurisdictions in which it is licensed. Most jurisdictions
require that Target be licensed, that its key personnel and certain of its security holders be found suitable or be licensed,
and that its products be reviewed, tested and approved before placement. If a license, approval or finding of suitability is required
by a regulatory authority and Target fails to seek or does not receive the necessary approval, license or finding of suitability,
then it may be prohibited from distributing its products for use in the respective jurisdiction. Additionally, such prohibition
could trigger reviews of Target by regulatory bodies in other jurisdictions.
The regulatory environment in any particular
jurisdiction may change in the future, and any such change could have a material adverse effect on Target’s results of operations.
Moreover, there can be no assurance that the operation of Server Based Gaming terminals, Video Lottery Terminals, Virtual Sports
Betting, Gaming or Lottery, Internet or Mobile gaming, betting, lottery or other forms of wagering systems will be approved by
additional jurisdictions or that those jurisdictions in which these activities are currently permitted will continue to permit
such activities. While Target believes that it has developed procedures and policies designed to comply with the requirements
of evolving laws, there can be no assurance that law enforcement or gaming regulatory authorities will not seek to restrict its
business in their jurisdictions or even institute enforcement proceedings. Moreover, in addition to the risk of enforcement action,
Target is also at risk from loss of business reputation in the event of any potential legal or regulatory investigation whether
or not Target is ultimately accused of or found to have committed any violations.
Target supplies certain of its products
to operators who operate gaming websites. Some of those operators may accept customers from so-called 'grey markets' in which
the provision of online gaming is unregulated or where there may be uncertainty as to the legal standing for the provision of
online gaming. If any of those operators is subjected to investigatory or enforcement action by local regulatory or police authorities,
that may result in the operator withdrawing from that market which may adversely affect such operator’s revenues. The suppliers
to such operators may themselves become subject to investigatory or enforcement action (if and to the extent that local laws impose
secondary liability on suppliers for the activities of the customers that they supply). Target takes steps which are common within
the online gaming industry to protect itself against any secondary liability for the activities of the operators that it supplies,
including contractually requiring those operators not to operate in certain territories and only supplying operators who are considered
to uphold high standards of regulatory compliance. Nonetheless, there is a risk that Target may become subject to local investigatory
or enforcement action should any of its customers be accused of breaching local laws. Such action may adversely impact the management
time of Target, and impact its standing with its own gaming regulators.
Target is required to obtain and maintain
licenses from various state and local jurisdictions in order to operate certain aspects of its business and it is subject to extensive
background investigations and suitability standards. Target may also become subject to regulation in any other jurisdiction where
its customers operate in the future. There can be no assurance that Target will be able to obtain new licenses or renew any of
its existing licenses, and the loss, denial or non-renewal of any of its licenses could have a material adverse effect on its
business. Generally, regulatory authorities have broad discretion when granting, renewing or revoking approvals and licenses.
Target’s failure, or the failure of any of its key personnel, systems or machines, in obtaining or retaining a required
license or approval in one jurisdiction could negatively impact Target’s ability (or the ability of any of its key personnel,
systems or gaming machines) to obtain or retain required licenses and approvals in other jurisdictions. The failure to obtain
or retain a required license or approval in any jurisdiction would decrease the geographic area where Target may operate and generate
revenues, decrease its share in the gaming marketplace and put it at a disadvantage compared with its competitors.
Some jurisdictions also require extensive
personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically
5% or more) of equity securities of licensed or regulated businesses. Following the Business Combination, the failure of beneficial
owners of Hydra Industries’ common stock to submit to such background checks and provide required disclosure could jeopardize
Target’s business. In light of these regulations and the potential impact on Target’s business, the Board of Directors
of Hydra Industries has proposed the adoption of an amendment to our restated certificate of incorporation, subject to a vote
of the stockholders at the special meeting, which amendment would allow for the prohibition of stock ownership by persons or entities
who fail to comply with informational or other regulatory requirements under applicable gaming law, who are found unsuitable to
hold our stock by gaming authorities or whose stock ownership adversely affects our ability to obtain, maintain, renew or qualify
for a license, contract, franchise or other regulatory approval from a gaming authority. The licensing procedures and background
investigations of the authorities that regulate our businesses and the proposed amendment may inhibit potential investors from
becoming significant stockholders or inhibit existing shareholders from retaining or increasing their ownership.
Target has developed and implemented an
internal compliance program in an effort to ensure that it will comply with legal requirements imposed in connection with its
wagering-related activities. Following the Business Combination, the compliance program will be run on a day-to-day basis by its
Chief Legal Officer with compliance and technical advice provided by its Compliance Director and outside experts. The compliance
program is expected to be overseen by the Audit Committee of our Board of Directors (or a separate Compliance Committee of our
Board of Directors, if our Board elects to establish one), consisting of [___] outside directors. There can be no assurance that
such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result
in the imposition of a monetary fine or suspension or revocation of one or more of our licenses.
Gaming opponents persist in their efforts to curtail legalized
gaming, which, if successful, could limit Target’s existing operations.
Legalized gaming is subject to opposition
from gaming opponents, including in the UK, Italy and other markets where Target is active. There can be no assurance that this
opposition will not succeed in preventing the legalization of gaming in jurisdictions where these activities are presently prohibited
or prohibiting or limiting the expansion or continuance of gaming where it is currently permitted, in either case to the detriment
of Target’s business, financial condition, results and prospects.
Target’s industry is subject to taxation by government
and by regulations that set parameters for levels of gaming or wagering duty, tax, stake, prize and return to player.
In most jurisdictions in which Target operates
or expects to seek to operate, the level of duty and/ or taxation and the stake, prize and return to player of wagering, betting
and lottery games, and the speed at which players can participate in gaming, is defined in government regulations which are subject
to change. Those regulations may also affect the premises in which gaming activities may take place (
i.e
., by limiting
the number of gaming machines which may be housed in licensed gaming premises, or by restricting the locations in which licensed
gaming premises may be situated). Once authorized, such parameters are subject to extensive and evolving governmental regulation.
Moreover, such gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore, Target is subject to a wide range
of complex gaming parameters in the jurisdictions in which it is licensed. If a key parameter is changed, such as the level of
taxation or duty or the maximum stake or prize or return to player of a game, then it may be to the detriment of Target’s
business, financial condition, results and prospects and / or the Target may be unable to distribute its products profitably for
use in the prospective jurisdiction or existing products in which the Target has invested may become economically unviable.
Following the Business Combination, our inability to complete
future acquisitions of gaming and related businesses and integrate those businesses successfully could limit our future growth,
if any.
Following the Business Combination, we
expect to pursue expansion and acquisition opportunities in gaming and related businesses and we could face significant challenges
in managing and integrating the expanded or combined operations including acquired assets, operations and personnel. There can
be no assurance that acquisition opportunities will be available on acceptable terms or at all or that we will be able to obtain
necessary financing or regulatory approvals to complete potential acquisitions. Our ability to succeed in implementing our strategy
will depend to some degree upon the ability of our management to identify, complete and successfully integrate commercially viable
acquisitions. Acquisition transactions may disrupt our ongoing business and distract management from other responsibilities. Any
future acquisition transactions involving the use of company stock have the potential of dilution to our existing shareholders
and earnings per share.
Target’s business may be affected by changes in general
and local economic and political conditions.
The demand for Target’s services
is sensitive to general and local economic conditions over which Target has no control, including changes in the levels of consumer
disposable income and geographical exposure to macro-economic trends and taxation. In addition, the economic stability of certain
Eurozone countries where Target conducts or intends to conduct business may become affected by sovereign debt crises. Adverse
changes in economic conditions may affect Target’s business generally or may be more prevalent or concentrated in particular
markets in which Target operates. Any deterioration in economic conditions or the continuation of uncertain economic conditions
could have a material adverse effect on Target’s business, financial condition, results of operations and prospects. Other
economic risks which may adversely impact Target’s performance include high interest rates, inflation and volatile foreign
exchange markets.
The performance of Target’s business
may also be subject to political risks in certain jurisdictions where it operates, including change of government, political unrest,
war or terrorism.
Target’s revenues fluctuate due to seasonal, weather
and other variations and you should not rely upon its periodic operating results as indications of future performance.
Target’s revenues are subject to
seasonal and other variations. Wagering equipment sales and software license revenues usually reflect a limited number of large
transactions, which may not recur on an annual basis. Consequently, revenues and operating results can vary substantially from
period to period as a result of the timing of revenue recognition for major equipment sales and software license revenue. In addition,
revenues may vary depending on the season and timing of contract awards, changes in customer budgets and general economic conditions.
Revenues may also vary based on adverse sequences of payouts of prizes, unusual jackpot wins, and other variations in game margin.
Target’s business could also be impacted
by natural or man-made disasters such as floods, storms or terrorist attacks. Target has taken steps to have disaster recovery
plans in place but there can be no assurance that such an event would not have a significant adverse impact on its business.
Target is dependent on its suppliers and contract manufacturers,
and any failure of these parties to meet its performance and quality standards or requirements or unexpected price raises could
cause it to incur additional costs or lose customers.
Target is dependent on a select group of
suppliers and manufacturers. In addition, Target’s business has signed a number of significant contracts whose performance
depends on third party suppliers delivering equipment on schedule for Target to meet its contract commitments. Failure of the
suppliers to meet their delivery commitments could result in Target being in breach of and subsequently losing those contracts,
which loss could have a material adverse effect on its revenue.
Target has operations in a variety of countries, which subjects
it to additional risks.
Target’s business in foreign markets
subjects it to risks customarily associated with such operations, including:
foreign withholding taxes on its subsidiaries’
earnings that could reduce cash flow available to meet its required debt service and its other obligations;
the complexity of foreign laws, regulations and markets;
the impact of foreign labor laws and disputes;
other economic, tax and regulatory policies of local
governments; and
the ability to attract and retain key personnel in
foreign jurisdictions.
Target’s consolidated financial results
are, and our consolidated financial results following the Business Combination will be, significantly affected by foreign currency
exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated transactions
denominated in currencies other than UK pounds or, following the Business Combination, U.S. dollars, and from the translation
of foreign currency balance sheet accounts into UK pound-denominated or U.S. dollar-denominated balance sheet accounts. Exposure
to currency exchange rate fluctuations exists and will continue because a significant portion of Target’s revenues are denominated
in currencies other than the U.S. dollar, particularly the British pound sterling and the Euro. Exchange rate fluctuations have
in the past adversely affected operating results and cash flows and may continue to adversely affect results of operations and
cash flows and the value of assets.
There can be no assurance that Target will
be able to operate successfully in any foreign market.
Target’s business is capital intensive and the retention
of customers may be influenced by Target’s ability to deploy additional capital.
Customers of Target’s server based
gaming products frequently request Target to incur capital expenditures to provide gaming terminals to support their land-based
operations. While Target seeks to obtain what it believes to be satisfactory rates of return on such investments, these
capital expenditures can be meaningful and may be concentrated within short periods of time. To the extent that Target has
insufficient access to capital and/or liquidity at the time that a customer, or prospective customer, makes such a request, Target
may be at a competitive disadvantage in retaining or attracting such customer. Such a circumstance could have a material
adverse effect on Target’s business, financial condition, results of operations or prospects.
The Business Combination is subject to the receipt of approvals,
consents or clearances from regulatory authorities that may impose conditions that could have an adverse effect on Target or,
if not obtained, could prevent completion of the Business Combination.
Completion of the Business Combination
is conditioned upon the receipt of certain governmental approvals, including, without limitation, gaming regulatory approvals.
Although each party has agreed to use their respective reasonable best efforts to obtain the requisite governmental approvals,
there can be no assurance that these approvals will be obtained and that the other conditions to completing the Business Combination
will be satisfied. In addition, the governmental authorities from which the regulatory approvals are required may impose conditions
on the completion of the Business Combination or require changes to the terms of the Business Combination or other agreements
to be entered into in connection with the Sale Agreement. Such conditions or changes and the process of obtaining regulatory approvals
could have the effect of delaying or impeding consummation of the transaction or of imposing additional costs or limitations on
us following completion of the Business Combination, any of which might have an adverse effect on us following completion of the
Business Combination.
Target
may be adversely affected by disruptions in
its transaction gaming and lottery systems, as well as internal enterprise and information technology systems.
Target’s operations are dependent
upon its transactional gaming, lottery and information technology systems. Target relies upon such systems to manage customer
systems on a timely basis, to coordinate its sales and installation activities across all of its locations and to manage invoicing.
A substantial disruption in Target’s transactional gaming, lottery and information technology systems for any prolonged
time period (arising from, for example, system capacity limits from unexpected increases in Target’s volume of business,
outages, computer viruses, unauthorized access or delays in its service) could result in delays in serving its customers, which
could adversely affect Target’s reputation and customer relationships. Target’s systems might be damaged or interrupted
by natural or man-made events or by computer viruses, physical or electronic break-ins, or similar disruptions affecting the Internet
and Target’s disaster recovery plan may be ineffective at mitigating the effects of these risks. Such delays, problems or
costs could have a material adverse effect on Target’s financial condition, results of operations and cash flows.
Target
may be subject to claims arising from the
operations of its various businesses for periods prior to the dates Target acquired them.
Target has consummated two acquisitions
since 2010. Target may be subject to claims or liabilities arising from the ownership or operation of acquired businesses for
the periods prior to its acquisition of them, including environmental, employee-related and other liabilities and claims not covered
by insurance. These claims or liabilities could be significant. Target’s ability to seek indemnification from the former
owners of its acquired businesses for these claims or liabilities may be limited by various factors, including the specific time,
monetary or other limitations contained in the respective acquisition agreements and the financial ability of the former owners
to satisfy its indemnification claims. In addition, insurance companies may be unwilling to cover claims that have arisen from
acquired businesses or locations, or claims may exceed the coverage limits that Target’s acquired businesses had in effect
prior to the date of acquisition. If Target is unable to successfully obtain insurance coverage of third-party claims or enforce
its indemnification rights against the former owners, or if the former owners are unable to satisfy their obligations for any
reason, including because of their current financial position, Target could be held liable for the costs or obligations associated
with such claims or liabilities, which could adversely affect Target’s financial condition and results of operations.
Target’s success depends on its key personnel.
Target’s business results depend
largely upon the continued contributions of its chief executive officer and other members of its management team, as well as certain
key technical specialists, game designers, operational experts and other developers and operators of key intellectual property
and processes. If Target loses the services of one or more members of its management team or key employees, its business, financial
condition and results of operations, as well as the market price of its securities, could be adversely affected.
The long-term performance of Target’s businesses relies
on its ability to attract, develop and retain talented personnel and its labor force while controlling its labor costs.
To be successful, Target must attract,
develop and retain highly qualified and talented personnel who have the experience, knowledge and expertise to successfully implement
its key business strategies. Target also must attract, develop and retain its labor force while maintaining labor costs. Target
competes for employees, including sales people, regional management, executive officers and others, with a broad range of employers
in many different industries, including large multinational firms, and Target invests significant resources in recruiting, developing,
motivating and retaining them. The failure to attract and retain key employees, or to develop effective succession planning to
assure smooth transitions of those employees and the knowledge, customer relationships and expertise they possess, could negatively
affect Target’s competitive position and its operating results. Further, if Target is unable to cost-effectively recruit,
train and retain sufficient skilled personnel, it may not be able to adequately satisfy increased demand for its products and
services, which could impact Target’s operating results.
The obligations associated with being a public company will
require significant resources and management attention.
Following the Business Combination, we
and Target will face legal, accounting, administrative and other costs and expenses applicable to a U.S. public company that Target
did not incur as a private company, particularly after we are no longer an emerging growth company. In addition, Target has been
a private company with limited accounting personnel and other related resources and will need to add personnel in areas such as
accounting, financial reporting, investor relations and legal in connection with its operations as a public company. Target expects
to incur incremental costs related to operating as a public company of approximately $2.0 million annually, although there can
be no assurance that these costs will not be higher, particularly when Target no longer qualifies as an emerging growth company.
The combined company will be subject to the reporting requirements of the Exchange Act, which requires us to file annual, quarterly
and current reports with respect to our business and financial condition and proxy and other information statements, and the rules
and regulations implemented by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, the Public Company Accounting Oversight
Board and the NASDAQ, each of which imposes additional reporting and other obligations on public companies. Target’s senior
management may not be able to implement programs and policies in an effective and timely manner that adequately respond to such
increased legal, regulatory compliance and reporting requirements, including establishing and maintaining internal controls over
financial reporting. Target’s compliance with existing and evolving regulatory requirements will result in increased administrative
expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities,
which could have a material adverse effect on Target’s business, financial condition, results of operations and cash flows.
Target
depends upon a limited number of customers
in any given period to generate a substantial portion of its revenue, the loss of any of which may adversely affect Target’s
business or results of operations.
Certain key customers, including certain
U.K. and Italian SBG Terminal customers and certain Virtual Sports customers make a significant contribution to Target’s
revenues and profitability. Target’s top ten customers generated 69% of total revenues and 81% of recurring revenues in
its most recently ended fiscal year. The loss of any of these customers, whether through contract expiry and non-renewal, exercise
of change of control rights, breach of contract or other adverse factors may materially adversely affect revenues and / or return
on capital and leave Target with surplus terminal and or software assets. If any of these customers experiences reduced sales
or revenue, such reduction may materially impact any revenue-share arrangements Target has with those customers.
Restrictions in Target’s existing credit agreement,
or any other indebtedness Target may incur in the future, could adversely affect its business, financial condition, results of
operations, and our ability to make distributions to stockholders and the value of our common stock.
Target’s existing credit agreement,
or any future credit facility or other indebtedness it enters into, may limit its, or our, ability to, among other things:
incur or guarantee additional
debt;
make distributions or dividends
on or redeem or repurchase shares of common stock;
make certain investments and
acquisitions;
make capital expenditures;
incur certain liens or permit
them to exist;
enter into certain types of
transactions with affiliates;
acquire, merge or consolidate
with another company; and
transfer, sell or otherwise
dispose of all or substantially all of Target’s assets.
The provisions of Target’s existing
credit agreement or other debt instruments may affect its ability to obtain future financing and pursue attractive business opportunities
and its flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the
provisions of Target’s credit agreement, any future credit facility or other debt instruments could result in a default
or an event of default that could enable its lenders or other debt holders to declare the outstanding principal of that debt,
together with accrued and unpaid interest, to be immediately due and payable. If the payment of Target’s debt is accelerated,
its assets may be insufficient to repay such debt in full, and we or you could experience a partial or total loss of our investment.
Target may have future capital needs and may not be able
to obtain additional financing on acceptable terms.
Economic and credit market conditions,
the performance of the gaming industry, and Target’s financial performance, as well as other factors, may constrain its
financing abilities. Target’s ability to secure additional financing, if available, and to satisfy its financial obligations
under indebtedness outstanding from time to time will depend upon its future operating performance, the availability of credit,
economic conditions and financial, business and other factors, many of which are beyond Target’s control.
Target may be unable to identify sufficient new products
and product lines and integrate them into its existing business, which may impact Target’s ability to compete; Target’s
expansion into new markets may present competitive and regulatory challenges that differ from current ones.
Target’s business depends in part
on its ability to identify future products and product lines that complement existing products and product lines and that respond
to its customers’ needs. Target may not be able to compete effectively unless its product selection keeps up with trends
in the markets in which it competes or trends in new products. In addition, Target’s ability to integrate new products and
product lines into its existing business could affect its ability to compete. Furthermore, the success of new products and product
lines will depend on market demand and there is a risk that new products and product lines will not deliver expected results,
which could negatively impact Target’s future sales and results of operations. Target’s expansion into new markets
may present competitive, distribution and regulatory challenges that differ from current ones. Target may be less familiar with
new product categories and may face different or additional risks, as well as increased or unexpected costs, compared to existing
operations.
Risk Factors Relating to Hydra Industries and the Business
Combination
Following the consummation of the Business Combination,
our only significant asset will be ownership of 100% of Target Parent’s capital stock, and we do not currently intend to
pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation
in the price of our common stock.
Following the consummation of the Business
Combination, we will have no direct operations and no significant assets other than the ownership of 100% of Target Parent’s
capital stock through a subsidiary. We will depend on Target Parent and its subsidiaries for distributions, loans and other payments
to generate the funds necessary to meet our financial obligations, including our expenses as a publicly traded company, and to
pay any dividends with respect to our common stock. Legal and contractual restrictions in agreements governing the current indebtedness
of Target and future indebtedness we intend to incur in connection with the Business Combination, as well as the financial condition
and operating requirements of Target, may limit our ability to obtain cash from Target Parent. Thus, we do not expect to pay cash
dividends on our common stock. Any future dividend payments are within the absolute discretion of our board of directors and will
depend on, among other things, our results of operations, working capital requirements, capital expenditure requirements, financial
condition, level of indebtedness, contractual restrictions with respect to payment of dividends, business opportunities, anticipated
cash needs, provisions of applicable law and other factors that our board of directors may deem relevant.
We may not be able to timely and effectively implement controls
and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002 that will be applicable to us after the Business Combination.
Neither we nor Target are currently subject
to Section 404 of the Sarbanes-Oxley Act of 2002. However, following the Business Combination, the combined company will be required
to provide management’s attestation on internal controls commencing with the Company’s annual report for the year
ending December 31, 2016. The standards required for a public company under Section 404 of the Sarbanes-Oxley Act of 2002 are
significantly more stringent than those required of Target as a privately held company. Management may not be able to effectively
and timely implement controls and procedures that adequately respond to the regulatory compliance and reporting requirements that
will be applicable to the Company after the Business Combination. If we are not able to implement the additional requirements
of Section 404 in a timely manner or with adequate compliance, we may not be able to assess whether our internal controls over
financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence
and the market price of our common stock.
Certain material weaknesses in the Target’s internal
control over financial reporting were identified in connection with the audits of the consolidated financial statements of the
Target presented in accordance with US GAAP as of the periods ended September 26, 2015, September 27, 2014 and September 28, 2013.
Material weaknesses in the Target’s internal control over financial reporting could result in a failure to prevent, or to
detect or correct on a timely basis, material misstatements in the financial statements of the Target or, following the Business
Combination, the Company, and could have a material adverse effect on the price of our common stock.
The Target enters into transactions
that are complex and whose accounting treatment under US GAAP requires extensive knowledge of US GAAP and financial reporting
disclosure requirements. Adjustments to the Target’s accounts and the disclosures in the notes to the financial statements
were identified and proposed, and recorded by the Target, which were necessary in order for the Target’s financial statements
to be in conformity with US GAAP. The Company and the Target are considering the retention of a person with the requisite technical
accounting knowledge of US GAAP in order to address the identified material weaknesses and assist in compliance with US GAAP on
an ongoing basis. However, no assurance can be given that internal control will be sufficient to prevent potential material weaknesses
from occurring in future periods. If additional material weaknesses are discovered in the future following the Business Combination,
we may fail to meet our future reporting obligations in a timely and reliable manner and our financial statements may contain
material misstatements. Any such failure could also adversely affect the results of our periodic management evaluations and annual
auditor attestation reports regarding the effectiveness of our internal control over financial reporting. Further, it could cause
our investors to have less confidence in the financial information we report, which could adversely affect the price of our common
stock.
Subsequent to the consummation of the Business Combination,
we may be required to recognize impairment charges related to goodwill, identified intangible assets and property and equipment
or to take writedowns or write-offs, restructuring or other charges that could have a significant negative effect on our financial
condition, results of operations and stock price, which could have an adverse effect on your investment.
Following the consummation of the Business
Combination, we expect to have substantial balances of goodwill and identified intangible assets. We are required to test goodwill
and any other intangible asset with an indefinite life for possible impairment on the same date each year and on an interim basis
if there are indicators of a possible impairment. We are also required to evaluate amortizable intangible assets and property
and equipment for impairment if there are indicators of a possible impairment. There is significant judgment required in the analysis
of a potential impairment of goodwill, identified intangible assets and property and equipment. If, as a result of a general economic
slowdown, deterioration in one or more of the markets in which we operate or impairment in Target’s financial performance
and/or future outlook, the estimated fair value of its long-lived assets decreases, we may determine that one or more of Target’s
long-lived assets is impaired. An impairment charge would be determined based on the estimated fair value of the assets and any
such impairment charge could have a material adverse effect on combined company’s financial condition and results of operations.
Although we have conducted due diligence
on Target, we cannot assure you that this diligence revealed all material issues that may be present in Target’s business,
that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside
of our and Target’s control will not later arise. As a result, we may be forced to later write down or write-off assets,
restructure its operations, or incur other charges that could result in losses. Even if our due diligence successfully identifies
certain risks, unexpected events may occur and previously known risks may materialize in a manner not consistent with our preliminary
risk analysis.
Even though these charges may be non-cash
items and would not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute
to negative market perceptions about the combined company or its securities. In addition, charges of this nature may cause us
to be unable to obtain future financing on favorable terms or at all.
Our initial stockholders have agreed to vote in favor of
our initial business combination, regardless of how our public stockholders vote.
Unlike many other blank check companies
in which the founders agree to vote their founder shares in accordance with the majority of the votes cast by the public stockholders
in connection with an initial business combination, our initial stockholders have agreed to vote any shares of Hydra Industries
common stock owned by them, and purchased prior to our IPO, in favor of our initial business combination. As of the date hereof,
our initial stockholders and affiliates own shares equal to 20% of our issued and outstanding shares of common stock. Accordingly,
it is more likely that the necessary stockholder approval will be received for the Business Combination than would be the case
if our initial stockholders agreed to vote any shares of Hydra Industries common stock owned by them in accordance with the majority
of the votes cast by our public stockholders.
We will incur significant transaction and transition costs
in connection with the Business Combination. If we fail to consummate the Business Combination, we may not have sufficient cash
available to pay such costs.
We expect to incur significant, non-recurring
costs in connection with consummating the Business Combination. Some of these costs are payable regardless of whether the Business
Combination is completed. Hydra Industries’ transaction expenses as a result of the Business Combination are currently estimated
at approximately $[__] million, which are comprised of (i) approximately $[__] million in fees to our financial advisors (other
than [__]) and for deferred underwriting commissions payable to the underwriters (other than [__]) from our IPO, (iii) an estimated
$[__] million in legal fees and expenses and (iv) approximately $[__] million relating to other fees and expenses incurred in
connection with the Business Combination. Additionally, this amount includes the expenses incurred in connection with the filing,
printing and mailing of this proxy statement and the solicitation of the approval of our stockholders, and all filing and other
fees paid to the SEC, which are estimated at approximately $[__]. If Hydra Industries and Target do not consummate the Business
Combination, each party will be required to pay its own fees and expenses, and Hydra Industries likely will not have sufficient
cash available to pay its fees and expenses unless and until it completes a subsequent business combination transaction. Going
forward, the combined company will incur transition costs and costs relating to being part of a public company.
The unaudited pro forma financial information included in
this document may not be indicative of what our actual financial position or results of operations would have been.
The unaudited pro forma financial information
in this proxy statement is presented for illustrative purposes only and is not necessarily indicative of what our actual financial
position or results of operations would have been had the Business Combination been completed on the dates indicated. See the
section entitled “Unaudited Pro Forma Condensed Combined Financial Information” for more information.
We may have limited rights of recourse in the event of a
breach of Warranties.
Warranties relating to the business affairs
and tax liabilities of Target are being given by certain key members of Target's management team (the "Management Warrantors")
to Hydra Industries under the terms of a management warranty deed. In addition, a Warranty & Indemnity Insurance Policy (the
"W&I Policy") has been entered into by Hydra Industries with AIG Europe Limited ("AIG") which should provide
a level of additional protection in the event of a breach of certain of the warranties being given by the Management Warrantors.
Other than in the event of fraud, the aggregate
liability of the Management Warrantors is capped at £500,000. The liability of the Management Warrantors is also subject
to certain customary limitations on liability, including individual and basket
de minimis
thresholds and time limits on
the bringing of claims. The liability of AIG under the W&I Policy is capped at £40 million, and is subject to a variety
of conditions and limitations under the terms of the W&I Policy.
Each member of the Selling Group is providing
warranties confirming (i) its title to the shares and/or shareholder loan notes in the Target which it is selling to Hydra Industries
and (ii) its capacity to enter into the Sale Agreement. Such warranties are given on a several basis, such that each member of
the Selling Group is liable only for a breach of the warranties that it has given (and is not liable for a breach of warranty
by any other member of the Selling Group) and its liability in the event of breach is capped at the amount of consideration received
by it under the Sale Agreement.
Hydra Industries believes that the level
of warranty protection which it has obtained (including the W&I Policy) should be reasonable under the circumstances of the
Business Combination, including the fact that the Selling Group consists principally of certain institutional investors. However,
the level of warranty protection relating to the business affairs and tax liabilities of the Target is substantially less than
the Purchase Price payable by Hydra Industries in connection with the Business Combination, and might not be sufficient to compensate
Hydra Industries in the event of any breach.
We may be unable to obtain Debt Financing if necessary to
fund the operations and growth of Target.
If we consummate the Business Combination,
we may require additional financing to fund the operations or growth of Target. The failure to secure additional financing could
have a material adverse effect on the continued development or growth of Target. None of our officers, directors or stockholders
is required to provide any financing to us in connection with or after the Business Combination.
We may waive one or more of the conditions to the Business
Combination.
We may agree to waive, in whole or in part,
some of the conditions to our obligations to complete the Business Combination, to the extent permitted by our amended and restated
certificate of incorporation and applicable laws. For example, it is a condition to our obligations to close the Business Combination
that Target’s representations and warranties are true and correct in all respects as of the closing date, except for such
inaccuracies that, individually or in the aggregate, would not result in a Material Adverse Effect (as defined in the Sale Agreement).
However, if our board of directors determines that it is in our stockholders’ best interest to waive any such breach, then
the board may elect to waive that condition and close the Business Combination. We are not able to waive the condition that our
stockholders approve the Business Combination.
Even if we consummate the Business Combination, there is
no guarantee that the public warrants will ever be in the money, and they may expire worthless and the terms of our warrants may
be amended.
The exercise price for our warrants is
$5.75 per one-half of one share ($11.50 per whole share), subject to adjustment. Warrants may be exercised only for a whole number
of shares of Hydra Industries’ common stock. No fractional shares will be issued upon exercise of the warrants. There is
no guarantee that the public warrants will ever be in the money prior to their expiration and they may expire worthless.
In addition, the warrant agreement between
Continental Stock Transfer & Trust Company, as warrant agent, and us provides that the terms of the warrants may be amended
without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders
of at least 65% of the then outstanding public warrants to make any change that adversely affects the interests of the registered
holders. Accordingly, we may amend the terms of the warrants in a manner adverse to a holder if holders of at least 65% of the
then outstanding public warrants approve of such amendment. Examples of such amendments could be amendments to, among other things,
increase the exercise price of the warrants, shorten the exercise period or decrease the number of shares of our common stock
purchasable upon exercise of a warrant.
Our Sponsors, directors and officers have a conflict of
interest in determining to pursue the merger with Target, since certain of their interests, and certain interests of their affiliates
and associates, are different from or in addition to (and which may conflict with) the interests of our stockholders.
Our initial stockholders, including our
officers and directors, have interests in and arising from the Business Combination that are different from or in addition to
(and which may conflict with) the interests of our public stockholders, which may result in a conflict of interest. These interests
include:
the fact that our Sponsors
and our independent directors paid an aggregate of approximately $3,775,000 for their founder shares and placement warrants and
such securities should have a significantly higher value at the time of the Business Combination;
the fact that certain directors
and officers may enter into employment agreements with the Company after the consummation of the Business Combination;
the Macquarie Forward Purchase;
the fact that A. Lorne Weil, our Chairman and Chief
Executive Officer and the managing member of our Hydra Sponsor, has agreed that he will be liable to us, and our Macquarie Sponsor
has agreed to indemnify Mr. Weil for 50% of any such liability, if and to the extent any claims by a vendor for services rendered
or products sold to us, or the Target, reduce the amount of funds in the Trust Account to below $10.00 per public share or such
lesser amount per public share held in the Trust Account as of the date of the liquidation of the trust account, due to reductions
in value of the trust assets other than due to the failure to obtain such waiver, in each case net of the amount of interest which
may be withdrawn to pay taxes, except as to any claims by a third party who executed a waiver of any and all rights to seek access
to the Trust Account and except as to any claims under our indemnity of the underwriters of our IPO against certain liabilities,
including liabilities under the Securities Act;
the fact that our directors
and officers will lose their entire investment in the Company if the Business Combination is not completed;
the continuation of one of
our five existing directors as a director of the combined company; and
the continued indemnification
of current directors and officers of the Company and the continuation of directors’ and officers’ liability insurance
after the Business Combination.
These interests may have influenced our
directors in making their recommendation that you vote in favor of the Business Combination Proposal and the other transactions
contemplated by the Sale Agreement collectively.
The exercise of our directors’ and officers’
discretion in agreeing to changes or waivers in the terms of the Business Combination may result in a conflict of interest when
determining whether such changes to the terms of the Business Combination or waivers of conditions are appropriate and in our
stockholders’ best interest.
In the period leading up to the closing
of the Business Combination, events may occur that, pursuant to the Sale Agreement, would require Hydra Industries to agree to
amend the Sale Agreement, to consent to certain actions taken by Target or to waive rights that Hydra Industries is entitled to
under the Sale Agreement. Such events could arise because of changes in the course of Target’s business, a request by Target
to undertake actions that would otherwise be prohibited by the terms of the Sale Agreement or the occurrence of other events that
would have a material adverse effect on Target’s business and would entitle Hydra Industries to terminate the Sale Agreement.
In any of such circumstances, it would be at Hydra Industries’ discretion, acting through its board of directors, to grant
its consent or waive those rights. The existence of the financial and personal interests of our officers and directors described
in the preceding risk factors may result in a conflict of interest on the part of one or more of the directors between what he
or they may believe is best for Hydra Industries and what he or they may believe is best for himself or themselves in determining
whether or not to take the requested action. As of the date of this proxy statement, Hydra Industries does not believe there will
be any changes or waivers that Hydra Industries’ directors and officers would be likely to make after stockholder approval
of the Business Combination Proposal has been obtained. While certain changes could be made without further stockholder approval,
Hydra Industries will circulate a new or amended proxy statement and re-solicit Hydra Industries’ stockholders if changes
to the terms of the transaction that would have a material impact on its stockholders are required prior to the vote on the Business
Combination Proposal.
Concentration of ownership after the Business Combination
may have the effect of delaying or preventing a change in control.
It is anticipated that, following the completion
of the Business Combination and if there are no redemptions, the existing common stockholders of Target will own 35% of the post-combination
company. The ownership percentage with respect to Target existing common stockholders following the Business Combination does
not take into account (i) the issuance of any shares upon completion of the Business Combination under the Company’s proposed
2016 Long-Term Incentive Plan or (ii) any or all of the 17,500,000 warrants to purchase up to a total of 8,750,000 shares of Hydra
Industries common stock that will remain outstanding following the Business Combination. If the actual facts are different than
these assumptions, the percentage ownership of the existing common stockholders of Target may be different. As a result, the existing
common stockholders of Target may have the ability to strongly influence the outcome of corporate actions of the Company requiring
stockholder approval. This concentration of ownership may have the effect of delaying or preventing a change in control and might
adversely affect the market price of our common stock.
Our ability to successfully effect the Business Combination
and successfully operate the business thereafter will be largely dependent upon the efforts of certain key personnel, including
the key personnel of Target, all of whom we expect to stay with Target following the Business Combination. The loss of such key
personnel could negatively impact the operations and profitability of the post-combination business.
Our ability to successfully effect the
Business Combination and successfully operate the business is dependent upon the efforts of certain key personnel, including the
key personnel of Target. Although we expect all of such key personnel to remain with Target following the Business Combination,
it is possible that we will lose some key personnel, the loss of which could negatively impact the operations and profitability
of our post-combination business. Furthermore, while we have scrutinized individuals we intend to engage to stay with Target following
the Business Combination, our assessment of these individuals may not prove to be correct. These individuals may be unfamiliar
with the requirements of operating a company regulated by the SEC, which could cause us to have to expend time and resources helping
them become familiar with such requirements.
If the results of the Business Combination do not meet expectations,
a market for our securities may not continue, which would adversely affect the liquidity and price of our securities.
Following the Business Combination, the
price of our securities may fluctuate significantly due to the market’s reaction to the Business Combination and general
market and economic conditions. An active trading market for our securities following the Business Combination may never develop
or, if developed, it may not be sustained. In addition, the price of our securities after the Business Combination can vary due
to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally,
if our securities are not listed on, or become delisted from, NASDAQ for any reason, and are quoted on the OTC Bulletin Board,
an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and
price of our securities may be more limited than if we were quoted or listed on NASDAQ or another national securities exchange.
You may be unable to sell your securities unless a market can be established or sustained.
Our initial stockholders and/or their affiliates may enter
into agreements concerning our securities prior to the special meeting, which may have the effect of increasing the likelihood
of consummation of the Business Combination, decreasing the value of our common stock or reducing the public “float”
of our common stock.
At any time prior to the special meeting,
during a period when they are not then aware of any material nonpublic information regarding the Company or its securities, the
initial stockholders and/or their affiliates may enter into a written plan to purchase the Company’s securities pursuant
to Rule 10b5-1 of the Exchange Act, and may engage in other public market purchases, as well as private purchases, of securities.
In addition, at any time prior to the special meeting, during a period when they are not then aware of any material nonpublic
information regarding the Company or its securities, the initial stockholders and/or their respective affiliates may purchase
shares from institutional and other investors who vote, or indicate an intention to vote, against the Business Combination Proposal,
or execute agreements to purchase such shares from them in the future, or they may enter into transactions with such persons and
others to provide them with incentives to acquire shares of the Company’s common stock or vote their shares in favor of
the Business Combination Proposal. Such an agreement may include a contractual acknowledgement that such stockholder, although
still the record holder of our shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption
rights. In the event that our initial stockholders or their affiliates purchase shares in privately negotiated transactions from
public stockholders who have already elected to exercise their redemption rights, such selling stockholders would be required
to revoke their prior elections to redeem their shares. The purpose of such share purchases and other transactions would be to
increase the likelihood of satisfaction of the requirements that the holders of a majority of the public shares present and entitled
to vote at the special meeting to approve the Business Combination Proposal vote in its favor, that the cash requirements of the
transaction are met and that the Company will have at least $5,000,001 in net tangible assets upon closing of the business combination
after taking into account holders of public shares that properly demanded redemption of their public shares into cash, when it
appears that such requirements would otherwise not be met. While the exact nature of any such incentives has not been determined
as of the date of this proxy statement, they might include, without limitation, arrangements to protect such investors or holders
against potential loss in value of their shares, including the granting of put options and the transfer to such investors or holders
of shares or warrants owned by the initial stockholders for nominal value.
Entering into any such arrangements may
have a depressive effect on the Company’s common stock. For example, as a result of these arrangements, an investor or holder
may have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the
shares it owns, either prior to or immediately after the special meeting. In addition, if such arrangements are made, the public
“float” of our common stock and the number of beneficial holders of our securities may be reduced, possibly making
it difficult to maintain or obtain the quotation, listing or trading of our securities on a national securities exchange.
As of the date of this proxy statement,
there have been no such discussions and no agreements to such effect have been entered into with any such investor or holder.
The Company will file a Current Report on Form 8-K to disclose arrangements entered into or significant purchases made by any
of the aforementioned persons that would affect the vote on the Business Combination Proposal and the Charter Proposals or the
redemption threshold.
Although we expect our common stock and warrants will
remain listed on NASDAQ after the Business Combination, there can be no assurance that our common stock and warrants will continue
to be so listed or, if listed, that we will be able to comply with the continued listing standards of NASDAQ.
We have applied to continue listing our
securities on NASDAQ subsequent to the closing of the Business Combination. To continue listing our securities on NASDAQ subsequent
to the closing of the Business Combination, we will be required to demonstrate compliance with NASDAQ’s initial listing
standards, which are more rigorous than NASDAQ’s continued listing requirements. For instance, we must maintain a minimum
number of holders (300 round-lot holders). We cannot assure you that we will be able to meet those initial listing standards at
that time.
If, after the Business Combination, NASDAQ
delists our common stock or warrants from trading on its exchange due to our failure to meet NASDAQ’s initial and/or continued
listing standards, we and our securityholders could face significant material adverse consequences including:
a limited availability of
market quotations for our securities;
a determination that our common
stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules,
possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;
a limited amount of analyst
coverage; and
a decreased ability to issue
additional securities or obtain additional financing in the future.
Pursuant to the Jumpstart Our Business Startups Act of 2012
(the “JOBS Act”), our independent registered public accounting firm will not be required to attest to the effectiveness
of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we are
an “emerging growth company.”
Section 404 of the Sarbanes-Oxley Act of
2002 requires annual management assessments of the effectiveness of our internal control over financial reporting, and generally
requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal
control over financial reporting. Following the Business Combination, the combined company will be required to provide management’s
attestation on internal controls effective with respect to the year ending December 31, 2016. However, under the JOBS Act, our
independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over
financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 until we are no longer an “emerging growth
company.” We could be an “emerging growth company” until the earlier of (1) the last day of the fiscal year
(a) following October 29, 2019, the fifth anniversary of our IPO, (b) in which we have total annual gross revenue of at least
$1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that
is held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (2) the date
on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
In addition, Section 107 of the JOBS Act
also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company”
can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have chosen not to “opt out” of such extended transition period, which means that when a standard is issued or
revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the
new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial
statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted
out of using the extended transition period difficult or impossible because of the potential differences in accounting standards
used.
If the results of the Business Combination do not meet the
expectations of investors, stockholders or financial analysts, the market price of our securities may decline.
If the results of the Business Combination
do not meet the expectations of investors or securities analysts, the market price of the Company’s securities prior to
the closing of the Business Combination may decline. The market values of our securities at the time of the Business Combination
may vary significantly from their prices on the date the Sale Agreement was executed, the date of this proxy statement, or the
date on which our stockholders vote on the Business Combination.
In addition, following the Business Combination,
fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Prior to the Business
Combination, there has not been a public market for Target’s stock and trading in the shares of the Company’s common
stock has not been active. Accordingly, the valuation ascribed to Target and our common stock in the Business Combination may
not be indicative of the price that will prevail in the trading market following the Business Combination. If an active market
for our securities develops and continues, the trading price of our securities following the Business Combination could be volatile
and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed
below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly
below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience
a further decline.
Factors affecting the trading price of
the Company’s securities following the Business Combination may include:
market conditions affecting
the gaming industry;
quarterly variations in our
results of operations;
changes in government regulations;
the announcement of acquisitions
by us or our competitors;
changes in general economic
and political conditions;
volatility in the financial
markets;
results of our operations
and the operations of others in our industry;
changes in interest rates;
threatened or actual litigation
and government investigations;
the addition or departure
of key personnel;
actions taken by our stockholders,
including the sale or disposition of their shares of our common stock; and
differences between our actual
financial and operating results and those expected by investors and analysts and changes in analysts’ recommendations or
projections.
Broad market and industry factors may materially
harm the market price of our securities irrespective of our operating performance. The stock market in general, and NASDAQ in
particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may
not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors
perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial conditions
or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional
securities and our ability to obtain additional financing in the future.
Following the Business Combination, the Company’s
business and stock price may suffer as a result of its lack of public company operating experience and if securities or industry
analysts do not publish or cease publishing research or reports about the Company, its business, or its market, or if they change
their recommendations regarding our common stock adversely, the price and trading volume of our common stock could decline.
Prior to the completion of the Business
Combination, we have been a blank check company. The Company’s lack of public company operating experience may make it difficult
to forecast and evaluate its future prospects. If the Company is unable to execute its business strategy, either as a result of
its inability to manage effectively its business in a public company environment or for any other reason, the Company’s
business, prospects, financial condition and operating results may be harmed.
The trading market for our common stock
will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market,
or our competitors. Securities and industry analysts do not currently, and may never, publish research on the Company. If no securities
or industry analysts commence coverage of the Company, our stock price and trading volume would likely be negatively impacted.
If any of the analysts who may cover the Company change their recommendation regarding our stock adversely, or provide more favorable
relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover
the Company were to cease coverage of the Company or fail to regularly publish reports on it, we could lose visibility in the
financial markets, which could cause our stock price or trading volume to decline.
We have not registered the shares of our common stock issuable
upon exercise of the rights and warrants under the Securities Act or state securities laws at this time, and such registration
may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise its
warrants and causing such warrants to expire worthless.
We have not registered the public shares
issuable upon exercise of the rights and warrants under the Securities Act or any state securities laws at this time. We have
agreed to use our best efforts to file with the SEC a registration statement for the registration, under the Securities Act, of
the common stock issuable upon exercise of the warrants as soon as practicable after the closing of the Business Combination (but
in no event later than fifteen (15) business days thereafter) and cause the same to become effective and to maintain the effectiveness
of such registration statement, and a current prospectus relating thereto, until the warrants expire or are redeemed. Until such
time as the shares issuable upon exercise of public warrants are registered under the Securities Act, we will be required, commencing
on the 61st day following the closing of the Business Combination, to permit holders to exercise their warrants on a cashless
basis under certain circumstances specified in the warrant agreement. However, no warrant will be exercisable for cash or on a
cashless basis, and we will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance
of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder, unless
an exemption is available. In no event will we be required to issue cash, securities or other compensation in exchange for the
warrants in the event that we are unable to register or qualify the shares underlying the warrants under the Securities Act or
applicable state securities laws. If the issuance of the shares upon exercise of the warrants is not so registered or qualified,
the holder of such warrant shall not be entitled to exercise such warrant and such warrant may have no value and expire worthless.
In such event, holders who acquired their warrants as part of a purchase of units will have paid the full unit purchase price
solely for the shares of common stock and the rights included in the units.
The future exercise of registration rights may adversely
affect the market price of our common stock.
Our common stock is subject to registration
rights agreements. We are obligated to register founder shares, placement warrants and shares issuable upon exercise of placement
warrants pursuant to a registration rights agreement signed in connection with our IPO and we are obligated to register the shares
purchased in the Macquarie Forward Purchase pursuant to a registration rights agreement signed in connection with the private
placement. In addition, pursuant to the Sale Agreement, we are obligated to promptly file a resale “shelf” registration
statement to register the shares of our common stock being issued to existing Target equity holders and loan note holders in the
Business Combination. Sales of restricted securities pursuant to these agreements may substantially depress the market price of
our common stock.
Warrants will become exercisable for our common stock and,
upon the closing of the Business Combination, the rights will be automatically converted, which would increase the number of shares
eligible for future resale in the public market and result in dilution to our stockholders.
Outstanding public warrants to purchase
an aggregate of 4,000,000 shares of our common stock and outstanding placement warrants to purchase an aggregate of 3,750,000
shares of our common stock will become exercisable 30 days after the completion of the Business Combination, along with warrants
to purchase an additional 1,000,000 shares of our common stock issuable pursuant to the Macquarie Forward Purchase. Each warrant
entitles the holder thereof to purchase one-half of one share of Hydra Industries’ common stock at a price of $5.75 per
half share ($11.50 per whole share), subject to adjustment. Warrants may be exercised only for a whole number of shares of Hydra
Industries’ common stock. No fractional shares will be issued upon exercise of the warrants. To the extent such warrants
are exercised, additional shares of our common stock will be issued, which will result in dilution to the then existing holders
of common stock of the Company and increase the number of shares eligible for resale in the public market. In addition, there
are rights covering in the aggregated 1,000,000 shares that will automatically convert into such shares upon the closing of the
Business Combination. Sales of substantial numbers of such shares in the public market could adversely affect the market price
of our common stock.
Our public stockholders may experience dilution as a consequence
of certain transactions. Having a minority share position may reduce the influence that our current stockholders have on the management
of the Company.
It is anticipated that, assuming completion
of the Business Combination as of September 24, 2016 and if there are no redemptions, Hydra Industries’ public stockholders
will retain an ownership interest of approximately 42% in Hydra Industries and our initial stockholders and affiliates will retain
an ownership interest of approximately 23% in Hydra Industries. In addition, if any of Hydra Industries’ stockholders exercise
their redemption rights, the ownership interest in Hydra Industries of Hydra Industries’ public stockholders will decrease.
The ownership percentage with respect to Hydra Industries following the Business Combination does not take into account (i) the
issuance of any shares upon completion of the Business Combination under the Company’s proposed 2016 Long-Term Incentive
Plan or (ii) any or all of the 17,500,000 warrants to purchase up to a total of 8,750,000 shares of Hydra Industries common stock
that will remain outstanding following the Business Combination. If the actual facts are different than these assumptions (which
they are likely to be), the percentage ownership retained by Hydra Industries’ existing stockholders in Hydra Industries
will be different. See “Unaudited Pro Forma Condensed Combined Financial Information” for further information. To
the extent that any of the warrants are converted into Hydra Industries common stock or any shares of Hydra Industries common
stock are issued pursuant to the proposed 2016 Long-Term Incentive Plan, current stockholders may experience substantial dilution.
Such dilution could, among other things, limit the ability of our current stockholders to influence management of the Company
through the election of directors following the Business Combination.
We may redeem any public warrants prior to their exercise
at a time that is disadvantageous to warrantholders, thereby making their warrants worthless.
We will have the ability to redeem the
public warrants at any time after they become exercisable and prior to their expiration at a price of $0.01 per warrant, provided
that (i) the last reported sale price of our common stock equals or exceeds $24.00 per share for any 20 trading days within the
30 trading-day period ending on the third business day before we send the notice of such redemption (on [___], 2016, (ii) the
last reported sale price for shares of our common stock was $[___]) and (iii) on the date we give notice of redemption and during
the entire period thereafter until the time the warrants are redeemed, there is an effective registration statement under the
Securities Act covering the shares of our common stock issuable upon exercise of the public warrants and a current prospectus
relating to them is available unless warrants are exercised on a cashless basis. Redemption of the outstanding public warrants
could force holders of public warrants:
to exercise their warrants
and pay the exercise price therefor at a time when it may be disadvantageous for them to do so;
to sell their warrants at
the then-current market price when they might otherwise wish to hold their warrants; or
to accept the nominal redemption
price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market
value of their warrants.
Anti-takeover provisions contained in our certificate of
incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
The Company’s certificate of incorporation
(as proposed to be amended) and bylaws contain provisions that could have the effect of delaying or preventing changes in control
or changes in our management without the consent of our board of directors. These provisions include:
no cumulative voting in the
election of directors, which limits the ability of minority stockholders to elect director candidates;
the exclusive right of our
board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation,
death, or removal of a director with or without cause by stockholders, which prevents stockholders from being able to fill vacancies
on our board of directors;
the ability of our board of
directors to determine whether to issue shares of our preferred stock and to determine the price and other terms of those shares,
including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership
of a hostile acquirer;
limiting the liability of,
and providing indemnification to, our directors and officers;
controlling the procedures
for the conduct and scheduling of stockholder meetings; and
advance notice procedures
that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted
upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies
to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.
These provisions, alone or together, could
delay hostile takeovers and changes in control of the Company or changes in our board of directors and management.
As a Delaware corporation, we are also
subject to provisions of Delaware law, including Section 203 of the DGCL, which prevents some stockholders holding more than 15%
of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially
all of Hydra Industries’ outstanding common stock. Any provision of our amended and restated certificate of incorporation
or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our
stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are
willing to pay for our common stock.
Our directors and key personnel are subject to the approval
of certain regulatory authorities, which, if withheld, will require us to sever our relationship with non-approved individuals,
which could adversely impact our operations.
Our members, managers, directors, officers
and key employees must also be approved by certain government and state regulatory authorities. If such regulatory authorities
were to find a person occupying any such position unsuitable, we would be required to sever our relationship with that person.
We may thereby lose key personnel which would have a negative effect on our operations. Certain public and private issuances of
securities and certain other transactions by us also require the approval of certain state regulatory authorities. Further, our
gaming regulators can require us to disassociate ourselves from suppliers or business partners found unsuitable by the regulators.
For a summary of some of the significant gaming regulations that affect our business, see ‘‘Regulation and Licensing.”
The regulatory environment in any particular jurisdiction may change in the future and any such change could have a material adverse
effect on our results of operations. In addition, we are subject to various gaming taxes, which are subject to increase at any
time.
Target is subject to extensive regulation at various levels,
and licensing and gaming authorities have significant control over its operations, which could have a negative effect on our business
and could cause us to redeem certain shareholders on potentially disadvantageous terms.
The operations of Target’s business
are contingent upon obtaining and maintaining all necessary licenses, permits, approvals, registrations, findings of suitability,
orders and authorizations. The laws, regulations and ordinances requiring these licenses, permits and other approvals generally
relate to the responsibility, financial stability and character of the owners and managers of gaming operations, as well as persons
financially interested or involved in gaming operations. The scope of the approvals required to operate Target’s business
is extensive.
Regulatory authorities have broad powers
to request detailed financial and other information, to limit, condition, suspend or revoke a registration, gaming license or
related approval and to approve changes in our operations. Substantial fines or forfeiture of assets for violations of gaming
laws or regulations may be levied. The suspension or revocation of any license which may be granted to us or the levy of substantial
fines or forfeiture of assets could significantly harm our business, financial condition and results of operations. Furthermore,
compliance costs associated with gaming laws, regulations and licenses are significant. Any change in the laws, regulations or
licenses applicable to our business or a violation of any current or future laws or regulations applicable to our business or
gaming licenses could require us to make substantial expenditures or could otherwise negatively affect our gaming operations and
results of operations.
Our certificate of incorporation is proposed
to be amended to provide that, to the extent required by the gaming authority making the determination of unsuitability or to
the extent the board of directors determines, in its sole discretion, that a person is likely to jeopardize the Company’s
or any affiliate’s application for, receipt of, approval for, right to the use of, or entitlement to, any gaming license,
shares of our capital stock that are owned or controlled by an unsuitable person or its affiliates are subject to mandatory redemption
by us. The redemption price may be paid in cash, by promissory note, or both, as required, and pursuant to the terms established
by, the applicable gaming authority and, if not, as we elect. Such a redemption could occur on terms that a shareholder believes
to be disadvantageous.
If we are unable to effect the Business Combination and
fail to complete an alternative initial business combination by October 29, 2016, we will cease all operations except for the
purpose of winding up, redeeming 100% of the outstanding public shares and, subject to the approval of our remaining stockholders
and our board of directors, dissolving and liquidating. In such event, the warrants will expire worthless and third parties may
bring claims against Hydra Industries and, as a result, the proceeds held in trust could be reduced and the per share liquidation
price received by stockholders could be less than $10.00 per share.
If we do not consummate the Business Combination
and fail to complete an alternative initial business combination by October 29, 2016 (subject to the requirements of law), the
existing charter provides that we will (a) cease all operations except for the purpose of winding up, (b) as promptly as reasonably
possible but not more than ten business days thereafter, redeem the public shares, at a per share price, payable in cash, equal
to the aggregate amount then on deposit in the trust account, including interest (which interest shall be net of taxes payable
and working capital released to us, and less up to $50,000 of interest to pay dissolution expenses) divided by the number of then
outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including
the right to receive further liquidation distributions, if any), subject to applicable law, and (c) as promptly as reasonably
possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve
and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements
of other applicable law. Holders of our founder shares have waived any right to any liquidation distribution with respect to those
shares. In the event of liquidation, there will be no distribution with respect to our outstanding warrants. Accordingly, the
warrants will expire worthless.
In addition, third parties may bring claims
against Hydra Industries. Although Hydra Industries has obtained waiver agreements from certain Selling Group and service providers
it has engaged and owes money to, and the prospective target businesses it has negotiated with, whereby such parties have waived
any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee
that they or other Selling Group who did not execute such waivers will not seek recourse against the trust account notwithstanding
such agreements. Furthermore, there is no guarantee that a court will uphold the validity of such agreements. Accordingly, the
proceeds held in the trust account could be subject to claims which could take priority over those of Hydra Industries’
public stockholders. A. Lorne Weil, our Chairman and Chief Executive Officer and the managing member of our Hydra Sponsor, has
agreed that he will be liable to us, and our Macquarie Sponsor has agreed to indemnify Mr. Weil for 50% of any such liability,
if and to the extent any claims by a vendor for services rendered or products sold to us, or the Target, reduce the amount of
funds in the Trust Account to below $10.00 per public share or such lesser amount per public share held in the Trust Account as
of the date of the liquidation of the trust account, due to reductions in value of the trust assets other than due to the failure
to obtain such waiver, in each case net of the amount of interest which may be withdrawn to pay taxes, except as to any claims
by a third party who executed a waiver of any and all rights to seek access to the Trust Account and except as to any claims under
our indemnity of the underwriters of our IPO against certain liabilities, including liabilities under the Securities Act. In the
event that an executed waiver is deemed to be unenforceable against a third party, then Mr. Weil will not be responsible to the
extent of any liability for such third-party claims. We cannot assure you, however, that Mr. Weil would be able to satisfy those
obligations. None of our other officers will indemnify us for claims by third parties including, without limitation, claims by
vendors and prospective target businesses.
In the event that the proceeds in the trust
account are reduced below the lesser of (i) $10.00 per share or (ii) other than due to the failure to obtain such waiver, such
lesser amount per share held in the trust account as of the date of the liquidation of the trust account due to reductions in
the value of the trust assets, in each case net of the interest which may be withdrawn to pay taxes or working capital expenses,
and Mr. Weil asserts that he is unable to satisfy his obligations or that he has no indemnification obligations related to a particular
claim, our independent directors would determine whether to take legal action against Mr. Weil to enforce his indemnification
obligations. While we currently expect that our independent directors would take legal action on our behalf against Mr. Weil to
enforce his indemnification obligations to us, it is possible that our independent directors in exercising their business judgment
may choose not to do so in any particular instance. If our independent directors choose not to enforce these indemnification obligations,
the amount of funds in the trust account available for distribution to our public stockholders may be reduced below $10.00 per
share.
Hydra Industries’ stockholders may be held liable
for claims by third parties against Hydra Industries to the extent of distributions received by them.
Under the DGCL, stockholders may be held
liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. The
pro rata portion of the trust account distributed to our public stockholders upon the redemption of 100% of our public shares
in the event we do not consummate an initial business combination by October 29, 2016 may be considered a liquidation distribution
under Delaware law. If a corporation complies with certain procedures set forth in Section 280 of the DGCL intended to ensure
that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims
can be brought against the corporation, a 90- day period during which the corporation may reject any claims brought, and an additional
150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect
to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed
to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However,
we intend to redeem our public shares as soon as reasonably possible following October 29, 2016 in the event we do not consummate
an initial business combination and, therefore, we do not intend to comply with those procedures.
Because we will not be complying with Section
280 of the DGCL, Section 281(b) of the DGCL requires the Company to adopt a plan, based on facts known to us at such time that
will provide for the payment of all existing and pending claims or claims that may be potentially brought against the Company
within the 10 years following dissolution. However, because we are a blank check company, rather than an operating company, and
our operations have been limited to searching for prospective target businesses, the only likely claims to arise would be from
the Selling Group (such as lawyers, investment bankers, and consultants) or prospective target businesses. If the Company’s
plan of distribution complies with Section 281(b) of the DGCL, any liability of our stockholders with respect to a liquidating
distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the
stockholder, and any liability of the stockholder would likely be barred after the third anniversary of the dissolution. There
can be no assurance that we will properly assess all claims that may be potentially brought against us. As such, our stockholders
could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of
its stockholders may extend beyond the third anniversary of such date. Furthermore, if the pro rata portion of the trust account
distributed to our public stockholders upon the redemption of 100% of our public shares in the event we do not consummate an initial
business combination within the required timeframe is not considered a liquidation distribution under Delaware law and such redemption
distribution is deemed to be unlawful, then pursuant to Section 174 of the DGCL, the statute of limitations for claims of creditors
could then be six years after the unlawful redemption distribution, instead of three years, as in the case of a liquidation distribution.
If we are forced to file a bankruptcy case
or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders could
be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent
conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by our stockholders. Furthermore,
because we intend to distribute the proceeds held in the trust account to our public stockholders promptly after October 29, 2016
in the event we do not consummate an initial business combination, this may be viewed or interpreted as giving preference to our
stockholders over any potential creditors with respect to access to or distributions from the Company’s assets. Furthermore,
our board of directors may be viewed as having breached its fiduciary duties to the Company’s creditors and/or may have
acted in bad faith, thereby exposing itself and the Company to claims of punitive damages, by paying our stockholders from the
trust account prior to addressing the claims of creditors. There can be no assurance that claims will not be brought against the
Company for these reasons.
Activities taken by affiliates of the Company to purchase,
directly or indirectly, public shares will increase the likelihood of approval of the Business Combination Proposal and other
proposals and may affect the market price of the Company’s securities during the buyback period.
Our initial stockholders, directors, officers,
advisors or their affiliates may purchase shares in privately negotiated transactions either prior to or following the consummation
of the Business Combination. None of our initial stockholders or their affiliates will make any such purchases when such parties
are in possession of any material non-public information not disclosed to the seller or during a restricted period under Regulation
M under the Exchange Act. Although none of our initial stockholders, directors, officers, advisors or their affiliates currently
anticipate paying any premium purchase price for such public shares, in the event such parties do, the payment of a premium may
not be in the best interest of those stockholders not receiving any such additional consideration. There is no limit on the number
of shares that could be acquired by our initial stockholders or their affiliates, or the price such parties may pay.
If such transactions are effected, the
consequence could be to cause the Business Combination to be approved in circumstances where such approval could not otherwise
be obtained. Purchases of shares by the persons described above would allow them to exert more influence over the approval of
the Business Combination Proposal and other proposals and would likely increase the chances that such proposals would be approved.
If the market does not view the Business Combination positively, purchases of public shares may have the effect of counteracting
the market’s view, which would otherwise be reflected in a decline in the market price of our securities. In addition, the
termination of the support provided by these purchases may materially adversely affect the market price of our securities.
As of the date of this proxy statement,
no agreements with respect to the private purchase of public shares by the Company or the persons described above have been entered
into with any such investor or holder. We will file a Current Report on Form 8-K with the SEC to disclose private arrangements
entered into or significant private purchases made by any of the aforementioned persons that would affect the vote on the Business
Combination Proposal or other proposals.
Changes in laws or regulations, or a failure to comply with
any laws and regulations, may adversely affect our business, investments and results of operations.
We are subject to laws and regulations
enacted by national, regional and local governments, including non-U.S. governments. In particular, we are required to comply
with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult,
time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time
and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a
failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our
business and results of operations.
We are dependent upon our executive officers and directors
and their departure could adversely affect our ability to complete the Business Combination.
Our operations are dependent upon a relatively
small group of individuals and, in particular, our executive officers and directors. We believe that our success depends on the
continued service of our executive officers and directors, at least until we have completed the Business Combination. In addition,
our executive officers and directors are not required to commit any specified amount of time to our affairs and, accordingly,
will have conflicts of interest in allocating management time among various business activities, including assessing the potential
Business Combination and monitoring the related due diligence. We do not have an employment agreement with, or key-man insurance
on the life of, any of our directors or executive officers. The unexpected loss of the services of one or more of our directors
or executive officers could adversely impact our ability to complete the Business Combination.
Since our Sponsors, executive officers and directors will
lose their entire investment in us if the Business Combination is not completed, a conflict of interest may arise in determining
whether Target is appropriate for our initial business combination.
In July 2014, our Sponsors purchased 2,875,000
founder shares for a purchase price of $25,000, or approximately $0.01 per share. The number of founder shares issued was determined
based on the expectation that such founder shares would represent 20.0% of the outstanding shares upon completion of the IPO.
In July 2014, our Hydra Sponsor transferred 389,942 founder shares to members of Hydra Industries’ management and consultants.
Three hundred thousand (300,000) founder shares were forfeited as a result of the underwriters’ determination not to exercise
their over-allotment option, and 575,000 founder shares were returned to the Company and subsequently cancelled prior to the IPO.
The founder shares will be worthless if we do not complete an initial business combination. In addition, our Sponsors and Hydra
Industries’ officer, Martin E. Schloss, purchased an aggregate of 7.5 million placement warrants, each exercisable for one-half
of one share of our common stock at $5.75 per half share ($11.50 per whole share), for a purchase price of $3,750,000, or $0.50
per warrant, that will also be worthless if we do not complete a business combination. In addition, each of our Sponsors has provided
us with a working capital loan in the amount of $250,000, or $500,000 in the aggregate, which loans are expected to be repaid
upon closing of the Business Combination and may not be repaid if we fail to consummate a transaction.
The personal and financial interests of
our executive officers and directors may have influenced their motivation in identifying and selecting Target for its target business
combination, completing an initial business combination and influencing the operation of the business following the initial business
combination.
Since our Sponsors, executive officers and directors will
not be eligible to be reimbursed for their out-of-pocket expenses if the Business Combination is not completed, a conflict of
interest may arise in determining whether Target is appropriate for our initial business combination.
At the closing of the Business Combination,
our Sponsors, executive officers and directors, or any of their respective affiliates, will be reimbursed for any out-of-pocket
expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due
diligence on suitable business combinations. There is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred
in connection with activities on our behalf. These financial interests of our Sponsors, executive officers and directors may have
influenced their motivation in identifying and selecting Target for the Business Combination. As of September [__], 2016, no such
out-of-pocket expenses had been incurred by our Sponsors, executive officers and directors, or any of their respective affiliates
Certain of our executive officers and directors are now,
and all of them may in the future become, affiliated with entities engaged in business activities similar to those intended to
be conducted by us after the Business Combination and, accordingly, may have conflicts of interest in determining to which entity
a particular business opportunity should be presented to our company or to another entity.
Following the completion of the Business
Combination, we intend to identify and combine with one or more businesses. Our executive officers and directors are, or may in
the future become, affiliated with entities that are engaged in similar businesses.
Our officers and directors also may become
aware of business opportunities which may be appropriate for presentation to us and the other entities to which they owe certain
fiduciary or contractual duties. Accordingly, they may have conflicts of interest in determining to which entity a particular
business opportunity should be presented – to our company or to another entity. These conflicts may not be resolved in our
favor and a potential target business may be presented to another entity prior to its presentation to us. Our proposed second
amended and restated certificate of incorporation provides that we renounce our interest in any corporate opportunity offered
to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director
or officer of our company and such opportunity is one we are legally and contractually permitted to undertake and would otherwise
be reasonable for us to pursue.
Members of our management team may directly
or indirectly own common stock, rights, warrants and stock options following the Business Combination, and, accordingly, may have
a conflict of interest in determining whether a particular target business is an appropriate business with which to combine. Further,
each of our officers and directors may have a conflict of interest with respect to evaluating a particular business combination
if the retention or resignation of any such officers and directors was included by a target business as a condition to any agreement
with respect to a particular business combination.
For a complete discussion of our executive
officers’ and directors’ business affiliations and the potential conflicts of interest that you should be aware of,
please see “Certain Relationships and Related Party Transactions.”
We will be a holding company and will conduct all of our
operations through our subsidiaries.
Upon consummation of the Business Combination,
we will be a holding company and will derive all of our operating income from Target and its subsidiaries. Other than any cash
we may retain, all of our assets will be held by our direct and indirect subsidiaries. We will rely on the earnings and cash flows
of Target and its subsidiaries, which will be paid to us by our subsidiaries, if and only to the extent available, in the form
of dividends and other payments or distributions, to meet our debt service obligations. The ability of our subsidiaries to pay
dividends or make other payments or distributions to us will depend on their respective operating results and may be restricted
by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the
payment of dividends and other distributions to us), the terms of existing and future indebtedness and other agreements of our
subsidiaries and the covenants of any future outstanding indebtedness we or our subsidiaries incur.
RISK FACTORS RELATING TO THE REDEMPTION
Unlike many blank check companies, we do not have a specified
maximum percentage redemption threshold, but Target may elect to not consummate the Business Combination if, after redemptions,
the Company’s available cash at closing is insufficient to pay all liabilities and obligations of the Company and Target
due and required to be paid at closing or by reason of closing. Each redemption of shares of Hydra Industries common stock by
our public stockholders will decrease the amount in our trust account. Accordingly, unless this right is waived by Target, we
may be unable to consummate the Business Combination if there are substantial redemptions by our public stockholders.
Since we have no specified percentage threshold
for redemption in our amended and restated certificate of incorporation other than the 25% threshold referred to below, our structure
is different in this respect from the structure that has been used by many blank check companies. Many blank check companies would
not be able to consummate a business combination if the holders of the company’s public shares voted against a proposed
business combination and elected to redeem or convert more than a specified percentage of the shares sold in such company’s
initial public offering, which percentage threshold has typically been between 19.99% and 39.99%. The absence of such a redemption
threshold makes it easier for us to consummate a business combination with which a substantial number of our stockholders may
not agree. Each redemption of public shares by our public stockholders will decrease the amount in our trust account, which holds
approximately $80 million as of June 30, 2016.
In addition, we are limited by the need
to have at least $5,000,001 in net tangible assets. This condition effectively requires that holders of no more than 6,843,439
shares as of June 30, 2016 redeem their public shares. Accordingly, holders of no more than 68.4% of the 10,000,000 shares outstanding
as of June 30, 2016 may redeem their shares in connection with the Business Combination if the Business Combination were consummated
as of that date. As a result, we may be able to consummate the Business Combination even though holders of a majority of our public
shares have chosen to redeem their shares.
If you or a “group” of stockholders of which
you are a part are deemed to hold an aggregate of 25% or more of our common stock issued in the IPO, you (or, if a member of such
a group, all of the members of such group in the aggregate) will lose the ability to redeem all such shares of 25% or more of
our common stock issued in the IPO.
A public stockholder, together with any
of his, her or its affiliates or any other person with whom it is acting in concert or as a “group” (as defined under
Section 13 of the Exchange Act), will be restricted from redeeming in the aggregate his, her or its shares or, if part of such
a group, the group’s shares, of 25% or more of the outstanding shares issued in the IPO. We refer to such shares aggregating
25% or more of the shares issued in the IPO as “Excess Shares”. In order to determine whether a stockholder is acting
in concert or as a group with another stockholder, the Company will require each public stockholder seeking to exercise redemption
rights to certify to the Company whether such stockholder is acting in concert or as a group with any other stockholder. Such
certifications, together with other public information relating to stock ownership available to the Company at that time, such
as Section 13D, Section 13G and Section 16 filings under the Exchange Act, will be the sole basis on which the Company makes the
above-referenced determination. A public stockholder’s inability to redeem any Excess Shares will reduce that stockholder’s
influence over our ability to consummate the Business Combination. A stockholder could suffer a material loss on its investment
in us if it sold Excess Shares in open market transactions. Additionally, a stockholder will not receive redemption distributions
with respect to its Excess Shares if we consummate the Business Combination. As a result, any such stockholder will continue to
hold that number of shares equal to its Excess Shares and, in order to dispose of such shares, would be required to sell its stock
in open market transactions, potentially at a loss. Notwithstanding the foregoing, stockholders may challenge the Company’s
determination as to whether a stockholder is acting in concert or as a group with another stockholder in a court of competent
jurisdiction.
There is no guarantee that a stockholder’s decision
whether to redeem its shares for a pro rata portion of the trust account will put the stockholder in a better future economic
position.
We can give no assurance as to the price
at which a stockholder may be able to sell its public shares in the future following the completion of the Business Combination
or any alternative business combination. Certain events following the consummation of any business combination, including the
Business Combination, may cause an increase in our share price, and may result in a lower value realized now than a stockholder
of Hydra Industries might realize in the future had the stockholder not elected to redeem such stockholder’s shares. Similarly,
if a stockholder does not redeem its shares, the stockholder will bear the risk of ownership of the public shares after the consummation
of any business combination, and there can be no assurance that a stockholder can sell its shares in the future for a greater
amount than the redemption price set forth in this proxy statement. A stockholder should consult the stockholder’s own tax
and/or financial advisor for assistance on how this may affect his, her or its individual situation.
If our stockholders fail to comply with the redemption requirements
specified in this proxy statement, they will not be entitled to redeem their shares of our common stock for a pro rata portion
of the funds held in our trust account.
Holders of public shares are required to
affirmatively vote either for or against the Business Combination Proposal in order to exercise their rights to redeem their shares
for a pro rata portion of the trust account. In addition, in order to exercise their redemption rights, they are required to submit
a request in writing and deliver their stock (either physically or electronically) to our transfer agent at least two business
days prior to the special meeting. Stockholders electing to redeem their shares will receive their pro rata portion of the trust
account less franchise and income taxes payable, calculated as of two business days prior to the anticipated consummation of the
Business Combination. See the section entitled “Special Meeting in Lieu of 2016 Annual Meeting of Hydra Industries Stockholders
— Redemption Rights” for additional information on how to exercise your redemption rights.
RISK FACTORS RELATING TO GLOBAL ECONOMIC CONDITIONS
Volatility or disruption in the financial markets could
materially adversely affect our business and the trading price of our common stock.
Target’s business has relied, and
we and Target following the Business Combination will continue to rely, on stable and efficient financial markets. Any disruption
in the credit and capital markets could adversely impact our ability to obtain financing on acceptable terms. Volatility in the
financial markets could also result in difficulties for financial institutions and other parties that we and Target do business
with, which could potentially affect the ability to access financing under existing arrangements. We are exposed to the impact
of any global or domestic economic disruption, including any potential impact of the recent vote by the United Kingdom to exit
the European Union (commonly referred to as "Brexit") and the sovereign debt crises in certain Eurozone countries where
Target does business. Our ability to continue to fund operating expenses, capital expenditures and other cash requirements over
the long term may require access to additional sources of funds, including equity and debt capital markets, and market volatility
and general economic conditions may adversely affect our ability to access capital markets. In addition, the inability of our
vendors to access capital and liquidity with which to maintain their inventory, production levels and product quality and to operate
their businesses, or the insolvency of our vendors, could lead to their failure to deliver merchandise. If we are unable to purchase
products when needed, our sales could be materially adversely impacted. Accordingly, volatility or disruption in the financial
markets could impair our ability to execute our growth strategy and could have a material adverse effect on the trading price
of our common stock.
Currency exchange rate fluctuations could result in lower
revenues, higher costs and decreased margins and earnings.
We will conduct purchase and sale transactions
in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates globally. Additionally,
there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom's June 23, 2016
referendum in which voters approved the United Kingdom's exit from the European Union, commonly referred to as “Brexit.”
It is possible that sovereign debt crises in certain Eurozone countries could lead to the abandonment of the Euro and the reintroduction
of national currencies in those countries. International revenues and expenses generally are derived from sales and operations
in various foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts
recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign
currencies relative to the U.S. Dollar will adversely affect the U.S. Dollar value of the Company's foreign currency-denominated
sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that
produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency
fluctuations could have an adverse effect on our results of operations and financial condition.
We may hedge certain foreign currency exposures
to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since
the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or
other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future
financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which
we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon
our hedging activities.
Global economic conditions could have a material adverse
effect on our business, operating results and financial condition.
The uncertain state of the global economy
continues to impact businesses around the world, most acutely in emerging markets and developing economies. If global economic
and financial market conditions do not improve or deteriorate, the following factors could have a material adverse effect on our
business, operating results and financial condition:
Slower consumer spending may result in reduced demand
for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased
inventories and lower gross margins;
In the future, we may be unable to access financing
in the credit and capital markets at reasonable rates in the event we find it desirable to do so;
We will conduct transactions in various currencies,
which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility
in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on
our reported operating results and financial condition;
Continued volatility in the availability and prices
for commodities and raw materials we use in our products and in our supply chain could have a material adverse effect on our costs,
gross margins and profitability;
If operators or distributors of our products experience
declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this
could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts
receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense;
If operators or distributors of our products experience
severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of
our products to consumers; and
If contract manufacturers of our products or other
participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials
or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments
of our products.
Risk Relating to the Referendum on the U.K.’s Membership
in the European Union
The announcement of the U.K.’s advisory
referendum vote to exit from the European Union (“Brexit”) could cause disruptions to and create uncertainty surrounding
Target’s business, including affecting Target’s relationships with existing and potential customers, suppliers and
employees. The referendum is non-binding; however, if the U.K’s government initiates the process for the U.K. to leave the
E.U., negotiations would then commence to determine the terms of the U.K’s future relationship with the E.U., including
the terms of trade between the U.K. and the E.U. The effects of Brexit will depend on any agreements the U.K. makes to retain
access to E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt some of
Target’s markets and jurisdictions in which it operates, and adversely change tax benefits or liabilities in these or other
jurisdictions. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as
the U.K. determines which E.U. laws to replace or replicate. In addition, the announcement of Brexit has caused significant volatility
in global stock markets and currency exchange rate fluctuations, including the strengthening of the U.S. dollar against some foreign
currencies and the weakening of the U.K. pound against some foreign currencies. The announcement of Brexit also may create global
economic uncertainty, which may cause customers and potential customers to monitor their costs and reduce their budgets for products
and services. Any of these effects of Brexit, among others, could materially adversely affect the business, business opportunities,
results of operations, financial condition and cash flows of each of Target and us following the Business Combination.
UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Hydra is providing the following unaudited
pro forma condensed combined financial information to aid you in your analysis of the financial aspects of the Business Combination.
The following unaudited pro forma condensed
combined balance sheet as of June 30, 2016 combines the unaudited historical condensed consolidated balance sheet of Target as
of April 9, 2016 with the unaudited historical condensed balance sheet of Hydra as of June 30, 2016, giving effect to the Business
Combination as if it had been consummated as of that date.
The following unaudited pro forma condensed
combined income statement for the six months ended June 30, 2016 combines the unaudited historical condensed consolidated statement
of operations of Target for the twenty eight week period ended April 9, 2016 with the unaudited historical condensed statement
of operations of Hydra for the six months ended June 30, 2016, giving effect to the Business Combination as if it had occurred
on January 1, 2015.
The following unaudited pro forma condensed
combined income statement for the year ended December 31, 2015 combines the audited historical consolidated statement of operations
of Target for the fiscal period ended September 26, 2015 with the audited historical statement of operations of Hydra for the
year ended December 31, 2015, giving effect to the Business Combination as if it had occurred on January 1, 2015.
The historical financial information has
been adjusted to give pro forma effect to events that are related and/or directly attributable to the Business Combination, are
factually supportable and are expected to have a continuing impact on the results of the combined company. The adjustments presented
on the unaudited pro forma condensed combined financial statements have been identified and presented to provide relevant information
necessary for an accurate understanding of the combined company upon consummation of the Business Combination.
The historical financial information of
Target was derived from the audited consolidated financial statements of Target as of September 26, 2015 and September 27, 2014
and for the fiscal periods ended September 26, 2015, September 27, 2014 and September 28, 2013 included elsewhere in this proxy
statement. The historical financial information for Target as of April 9, 2016 and for the twenty eight week period ended April
9, 2016 has been derived from Target’s unaudited financial statements. The historical financial information of Hydra was
derived from the audited financial statements of Hydra for the years ended December 31, 2015 and 2014 and the unaudited condensed
financial statements of Hydra for the six months ended June 30, 2016 and 2015 included elsewhere in this proxy statement. This
information should be read together with Target’s and Hydra’s audited and unaudited financial statements and related
notes, “
Target’s Management’s Discussion and Analysis of Financial Condition and Results of Operations
,”
“Hydra’s Management’s Discussion and Analysis of Financial Condition and Results of Operations
” and other financial information included elsewhere in this proxy statement.
The unaudited pro forma condensed combined
financial information is for illustrative purposes only. The financial results may have been different had the companies always
been combined. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of
the historical results that would have been achieved had the companies always been combined or the future results that the combined
company will experience. Target and Hydra have not had any historical relationship prior to the Business Combination. Accordingly,
no pro forma adjustments were required to eliminate activities between the companies.
The Business Combination will be accounted
for as a reverse merger in accordance with accounting principles generally accepted in the United States of America. Under this
method of accounting, Hydra will be treated as the “acquired” company for financial reporting purposes. This determination
was primarily based on Target comprising the ongoing operations of the combined entity, Target comprising a majority of the governing
body of the combined company, and Target’s senior management comprising the senior management of the combined company. Accordingly,
for accounting purposes, the Business Combination will be treated as the equivalent of Target issuing stock for the net assets
of Hydra, accompanied by a recapitalization. The net assets of Hydra will be stated at historical cost, with no goodwill or other
intangible assets recorded. Operations prior to the Business Combination will be those of Target.
Pursuant to the Sale Agreement, the “Base
Consideration” to be paid for the equity and shareholder loan notes pursuant to the Sale Agreement will equal (i) £100,363,394,
plus any amount by which the Company’s transaction expenses (“Purchaser Costs”) referred to in Schedule 6 to
the Sale Agreement exceeds £8,237,909, minus (iii) certain expenses of the Selling Group noticed by its representatives,
not to exceed £3,000,000, minus (iv) certain excess interest payments owing on the Inspired Group’s existing financing
arrangements. The Selling Group will be paid the Base Consideration, adjusted for the Accruing Negative Consideration (the “Completion
Payment”), partially in cash (the “Cash Consideration”), to the extent available after the payment of transaction
expenses and working capital adjustments, if any, and partially in newly-issued shares of Hydra common stock (“Purchaser
Shares”) at a value of $10.00 per share (the “Stock Consideration”).
The Cash Consideration represents the cash
Hydra will have available at closing to pay the Completion Payment. The Cash Consideration will equal (i) the Company’s
then current cash in trust (after any redemptions), the $20,004,348 proceeds of the Macquarie Private Placement and any other
available funds, minus (ii) an agreed amount of Purchaser Costs (including expenses incurred in connection with the preparation
of the proxy statement and meetings with Hydra stockholders), minus (iii) an agreed amount of the Selling Group’s transaction
expenses, minus (iv) the amount of repayment required under certain of the Inspired Group’s financing arrangements, minus
(v) £5 million for the purposes of retaining cash on the Company’s balance sheet.
The Cash Consideration is anticipated
to be funded through a combination of (i) cash held in the Company’s trust account after redemptions, (ii) the proceeds
of the Macquarie Private Placement and (iii) additional funds, if any, otherwise available at closing.
The Stock Consideration will be the number
of Purchaser Shares equal to the amount of the Completion Payment minus the Cash Consideration, divided by $10.00 per share. As
a result of the Business Combination, assuming that no Hydra stockholders elect to redeem their shares into cash, the Selling
Group will own approximately 35.9% of the Company’s common stock to be outstanding immediately after the Business Combination,
and the other Hydra stockholders will own approximately 64.1% of the Company’s outstanding common stock, based on the number
of shares of Hydra common stock outstanding as of June 30, 2016. If 6,108,323 shares of common stock are converted into cash,
which assumes the maximum redemption of Hydra’s common stock after the maximum drawdown of available capacity under Target’s
revolving credit agreement and the payment of expenses resulting in no cash consideration to be paid to the Selling Group, the
Selling Group will own approximately 63.9% and other Hydra stockholders will own approximately 36.1% of the Company’s common
stock to be outstanding immediately after the Business Combination.
Hydra cannot predict how many of its
public stockholders will elect to convert their shares into cash. As a result, it has elected to provide pro forma financial statements
under the following two circumstances: (1) no holders of Hydra common stock exercise their right to have their shares redeemed
upon the consummation of the Business Combination and (2) holders of no more than 6,108,323 shares of Hydra common stock elect
to have their shares converted upon consummation of the Business Combination at a conversion price of approximately $10.00 per
share, which represents the maximum redemption amount before no cash consideration would be paid to the Selling Group if the Business
Combination were consummated as of June 30, 2016. The actual results are likely to be in between the results shown, but there
can be no assurance that will be the case.
Included in the shares outstanding and
weighted average shares outstanding as presented in the pro forma condensed combined financial statements are 7,563,355 and 13,080,070
shares of the Company’s common stock to be issued to Target stockholders assuming no redemptions of common stock and maximum
redemptions of common stock, respectively.
PRO FORMA CONDENSED COMBINED BALANCE
SHEET AS OF JUNE 30, 2016
(UNAUDITED) (in thousands)
|
|
(A)
|
|
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Adjustments
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Balance Sheet
|
|
|
Assuming
|
|
|
Assuming
|
|
|
|
|
|
|
|
|
|
Assuming No
|
|
|
Assuming No
|
|
|
Maximum
|
|
|
Maximum
|
|
|
|
Target
|
|
|
Hydra
|
|
|
Redemptions
|
|
|
Redemptions
|
|
|
Redemptions
|
|
|
Redemptions
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,985
|
|
|
$
|
217
|
|
|
$
|
80,031
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,874
|
)
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,817
|
)
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,419
|
)
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,134
|
)
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,025
|
)
(9)
|
|
|
|
|
|
$
|
5,940
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,167
|
)
(10)
|
|
|
|
|
|
|
55,167
|
(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
(11)
|
|
$
|
8,301
|
|
|
|
(61,107
|
)
(13)
|
|
$
|
8,301
|
|
Accounts receivable
|
|
|
41,509
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,509
|
|
|
|
-
|
|
|
|
41,509
|
|
Inventory
|
|
|
8,128
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,128
|
|
|
|
-
|
|
|
|
8,128
|
|
Prepaid expenses and current assets
|
|
|
9,400
|
|
|
|
51
|
|
|
|
-
|
|
|
|
9,451
|
|
|
|
-
|
|
|
|
9,451
|
|
Total Current Assets
|
|
|
61,022
|
|
|
|
268
|
|
|
|
6,099
|
|
|
|
67,389
|
|
|
|
-
|
|
|
|
67,389
|
|
Long term assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and marketable securities held in Trust Account
|
|
|
-
|
|
|
|
80,031
|
|
|
|
(80,031
|
)
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Property and equipment, net
|
|
|
61,679
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,679
|
|
|
|
-
|
|
|
|
61,679
|
|
Intangible assets
|
|
|
49,591
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,591
|
|
|
|
-
|
|
|
|
49,591
|
|
Goodwill
|
|
|
91,973
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,973
|
|
|
|
-
|
|
|
|
91,973
|
|
Other assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Long Term Assets
|
|
|
203,243
|
|
|
|
80,031
|
|
|
|
(80,031
|
)
|
|
|
203,243
|
|
|
|
-
|
|
|
|
203,243
|
|
Total Assets
|
|
$
|
264,265
|
|
|
$
|
80,299
|
|
|
$
|
(73,932
|
)
|
|
$
|
270,632
|
|
|
$
|
-
|
|
|
$
|
270,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
35,767
|
|
|
$
|
3,538
|
|
|
$
|
(3,538
|
)
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(588
|
)
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,134
|
)
(8)
|
|
$
|
23,045
|
|
|
$
|
-
|
|
|
$
|
23,045
|
|
Convertible promissory notes - related parties
|
|
|
-
|
|
|
|
500
|
|
|
|
(500
|
)
(11)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Corporate tax and other current taxes payable
|
|
|
4,313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,313
|
|
|
|
-
|
|
|
|
4,313
|
|
Deferred revenue
|
|
|
9,313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,313
|
|
|
|
-
|
|
|
|
9,313
|
|
Other current liabilities
|
|
|
7,554
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,554
|
|
|
|
-
|
|
|
|
7,554
|
|
Current portion of long-term debt
|
|
|
11,416
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,416
|
|
|
|
5,940
|
(4)
|
|
|
17,356
|
|
Total Current Liabilities
|
|
|
68,363
|
|
|
|
4,038
|
|
|
|
(16,760
|
)
|
|
|
55,641
|
|
|
|
5,940
|
|
|
|
61,581
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
415,494
|
|
|
|
-
|
|
|
|
(1,419
|
)
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(305,791
|
)
(12)
|
|
|
108,284
|
|
|
|
-
|
|
|
|
108,284
|
|
Deferred revenue, net of current portion
|
|
|
17,805
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,805
|
|
|
|
-
|
|
|
|
17,805
|
|
Deferred underwriting fees
|
|
|
-
|
|
|
|
2,800
|
|
|
|
(2,800
|
)
(5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Earnout share liability
|
|
|
-
|
|
|
|
-
|
|
|
|
7,354
|
(16)
|
|
|
7,354
|
|
|
|
-
|
|
|
|
7,354
|
|
Other long-term liabilities
|
|
|
3,129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,129
|
|
|
|
-
|
|
|
|
3,129
|
|
Total Liabilities
|
|
|
504,791
|
|
|
|
6,838
|
|
|
|
(319,416
|
)
|
|
|
192,213
|
|
|
|
5,940
|
|
|
|
198,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock subject to possible redemption
|
|
|
-
|
|
|
|
68,461
|
|
|
|
(68,461
|
)
(13)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
165
|
|
|
|
-
|
|
|
|
1
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
(15)
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
450
|
|
|
|
10,090
|
|
|
|
20,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,167
|
)
(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305,791
|
(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,460
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,926
|
)
(15)
|
|
|
|
|
|
|
55,167
|
(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,354
|
)
(16)
|
|
|
337,348
|
|
|
|
(61,107
|
)
(13)
|
|
|
331,408
|
|
Accumulated other comprehensive loss
|
|
|
7,604
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,604
|
|
|
|
-
|
|
|
|
7,604
|
|
Accumulated deficit
|
|
|
(248,745
|
)
|
|
|
(5,090
|
)
|
|
|
(4,536
|
)
(5)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,229
|
)
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,025
|
)
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,090
|
(15)
|
|
|
(266,535
|
)
|
|
|
-
|
|
|
|
(266,535
|
)
|
Total Stockholders’ Equity (Deficit)
|
|
|
(240,526
|
)
|
|
|
5,000
|
|
|
|
313,945
|
|
|
|
78,419
|
|
|
|
(5,940
|
)
|
|
|
72,479
|
|
Total Liabilities and Stockholders’ Equity
(Deficit)
|
|
$
|
264,265
|
|
|
$
|
80,299
|
|
|
$
|
(73,932
|
)
|
|
$
|
270,632
|
|
|
$
|
-
|
|
|
$
|
270,632
|
|
Pro Forma Adjustments to the Unaudited
Condensed Combined Balance Sheet
|
(A)
|
Derived from the unaudited condensed consolidated balance sheet of Target as of April 9, 2016.
|
|
(B)
|
Derived from the unaudited condensed balance sheet of Hydra as of June 30, 2016.
|
|
(1)
|
To liquidate investments held in the trust account.
|
|
(2)
|
To record $20 million proceeds from Macquarie Private Placement
|
|
(3)
|
To record Macquarie Private Placement of 500,000 shares of Hydra common stock.
|
|
(4)
|
To record $5,940 maximum drawdown of available capacity under Target’s revolving credit agreement in the case
of maximum redemptions to be used to pay estimated transaction costs and expenses.
|
|
(5)
|
To reflect payment of deferred underwriting fee payable and estimated fees and expenses incurred by Hydra related to
the Business Combination.
|
|
(6)
|
To reflect payment of estimated fees and expenses incurred by Target related to the Business Combination.
|
|
(7)
|
To record debt issuance costs incurred in connection with the extension of the maturity date of the Target’s
senior debt.
|
|
(8)
|
To record payment of accrued interest on third party debt.
|
|
(9)
|
To record payment of estimated management bonuses, legal, financial advisory, accounting, printing and other professional
fees related to the Business Combination.
|
|
(10)
|
To reflect the payment of the Cash Consideration to the Selling Group assuming no redemptions. Assuming maximum redemptions,
no Cash Consideration would be paid to the Selling Group.
|
|
(11)
|
To record repayment of convertible promissory notes to Sponsors.
|
|
(12)
|
To record adjustment to shareholder loan notes and concurrent purchase of shareholder loan notes by Hydra. As a condition
to the consummation of the Business Combination, Hydra will purchase shareholder loan notes from the Selling Group for an
aggregate purchase price equal to their fair market value on the date of the Business Combination. As a result of this transaction,
the Selling Group will be released from their right to receive payment on such notes and the Target will be required to remit
payment to Hydra for the amounts owed on such notes. The shareholder loan notes purchased by Hydra would consequently become
intercompany loans and, therefore, would eliminate in consolidation.
|
|
(13)
|
Assuming no Hydra stockholders exercise their redemption rights, the common stock subject to redemption amounting to
$68,461 would be transferred to permanent equity. Assuming the maximum amount of shares are redeemed by the Hydra stockholders,
$61,107 of the common stock subject to redemption would be paid out in cash and the remaining balance of $7,354 would be transferred
to permanent equity. The $61,107, or 6,108,323 shares of common stock, which represents the maximum redemption amount before
no cash consideration would be paid to the Selling Group if the Business Combination were consummated as of June 30, 2016.
|
|
(14)
|
Assuming no Hydra stockholders exercise their redemption rights, 10,000,000 rights would convert into 1,000,000 shares
of common stock at a par value of $0.0001 per share. Assuming the maximum amount of shares are redeemed by the Hydra stockholders,
3,891,677 rights would convert into 389,168 shares of common stock at a par value of $0.0001 per share.
|
|
(15)
|
To reflect recapitalization of Target through issuance of 7,563,355 shares of Hydra’s common stock, assuming
no redemptions of Hydra’s common stock, or 13,080,070 shares of Hydra’s common stock, assuming maximum redemptions
of Hydra’s common stock, and the elimination of the historical accumulated deficit of Hydra, the accounting acquire.
|
|
(16)
|
To reflect the value of contingent consideration in connection with the earn-out payments contemplated in the Sale
Agreement, which are variable in nature, and dependent on the Target’s future performance.
|
PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS
ENDED JUNE 30, 2016
(UNAUDITED)
(in thousands
except share and per share amounts)
|
|
(A)
|
|
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Income
|
|
|
Adjustments
|
|
|
Statement
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Statement
|
|
|
Assuming
|
|
|
Assuming
|
|
|
|
|
|
|
|
|
|
Assuming No
|
|
|
Assuming No
|
|
|
Maximum
|
|
|
Maximum
|
|
|
|
Target
|
|
|
Hydra
|
|
|
Redemptions
|
|
|
Redemptions
|
|
|
Redemptions
|
|
|
Redemptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
63,624
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
63,624
|
|
|
$
|
-
|
|
|
$
|
63,624
|
|
Cost of sales
|
|
|
(9,656
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,656
|
)
|
|
|
-
|
|
|
|
(9,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
(33,197
|
)
|
|
|
(1,492
|
)
|
|
|
1,955
|
(2)
|
|
|
(32,734
|
)
|
|
|
-
|
|
|
|
(32,734
|
)
|
Depreciation and amortization
|
|
|
(19,761
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,761
|
)
|
|
|
-
|
|
|
|
(19,761
|
)
|
Total operating expenses
|
|
|
(52,958
|
)
|
|
|
(1,492
|
)
|
|
|
1,955
|
|
|
|
(52,495
|
)
|
|
|
-
|
|
|
|
(52,495
|
)
|
Net operating income (loss)
|
|
|
1,010
|
|
|
|
(1,492
|
)
|
|
|
1,955
|
|
|
|
1,473
|
|
|
|
-
|
|
|
|
1,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities held in Trust Account
|
|
|
-
|
|
|
|
11
|
|
|
|
(11
|
)
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
-
|
|
|
|
58
|
|
|
|
(58
|
)
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
|
(31,901
|
)
|
|
|
-
|
|
|
|
(157
|
)
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,582
|
(4)
|
|
|
(10,476
|
)
|
|
|
(172
|
)
(5)
|
|
|
(10,648
|
)
|
Loss before income taxes
|
|
|
(30,891
|
)
|
|
|
(1,423
|
)
|
|
|
23,311
|
|
|
|
(9,003
|
)
|
|
|
(172
|
)
|
|
|
(9,175
|
)
|
Provision for income taxes
|
|
|
(287
|
)
|
|
|
-
|
|
|
|
2,088
|
(6)
|
|
|
1,801
|
|
|
|
34
|
(6)
|
|
|
1,835
|
|
Net loss
|
|
$
|
(31,178
|
)
|
|
$
|
(1,423
|
)
|
|
$
|
25,399
|
|
|
$
|
(7,202
|
)
|
|
$
|
(138
|
)
|
|
$
|
(7,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
|
|
|
|
3,026,265
|
|
|
|
17,906,794
|
(7)
|
|
|
20,933,059
|
|
|
|
(591,608
|
)
(7)
|
|
|
20,341,451
|
|
Basic and diluted net loss per share
|
|
|
|
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
$
|
(0.36
|
)
|
PRO FORMA CONDENSED COMBINED STATEMENT
OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2015
(UNAUDITED)
(in thousands except share and per share
amounts)
|
|
(C)
|
|
|
(D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Income
|
|
|
Adjustments
|
|
|
Statement
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Statement
|
|
|
Assuming
|
|
|
Assuming
|
|
|
|
|
|
|
|
|
|
Assuming No
|
|
|
Assuming No
|
|
|
Maximum
|
|
|
Maximum
|
|
|
|
Target
|
|
|
Hydra
|
|
|
Redemptions
|
|
|
Redemptions
|
|
|
Redemptions
|
|
|
Redemptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
127,573
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
127,573
|
|
|
$
|
-
|
|
|
$
|
127,573
|
|
Cost of sales
|
|
|
(24,227
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,227
|
)
|
|
|
-
|
|
|
|
(24,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
(65,229
|
)
|
|
|
(3,530
|
)
|
|
|
3,052
|
(2)
|
|
|
(65,707
|
)
|
|
|
-
|
|
|
|
(65,707
|
)
|
Depreciation and amortization
|
|
|
(40,077
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,077
|
)
|
|
|
-
|
|
|
|
(40,077
|
)
|
Total operating expenses
|
|
|
(105,306
|
)
|
|
|
(3,530
|
)
|
|
|
3,052
|
|
|
|
(105,784
|
)
|
|
|
-
|
|
|
|
(105,784
|
)
|
Net operating loss
|
|
|
(1,960
|
)
|
|
|
(3,530
|
)
|
|
|
3,052
|
|
|
|
(2,438
|
)
|
|
|
-
|
|
|
|
(2,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities held in Trust Account
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
10
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
646
|
|
|
|
14
|
|
|
|
(14
|
)
(1)
|
|
|
646
|
|
|
|
-
|
|
|
|
646
|
|
Interest expense
|
|
|
(58,100
|
)
|
|
|
-
|
|
|
|
(315
|
)
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,198
|
(4)
|
|
|
(21,217
|
)
|
|
|
(345
|
)
(5)
|
|
|
(21,562
|
)
|
Other finance costs
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
(153
|
)
|
|
|
-
|
|
|
|
(153
|
)
|
Loss from equity method investee
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
(340
|
)
|
|
|
-
|
|
|
|
(340
|
)
|
Loss before income taxes
|
|
|
(59,907
|
)
|
|
|
(3,526
|
)
|
|
|
39,931
|
|
|
|
(23,502
|
)
|
|
|
(345
|
)
|
|
|
(23,847
|
)
|
Provision for income taxes
|
|
|
(631
|
)
|
|
|
-
|
|
|
|
5,331
|
(6)
|
|
|
4,700
|
|
|
|
69
|
(6)
|
|
|
4,769
|
|
Net loss
|
|
$
|
(60,538
|
)
|
|
$
|
(3,526
|
)
|
|
$
|
45,262
|
|
|
$
|
(18,802
|
)
|
|
$
|
(276
|
)
|
|
$
|
(19,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
|
|
|
|
2,787,207
|
|
|
|
18,050,923
|
(7)
|
|
|
20,838,130
|
|
|
|
(735,737
|
)
(7)
|
|
|
20,102,393
|
|
Basic and diluted net loss per share
|
|
|
|
|
|
$
|
(1.27
|
)
|
|
|
|
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
$
|
(0.95
|
)
|
Pro Forma Adjustments to the Unaudited
Condensed Combined Income Statements
|
(A)
|
Derived from the unaudited condensed consolidated statements of operations of Target for the twenty
eight week period ended April 9, 2016.
|
|
(B)
|
Derived from the unaudited condensed statements of operations of Hydra for the six months ended June 30, 2016.
|
|
(C)
|
Derived from the audited consolidated statements of operations of Target for the fiscal period ended September 26,
2015.
|
|
(D)
|
Derived from the audited statements of operations of Hydra for the year ended December 31, 2015.
|
|
(1)
|
To eliminate unrealized gain (loss) and interest income on marketable securities held in the trust
account as of the beginning of the periods.
|
|
(2)
|
To eliminate direct, incremental costs of the Business Combination which are reflected in the historical financial
statements of Target and Hydra in the amount of $818 and $1,137 as of June 30, 2016, respectively, and $0 and $3,052 as of
December 31, 2015, respectively.
|
|
(3)
|
To record amortization of debt issue costs to interest expense in connection with the extension of the maturity date
of the Target’s senior debt.
|
|
(4)
|
To eliminate interest expense on shareholder loan notes exchanged and purchased in connection with Business Combination
as of the beginning of the periods.
|
|
(5)
|
To record interest expense on the $5,940 drawdown of the Target’s revolving credit agreement
in the case of maximum redemptions.
|
|
(6)
|
To record normalized income tax benefit of 20.0% for pro forma financial presentation purposes.
|
|
(7)
|
As the Business Combination is being reflected as if it had occurred at the beginning of the periods presented, the
calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issuable
relating to the Business Combination have been outstanding for each of the periods presented. Weighted average common shares
outstanding—basic and diluted is calculated as follows:
|
|
|
Combined
(Assuming
No
Redemptions)
|
|
|
Combined
(Assuming
Maximum
Redemptions)
|
|
|
|
Six
Months
Ended
June 30,
2016
|
|
|
Year
Ended
December 31,
2015
|
|
|
Six
Months
Ended
June 30,
2016
|
|
|
Year
Ended
December 31,
2015
|
|
Hydra weighted average shares outstanding
|
|
|
3,026,265
|
|
|
|
2,787,207
|
|
|
|
3,026,265
|
|
|
|
2,787,207
|
|
Hydra rights converted to shares and shares issued to Macquarie
|
|
|
2,700,000
|
|
|
|
2,700,000
|
|
|
|
2,700,000
|
|
|
|
2,700,000
|
|
Hydra rights converted to shares
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
800,000
|
|
Hydra shares subject to redemption reclassified to equity
|
|
|
6,843,439
|
|
|
|
6,987,568
|
|
|
|
735,116
|
|
|
|
735,116
|
|
Hydra shares issued in Business Combination
|
|
|
7,563,355
|
|
|
|
7,563,355
|
|
|
|
13,080,070
|
|
|
|
13,080,070
|
|
Weighted average shares outstanding
|
|
|
20,933,059
|
|
|
|
20,838,130
|
|
|
|
20,341,451
|
|
|
|
20,102,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of shares owned by Target holders
|
|
|
36.1
|
%
|
|
|
36.3
|
%
|
|
|
64.3
|
%
|
|
|
65.1
|
%
|
Percent of shares owned by Hydra and Macquarie
|
|
|
63.9
|
%
|
|
|
63.7
|
%
|
|
|
35.7
|
%
|
|
|
34.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares calculation, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing Target holders
|
|
|
7,563,355
|
|
|
|
7,563,355
|
|
|
|
13,080,070
|
|
|
|
13,080,070
|
|
Hydra holders and Macquarie
|
|
|
13,369,704
|
|
|
|
13,274,775
|
|
|
|
7,261,381
|
|
|
|
7,022,323
|
|
Weighted average shares, basic and diluted
|
|
|
20,933,059
|
|
|
|
20,838,130
|
|
|
|
20,341,451
|
|
|
|
20,102,393
|
|
The computation of diluted loss per share excludes the effect
of warrants to purchase 8,750,000 shares of the Company’s common stock because their inclusion would be anti-dilutive.
SPECIAL MEETING
IN LIEU OF 2016 ANNUAL MEETING OF HYDRA INDUSTRIES STOCKHOLDERS
General
We are furnishing this proxy statement
to our stockholders as part of the solicitation of proxies by our board of directors for use at the special meeting of stockholders
to be held on _______________, 2016, and at any adjournment or postponement thereof. This proxy statement is first being furnished
to our stockholders on or about _________________, 2016. This proxy statement provides you with information you need to know to
be able to vote or instruct your vote to be cast at the special meeting. In connection with the special meeting, we are also providing
you with our Annual Report on Form 10-K for the year ended December 31, 2015.
Date, Time and Place
of Special Meeting
The special meeting will be held at _______________________
Eastern time, on __________________, 2016, at the offices of Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas,
New York, New York 10036, or such other date, time and place to which such meeting may be adjourned or postponed, to consider
and vote upon the proposals set forth in this proxy statement.
Voting Power;
Record Date
You will be entitled to vote or direct
votes to be cast at the special meeting if you owned shares of our common stock at the close of business on _____________, 2016,
which is the record date for the special meeting. You are entitled to one vote for each share of our common stock that you owned
as of the close of business on the record date. If your shares are held in “street name” or are in a margin or similar
account, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own
are properly counted. On the record date, there were 10,000,000 shares of Hydra Industries common stock outstanding, of which
8,000,000 are public shares and 2,000,000 are shares held by our Sponsors, independent directors and affiliates.
Vote of Sponsors
In connection with our IPO, we entered
into letter agreements (the “2014 Letter Agreements”) with each of our initial stockholders, consisting of the Sponsors,
our directors, our executive officers and our advisor, pursuant to which each agreed to vote any shares of Hydra Industries common
stock owned by them in favor of the Business Combination Proposal.
In addition, concurrently with the execution
of the Sale Agreement, our Sponsors entered into Voting and Support Letter Agreements with Target (the “Voting and Support
Letter Agreements”), copies of which are attached hereto as
Annex E
. Pursuant to the Voting and Support Letter Agreements,
the Sponsors, among other things, have confirmed their obligations under the 2014 Letter Agreements to vote all of the shares
of Hydra Industries common stock held by them (representing as of the record date approximately [__]% of the voting power of the
Company) in favor of the Business Combination, and agreed that the Selling Group would be entitled to enforce such obligations.
Our initial stockholders have waived any
redemption rights, including with respect to shares of common stock purchased in our IPO or in the aftermarket, in connection
with the Business Combination. The founder shares and placement warrants held by our initial stockholders have no redemption rights
upon our liquidation and will be worthless if no business combination is effected by us by October 29, 2016 (subject to the requirements
of law). However, our initial stockholders are entitled to redemption rights upon our liquidation with respect to any public shares
they may own.
Quorum and Required
Vote for Proposals for the Special Meeting
A quorum of our stockholders is necessary
to hold a valid meeting. A quorum will be present at the special meeting if a majority of the common stock outstanding and entitled
to vote at the special meeting is represented in person or by proxy. Abstentions will count as present for the purposes of establishing
a quorum. Broker non-votes will not be counted for the purpose of determining the existence of a quorum.
Approval of the Business Combination Proposal,
the Incentive Plan Proposal and the Adjournment Proposal requires the affirmative vote of a majority of the votes cast by stockholders
present in person or represented by proxy. Accordingly, a Hydra Industries stockholder’s failure to vote by proxy or to
vote in person at the special meeting or the failure of a Hydra Industries stockholder who holds his or her shares in “street
name” through a broker or other nominee to give voting instructions to such broker or other nominee (a “broker non-vote”)
will not be counted towards the number of shares of Hydra Industries common stock required to validly establish a quorum, but
if a valid quorum is otherwise established, it will have no effect on the outcome of any vote on the Business Combination Proposal,
the Incentive Plan Proposal or the Adjournment Proposal. Abstentions will be counted in connection with the determination of whether
a valid quorum is established, but will have no effect on the outcome of the Business Combination Proposal, the Incentive Plan
Proposal or the Adjournment Proposal.
The approval of the Charter Proposals requires
the affirmative vote of the holders of a majority of the outstanding shares of our common stock. Accordingly, a Hydra Industries
stockholder’s failure to vote by proxy or to vote in person at the special meeting, an abstention from voting, or a broker
non-vote with regard to any Charter Proposal will have the same effect as a vote “AGAINST” such Charter Proposal.
Directors are elected by a plurality of
all of the votes cast by holders of shares of our common stock represented in person or by proxy and entitled to vote thereon
at the special meeting. This means that the six nominees will be elected if they receive more affirmative votes than any other
nominee for the same position. Stockholders may not cumulate their votes with respect to the election of directors. Abstentions
and broker non-votes will have no effect on the election of directors.
The transactions contemplated by the Sale
Agreement will consummated only if the Business Combination Proposal and, unless waived the Director Election Proposal and the
Charter Proposals are approved at the special meeting. In addition, (i) the Incentive Plan Proposal is conditioned on the approval
of the Business Combination Proposal, (ii) the Charter Proposals are conditioned on the approval of the Business Combination Proposal
and (iii) the Director Election Proposal is conditioned on the approval of Proposal 3. The Adjournment Proposal does not require
the approval of any other proposal to be effective. It is important for you to note that in the event that the Business Combination
Proposal or, unless waived, the Director Election Proposal and Charter Proposals do not receive the requisite vote for approval,
then we will not consummate the Business Combination. If we do not consummate the Business Combination and fail to complete an
initial business combination by October 29, 2016 (subject to the requirements of law), we will be required to dissolve and liquidate
our trust account by returning the then remaining funds in such account to the public stockholders.
Recommendation to
Hydra Industries Stockholders
Our board of directors believes that each
of the Business Combination Proposal, the Charter Proposals, the Director Election Proposal, the Incentive Plan Proposal and the
Adjournment Proposal to be presented at the special meeting is in the best interests of the Company and our stockholders and unanimously
recommends that its stockholders vote “FOR” each of these proposals.
When you consider the recommendation of
our board of directors in favor of approval of the Business Combination Proposal, you should keep in mind that our directors and
officers have interests in the Business Combination that are different from or in addition to (or which may conflict with) your
interests as a stockholder. These interests include, among other things:
|
·
|
the fact that
our Sponsors and our independent directors paid an aggregate of approximately $3,775,000
for their founder shares and placement warrants and such securities should have a significantly
higher value at the time of the Business Combination;
|
|
·
|
the fact that
certain directors and officers may enter into employment agreements with the Company
after the consummation of the Business Combination;
|
|
·
|
the Macquarie
Forward Purchase;
|
|
·
|
the fact that
A. Lorne Weil, our Chairman and Chief Executive Officer and the managing member of our
Hydra Sponsor, has agreed that he will be liable to us, and our Macquarie Sponsor has
agreed to indemnify Mr. Weil for 50% of any such liability, if and to the extent any
claims by a vendor for services rendered or products sold to us, or the Target, reduce
the amount of funds in the Trust Account to below $10.00 per public share or such lesser
amount per public share held in the Trust Account as of the date of the liquidation of
the trust account, due to reductions in value of the trust assets other than due to the
failure to obtain such waiver, in each case net of the amount of interest which may be
withdrawn to pay taxes, except as to any claims by a third party who executed a waiver
of any and all rights to seek access to the Trust Account and except as to any claims
under our indemnity of the underwriters of our IPO against certain liabilities, including
liabilities under the Securities Act;
|
|
·
|
the
fact that our directors and officers will lose their entire investment in the Company
if the Business Combination is not completed;
|
|
·
|
the continuation
of one of our five existing directors as a director of the Company; and
|
|
·
|
the continued
indemnification of current directors and officers of the Company and the continuation
of directors’ and officers’ liability insurance after the Business Combination.
|
These interests may influence our directors
in making their recommendation that you vote in favor of the approval of the Business Combination. These interests were considered
by our Board when our Board approved the Business Combination.
Broker Non-Votes
and Abstentions
Under the rules of various national and
regional securities exchanges, your broker, bank or other nominee cannot vote your shares with respect to non-discretionary matters
unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker,
bank or other nominee. We believe the proposals presented to our stockholders will be considered non-discretionary and therefore
your broker, bank or other nominee cannot vote your shares without your instructions. If you do not provide instructions with
your proxy, your broker, bank or other nominee may deliver a proxy card expressly indicating that it is NOT voting your shares;
this indication that a broker, bank or nominee is not voting your shares is referred to as a “broker non-vote.”
Abstentions are considered present for
the purposes of establishing a quorum but will have the same effect as a vote “AGAINST” the Charter Proposals. Broker
non-votes will have the effect of a vote “AGAINST” the Charter Proposals but, assuming a quorum is otherwise validly
established, broker non-votes and abstentions will have no effect on the other proposals to be considered at the special meeting.
Voting Your Shares
Each share of our common stock that you
own in your name entitles you to one vote on each of the proposals for the special meeting. Your one or more proxy cards show
the number of shares of our common stock that you own.
|
·
|
You can vote your
shares in advance of the special meeting by completing, signing, dating and returning
the enclosed proxy card in the postage-paid envelope provided. If you hold your shares
in “street name” through a broker, bank or other nominee, you will need to
follow the instructions provided to you by your broker, bank or other nominee to ensure
that your shares are represented and voted at the special meeting. If you vote by proxy
card, your “proxy,” whose name is listed on the proxy card, will vote your
shares as you instruct on the proxy card. If you sign and return the proxy card but do
not give instructions on how to vote your shares, your shares of our common stock will
be voted as recommended by our board of directors. Our board of directors recommends
voting “FOR” the Business Combination Proposal, “FOR” each of
the Charter Proposals, “FOR” the Director Election Proposal, “FOR”
the Incentive Plan Proposal and “FOR” the Adjournment Proposal.
|
|
·
|
You can attend
the special meeting and vote in person even if you have previously voted by submitting
a proxy. You will be given a ballot when you arrive. However, if your shares of common
stock are held in the name of your broker, bank or other nominee, you must get a proxy
from the broker, bank or other nominee. That is the only way we can be sure that the
broker, bank or nominee has not already voted your shares of common stock.
|
Revoking Your Proxy
If you give a proxy, you may revoke it
at any time before the special meeting or at such meeting by doing any one of the following:
|
·
|
you may send another
proxy card with a later date;
|
|
·
|
you may notify
Martin Schloss, the Company’s Executive Vice President, General Counsel and Secretary,
by telephone at (646) 565-3861, by email at
marty@hydramgmt.com
or in writing
to c/o Hydra Industries Acquisition Corp., 250 W. 57
th
Street, New York 10107
before the special meeting that you have revoked your proxy; or
|
|
·
|
you may attend
the special meeting, revoke your proxy, and vote in person, as indicated above.
|
No Additional Matters
May Be Presented at the Special Meeting
The special meeting has been called only
to consider the approval of the Business Combination Proposal, the Charter Proposals, the Director Election Proposal, the Incentive
Plan Proposal and the Adjournment Proposal. Under our bylaws, other than procedural matters incident to the conduct of the special
meeting, no other matters may be considered at the special meeting if they are not included in this proxy statement, which serves
as the notice of the special meeting.
Who Can Answer Your
Questions About Voting
If you have any questions about how to
vote or direct a vote in respect of your shares of our common stock, you may call [Proxy Solicitor], our proxy solicitor, at [___]
(toll free) or banks and brokers can call collect at [____].
Redemption Rights
Pursuant to our currently existing charter,
any holders of our public shares may demand that such shares be redeemed in exchange for a pro rata share of the aggregate amount
on deposit in the trust account, less taxes payable, calculated as of two business days prior to the consummation of the Business
Combination. If you affirmatively vote for or against the Business Combination Proposal, your request is properly made and the
Business Combination is consummated, these shares, immediately prior to the Business Combination, will cease to be outstanding
and will represent only the right to receive a pro rata share of the aggregate amount on deposit in the trust account which holds
the proceeds of our IPO (calculated as of two business days prior to the consummation of the Business Combination, less taxes
payable or amounts released to us for working capital). For illustrative purposes, based on funds in the trust account of approximately
$80 million on June 30, 2016, the estimated per share redemption price would have been approximately $10.00.
In order to exercise your redemption rights,
you must:
|
·
|
check the box
on the proxy card to elect redemption;
|
|
·
|
check the box
on the proxy card marked “Shareholder Certification”;
|
|
·
|
affirmatively
vote for or against the Business Combination Proposal;
|
|
·
|
submit a request
in writing prior to 5:00 p.m., Eastern time on
, 2016 (two business days before the special meeting) that we redeem your public shares
for cash to Continental Stock Transfer & Trust Company, our transfer agent, at the
following address:
|
Continental Stock
Transfer & Trust Company
17 Battery Place
New York, New York
10004
Attn:
E-mail: [____]@continentalstock.com
and
|
·
|
deliver your public
shares either physically or electronically through DTC to our transfer agent at least
two business days before the special meeting. Stockholders seeking to exercise their
redemption rights and opting to deliver physical certificates should allot sufficient
time to obtain physical certificates from the transfer agent and time to effect delivery.
It is our understanding that stockholders should generally allot at least two weeks to
obtain physical certificates from the transfer agent. However, we do not have any control
over this process and it may take longer than two weeks. Stockholders who hold their
shares in street name will have to coordinate with their broker, bank or other nominee
to have the shares certificated or delivered electronically. If you do not submit a written
request and deliver your public shares as described above, your shares will not be redeemed.
|
Any demand for redemption, once made, may
be withdrawn at any time until the deadline for exercising redemption requests (and submitting shares to the transfer agent) and
thereafter, with our consent, until the vote is taken with respect to the Business Combination. If you delivered your shares for
redemption to our transfer agent and decide within the required timeframe not to exercise your redemption rights, you may request
that our transfer agent return the shares (physically or electronically). You may make such request by contacting our transfer
agent at the phone number or address listed above.
Prior to exercising redemption rights,
stockholders should verify the market price of our common stock, as they may receive higher proceeds from the sale of their common
stock in the public market than from exercising their redemption rights if the market price per share is higher than the redemption
price. We cannot assure you that you will be able to sell your shares of our common stock in the open market, even if the market
price per share is higher than the redemption price stated above, as there may not be sufficient liquidity in our common stock
when you wish to sell your shares.
If you exercise your redemption rights,
your shares of our common stock will cease to be outstanding immediately prior to the Business Combination and will only represent
the right to receive a pro rata share of the aggregate amount on deposit in the trust account. You will no longer own those shares
and will have no right to participate in, or have any interest in, the future growth of the Company, if any. You will be entitled
to receive cash for these shares only if you properly and timely request redemption.
If the Business Combination is not approved
and we do not consummate an initial business combination by October 29, 2016 (subject to the requirements of law), we will be
required to dissolve and liquidate our trust account by returning the then remaining funds in such account to the public stockholders
and our warrants to purchase common stock, as well as our rights to receive shares of our common stocks upon consummation of an
initial business combination, will expire worthless.
Holders of outstanding units must separate
the underlying public shares and public warrants prior to exercising redemption rights with respect to the public shares.
If you hold units registered in your own
name, you must deliver the certificate for such units to Continental Stock Transfer & Trust Company with written instructions
to separate such units into public shares and public warrants. This must be completed far enough in advance to permit the mailing
of the public share certificates back to you so that you may then exercise your redemption rights with respect to the public shares
upon the separation of the public shares from the units.
If a broker, dealer, commercial bank, trust
company or other nominee holds your units, you must instruct such nominee to separate your units. Your nominee must send written
instructions by facsimile to Continental Stock Transfer & Trust Company. Such written instructions must include the number
of units to be split and the nominee holding such units. Your nominee must also initiate electronically, using DTC’s deposit
withdrawal at custodian (DWAC) system, a withdrawal of the relevant units and a deposit of an equal number of public shares and
public warrants. This must be completed far enough in advance to permit your nominee to exercise your redemption rights with respect
to the public shares upon the separation of the public shares from the units. While this is typically done electronically the
same business day, you should allow at least one full business day to accomplish the separation. If you fail to cause your public
shares to be separated in a timely manner, you will likely not be able to exercise your redemption rights.
Appraisal Rights
Appraisal rights are not available to holders
of shares of our common stock in connection with the Business Combination.
THE
BUSINESS COMBINATION PROPOSAL
We are asking our stockholders to approve
and adopt the Sale Agreement and the other transactions contemplated thereby, including the Business Combination. Our stockholders
should read carefully this proxy statement in its entirety for more detailed information concerning the Sale Agreement and the
Business Combination. Please see the subsections below for additional information and a summary of the material provisions of
the Sale Agreement, which should be read together with the complete text of the Sale Agreement, a copy of which is attached as
Annex A
to this proxy statement.
Because we are holding a stockholder vote
on the Business Combination, our existing charter provides that we may consummate the Business Combination only if it is approved
by the affirmative vote of the holders of a majority of the shares of our common stock that are voted at the special meeting,
assuming that a quorum is present.
The Sale Agreement
This subsection describes certain material
provisions of the Sale Agreement, but does not purport to describe all of the terms of the Sale Agreement. The following summary
should be read together with the complete text of the Sale Agreement, a copy of which is attached as
Annex A
hereto, which
is incorporated herein by reference. Stockholders and other interested parties are urged to read the Sale Agreement, carefully
and in its entirety (and, if appropriate, with the advice of financial and legal counsel), because it is the primary legal document
that governs the Business Combination.
Consideration
The Sale Agreement reflects a transaction
value for the Business Combination of £200 million (equivalent to approximately $264 million based on the USD/GBP exchange
rate of $1.32/£1.00 as of the July 13, 2016 date of the Sale Agreement), plus an earn-out of up to 2.5 million Hydra shares,
subject to certain customary anti-dilution adjustments (having a value of up to $25 million at an assumed value of $10.00 per
share). The transaction is expected to represent approximately £96 million of equity value after adjusting for the maintenance
of debt and certain other liabilities (equivalent to approximately $126 million based on the USD/GBP exchange rate of $1.32/£1.00
as of July 13, 2016). Exclusive of the potential earn-out, the consideration to be paid for the equity and shareholder loan notes
of the Target Parent and the Inspired Group will be the aggregate of the Base Consideration (as defined below), less a fixed amount
of Accruing Negative Consideration (£21,500 per day from but excluding July 2, 2016 through and including the closing of
the Business Combination).
The “Base Consideration” to
be paid for the equity and shareholder loan notes pursuant to the Sale Agreement will equal (i) £100,363,394.31, plus (ii)
any amount by which the Company’s transaction expenses (“Purchaser Costs”) referred to in Schedule 6 to the
Sale Agreement exceeds £8,237,909.41, minus (iii) certain expenses of the Selling Group noticed by its representatives,
not to exceed £3,000,000, minus (iv) certain excess interest payments owing on the Inspired Group’s existing financing
arrangements.
The Selling Group will be paid the Base
Consideration, adjusted for the Accruing Negative Consideration (the “Completion Payment”), partially in cash (the
“Cash Consideration”), to the extent available after the payment of certain transaction expenses, certain debt repayment
and cash balance maintenance, and partially in newly-issued shares of Company common stock (“Purchaser Shares”) at
a value of $10.00 per share (the “Stock Consideration”), as follows:
The Cash Consideration represents the cash
Hydra Industries will have available at closing to pay the Completion Payment. The Cash Consideration will equal (i) the Company’s
then current cash in trust (after any redemptions), the $20,004,347 proceeds of a private placement to Macquarie Capital pursuant
to the Contingent Forward Purchase Contract, the form of which was included as Exhibit 10.12 to its registration statement on
Form S-1 (the “Macquarie Forward Purchase”) and any other available funds, minus (ii) an agreed amount of Purchaser
Costs (including expenses incurred in connection with the preparation of the proxy statement and meetings with Hydra stockholders),
minus (iii) an agreed amount of the Selling Group’s transaction expenses, minus (iv) the amount of repayment required under
certain of the Inspired Group’s financing arrangements, minus (v) £5 million for the purposes of retaining cash on
the Company’s balance sheet.
Upon closing of the Business Combination,
the Cash Consideration will be deposited into an account designated by the Selling Group’s attorneys and the Company shall
not be responsible for the application of the funds to individual members of the Selling Group.
The Stock Consideration will be the number
of Purchaser Shares equal to the amount of the Completion Payment minus the Cash Consideration, divided by $10.00 per share, and
is currently estimated to be approximately 7.3 million shares of our common stock, assuming, for illustrative purposes only, no
redemption of shares by our existing public stockholders and closing of the Business Combination as of September 24, 2016. The
Stock Consideration will fluctuate if either of these assumptions should change. For example, should redemption of shares by our
existing public stockholders reach 5.7 million shares, or 71.1% of the common shares sold through our IPO, and assuming that the
Business Combination closed as of September 24, 2016, it is estimated that the Stock Consideration would be approximately 12.6
million shares of our common stock.
The earn-out payment of up to 2.5 million
Hydra shares, subject to certain customary anti-dilution adjustments (having a value of up to $25 million at an assumed value
of $10.00 per share) (the “Earn-out Consideration”) shall be paid to the Selling Group exclusively in Purchaser Shares
and will be determined based on the financial performance of Inspired's businesses in six specific countries, China, Colombia,
Greece, Norway, Spain and Ukraine, as measured by EBITDA for the twelve months ended September 30, 2018. If such EBITDA is equal
to or greater than £15,000,000, the Selling Group will receive an aggregate of 2,500,000 shares. If such EBITDA is less
than £15,000,000, the Selling Group will receive the number of shares equal to the product of (x) 2,500,000 and (y) a fraction,
the numerator of which is such EBITDA and the denominator of which is £15,000,000. For example, if the EBITDA achieved in
such countries for the period were £7,500,000, the Selling Group would receive 1,250,000 shares as the earn-out payment.
By contrast, if the EBITDA achieved in such countries for the period were £20,000,000, the Selling Group would receive 2,500,000
shares as the earn-out payment.
The Cash Consideration is anticipated to
be funded through a combination of (i) cash held in our trust account after redemptions (as described herein), (ii) the proceeds
of the Macquarie Forward Purchase and (iii) additional funds, if any, otherwise available at closing. If the Company’s available
cash at closing is insufficient to pay all liabilities and obligations of the Company and Target due and required to be paid at
closing or by reason of closing, the Selling Group may elect to not consummate the Business Combination. At June 30, 2016, the
balance in our trust account was approximately $80 million. For additional information regarding sources and uses for funding
the Total Consideration, see “The Business Combination Proposal — Sources and Uses for the Business Combination.”
For more information on the Company’s shares, see the section entitled “The Business Combination Proposal —
Total Shares of Hydra Common Stock to be Issued in the Business Combination.”
Representations and Warranties
The Sale Agreement contains representations,
warranties and covenants that the respective parties made to each other as of the date of the Sale Agreement or other specific
dates. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among
the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with
negotiating the Sale Agreement. The representations and warranties of certain managers of the Target are contained in the Warranty
Deed pertaining to the transaction, which has been filed with the SEC. The representations, warranties and covenants in the Sale
Agreement are also modified in important part by the disclosure schedules and annexes attached thereto which are not filed publicly
and which may be subject to contractual standards of materiality or material adverse effect applicable to the contracting parties
that differ from what may be viewed as material to investors. The representations and warranties in the Sale Agreement and Warranty
Deed and the items listed in the disclosure schedules were used for the purpose of allocating risk among the parties rather than
establishing matters as facts. We do not believe that the disclosure schedules contain information that is material to an investment
decision. Investors are not third-party beneficiaries under the Sale Agreement and should not rely on the representations, warranties
and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the parties thereto
or any of their respective subsidiaries or affiliates. If we become aware of any specific material facts that contradict the representations,
warranties or covenants in the Sale Agreement, we will provide for further disclosure as appropriate.
Undertakings and Conditions
Prior
to the closing of the Business Combination, Target Parent and the members of the Selling Group will engage in an internal restructuring
of the shareholder loan notes pursuant to Schedule 7 of the Sale Agreement enabling Hydra Industries to purchase all of the shareholder
loan notes free from encumbrances. Inspired has agreed to continue to operate in the ordinary course of its business. The consummation
of the Sale Agreement is subject, among other things, to the approval of the Hydra Industries stockholders, required gaming industry
regulatory approvals, Hydra Industries’ having at least $5,000,001 of net tangible assets remaining after redemptions and,
unless waived, the approval of the Charter Proposals and the Director Election Proposal. Subsequent to the receipt of its stockholders’
approval, Hydra Industries shall draw down on the Macquarie Forward Purchase in connection with the closing. Hydra Industries
shall not be obligated to complete the Business Combination if a breach (or breaches, in the aggregate) or event constituting
a Material Adverse Effect (as such term is defined in the Sale Agreement) occurs prior to the closing date.
Voting and Support
Letter Agreements
For information about the Voting and Support
Letter Agreements, see “Special Meeting in Lieu of 2016 Annual Meeting of Hydra Industries Stockholders — Vote of
Hydra Industries Founders and Chairman and CEO.”
Existing Target
Indebtedness
As of April 9, 2016, the Target had £96.5
million in total credit facilities consisting of a £17.5 million revolver provided by Lloyds Bank plc and a £79 million
term loan held by Ares Management Limited. £8 million was drawn on the revolver and the interest rate on the revolver
was LIBOR + 5.0%. The interest on the term loan consists of cash and PIK interest, with a cash rate of LIBOR plus 7.0% subject
to a LIBOR floor of 3.0% and a PIK interest component currently at 4.5%. The PIK interest component increases every three
months up to 7.0% at June 1, 2017 and thereafter. Both the revolver and term loan maturities were extended in connection
with the Business Combination, with the revolver maturing on June 30, 2019 and the term loan maturing on September 30, 2019.
Background of the
Business Combination
Hydra Industries is a blank check company
formed in Delaware on May 30, 2014, for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase,
reorganization, recapitalization or other similar business combination with one or more businesses. The proposed Business Combination
is the result of an extensive search for a potential transaction drawing upon the network, investing experience and operating
background of our management team and Board of Directors. The terms of the proposed Business Combination are the result of thorough
negotiations between the representatives of Hydra Industries (including Macquarie Capital (USA) Inc.), representatives of the
sellers and representatives of Inspired Gaming Group. The following is a brief description of these negotiations and the background
of the Business Combination:
From the date of our IPO through the execution
of the Share Sale Agreement on July 13, 2016, Hydra Industries considered a number of potential target companies with the objective
of consummating an appropriate acquisition. Representatives of Hydra Industries contacted, and were contacted by, a number of
individuals and entities who offered to present ideas for acquisition opportunities, including financial advisors and companies
within the diversified industrial, manufacturing, transportation, distribution, gaming and services sectors in the United States
and abroad. Hydra Industries compiled a pipeline of high priority potential targets and updated and supplemented such pipeline
from time to time. This pipeline and related developments were discussed periodically with the Board of Directors of Hydra Industries.
During this period, Hydra Industries and
its representatives:
|
·
|
Identified
and preliminarily evaluated more than 140 potential acquisition targets;
|
|
·
|
Conducted initial
business and financial due diligence or had meaningful discussions with representatives
of 12 potential acquisition targets (other than Inspired);
|
|
·
|
Provided an
initial non-binding indication of interest to five potential acquisition targets (other
than Inspired); and
|
|
·
|
Submitted a
letter of intent and commenced further due diligence with respect to two potential acquisition
targets (other than Inspired).
|
Hydra Industries reviewed these opportunities and potential
acquisition targets based on the same general criteria discussed below and used in evaluating the Business Combination. These
criteria included established middle-market businesses with proven track records, experienced management teams and strong competitive
positions with, or with the potential for, revenue and earnings growth and attractive free cash flow generation. Hydra Industries
focused on sectors exhibiting secular growth or the potential for near-term secular uptick, and within those sectors, focused
only on businesses that the management of Hydra Industries believed were likely to benefit from being part of a publicly traded
company.
Prior to the completion of our IPO in
October 2014, representatives of Hydra Industries had engaged in extensive discussions with a number of different financial advisors
with experience in, among other things, diversified industrial, manufacturing, transportation, distribution, gaming and services
sectors which might assist Hydra Industries with respect to potential acquisition opportunities. After several meetings with Macquarie
Capital (USA) Inc. (“Macquarie”), Hydra Industries decided to engage Macquarie as a financial advisor for that purpose.
On October 24, 2014, Hydra Industries entered into an engagement letter with Macquarie. On that date, MIHI LLC, an affiliate of
Macquarie, agreed to a Contingent Forward Purchase Commitment with Hydra Industries pursuant to which it would, upon the satisfaction
of certain conditions, purchase 2,000,000 Units and 500,000 shares of common stock of Hydra Industries for an aggregate purchase
price of $20,004,347. On October 24, 2014, Hydra Industries also entered into an underwriting agreement with UBS Securities LLC
pursuant to which it would be sole bookrunning manager of the IPO and pursuant to which EarlyBird Capital, Inc. was engaged as
a co-manager of the offering. Both of the underwriters have significant established relationships with fundamental investors (both
institutional investors and high net worth individuals) and Hydra Industries sought to use them as additional potential sources
of acquisition opportunities.
The potential opportunity to acquire a
portion of the business of a company perceived to meet many of the board’s criteria (“Company A”) was presented
to us in a meeting in January 2015 between A. Lorne Weil, our Chairman and CEO, another of our directors and a major shareholder
of Company A. That initial meeting was followed by detailed discussions and due diligence with representatives of Company A following
execution of a non-disclosure agreement with Company A on February 3, 2015. On June 13, 2015, Hydra Industries submitted a non-binding
indication of interest to Company A, which was accepted by Company A. At that point, due diligence continued and contract preparations
and negotiations began with representatives of Company A. On October 25, 2015, Company A advised Hydra Industries that it was
terminating discussions and selling the business in question to another entity.
In February 2015, a representative of Hydra
Industries met with the CEO of Company B at an industry trade show. Company B was interested in exploring the possibility of a
business combination with Hydra Industries, and on February 6, 2015, sent a non-confidential presentation to Hydra Industries
describing Company B. The delivery of the presentation generated a number of telephonic discussions among the CEO of Company B,
Mr. Weil and other representatives of Hydra Industries.
In March 2015, a representative of the
owner of Company B began discussions with Hydra Industries and representatives of Macquarie. On April 17, 2015, Company B and
Hydra Industries entered into a non-disclosure agreement. Further discussions were held among representatives of Hydra Industries,
Macquarie and the owner of Company B between April and June of 2015.
In September and October 2015, the owner
of Company B sent revised presentations regarding Company B to Hydra Industries.
In November 2015, the owner and the CEO
of Company B met with representatives of Hydra Industries to provide a management presentation about Company B and to further
discuss the possibility of a business combination.
In December 2015, the owner of Company
B met and had further discussions with Macquarie and other representatives of Hydra Industries.
Hydra Industries sent a non-binding offer
letter to the owner of Company B on January 22, 2016, proposing an acquisition of Company B by Hydra Industries. The offer letter
was not accepted by the owner of Company B and discussions to combine Hydra Industries with Company B were terminated. The Company
understands that Company B had concerns about the process of pursuing a potential transaction with a special purpose acquisition
company, and determined to remain independent for the time.
In October 2015, at a meeting in the New
York offices of Hydra Industries with Luke Alvarez, a representative of Morgan Stanley and representatives of Hydra Industries,
Hydra Industries was advised that a formal sale process for Inspired and another company (“Company C”) was about to
commence, pursuant to which interested parties might submit bids for Inspired and Company C.
On November 10, 2015, Hydra Industries
executed non-disclosure agreements with each of Inspired and Company C in order to obtain information regarding Inspired and Company
C.
On December 2, 2015, representatives of
Hydra Industries including Lorne Weil and Macquarie attended a management presentation regarding Inspired and Company C, by their
respective management teams, including Mr. Alvarez.
On December 17, 2015, Hydra Industries
submitted a non-binding indication of interest to purchase both Inspired and Company C.
In December 2015, Hydra Industries was
approached by representatives of another company (“Company D”) seeking a possible business combination. On February
1, 2016, a non-binding indication of interest was submitted by Hydra Industries to Company D, which was subsequently accepted
by Company D. Due diligence and the drafting of relevant documentation was commenced. On May 21, 2016, after further evaluation
and consideration, having not reached agreement with respect to price or governance matters, considering potential timing and
uncertainty of completion, and in light of the prospects for a potential transaction with Inspired, Hydra Industries advised Company
D that it was terminating discussions with respect to a possible business combination.
In late December 2015 or early January
2016, a representative of Morgan Stanley called Hydra Industries and advised it that Company C had been sold to a higher bidder,
and that a new auction process would begin for Inspired. At that time, Mr. Weil discussed Hydra Industries’ interest in
making an offer for Inspired. The representative of Morgan Stanley invited Hydra Industries to submit a written offer regarding
Inspired.
On February 23, 2016, Hydra Industries
submitted a revised, written, non-binding offer for Inspired.
Thereafter, on March 8, 2016, Mr. Weil
and representatives of Macquarie met with Vitruvian Partners LLP (“Vitruvian”), the principal equity and shareholder
loan note holder of Inspired, in London to discuss the offer by Hydra Industries, which if pursued would result in a meaningful
ownership of the surviving company by Vitruvian post-closing. Vitruvian indicated its interest in continuing discussions on that
basis.
Also in March 2016, Inspired, with input
from Hydra Industries, Macquarie and Vitruvian, began discussing and negotiating with Inspired’s existing lenders a proposed
two year extension of Inspired’s debt maturities.
During the following weeks, the parties
and their respective representatives and advisers were in regular communication regarding the potential transaction, including
the operative transaction agreements and other matters.
On June 3, 2016, the Board of Directors
of Hydra Industries met to discuss developments and a presentation was made by Macquarie outlining, on a preliminary basis, the
principal proposed terms for a potential acquisition of Inspired. After discussion, the Board approved the continuation of negotiations
with Inspired. At that time, the Board also approved Hydra Industries’ entry into a two-week exclusivity period with Inspired.
On June 17, 2016, Hydra Industries and
the sellers of Inspired agreed to extend the period of that mutual exclusivity agreement by an additional week.
During the period between the delivery
of Hydra Industries’ non-binding letter of intent and the completion of the contract negotiations for the purchase of Inspired,
numerous telephone calls and e-mails were exchanged between the parties and their representatives and advisers.
On June 23, 2016, Hydra Industries’
Board of Directors met to further review the proposed purchase of Inspired. Macquarie answered questions about the proposed terms
of the transaction and the Board again authorized negotiations to continue.
On July 7, 2016, the Board of Directors
of Hydra Industries met to discuss the proposed purchase of Inspired. Macquarie made a presentation regarding the principal terms
of the transaction and also reviewed the main valuation considerations regarding the contemplated purchase price and related matters.
The Board also discussed the possible impact of the recent “Brexit” vote in the United Kingdom and the progress in
obtaining the Warranties and Indemnity insurance sought by the Sellers. The parties anticipated that the insurance policy would
be issued soon.
On July 12, 2016, Hydra Industries’
Board of Directors met again. After further discussion and, among other things, an update from Kramer Levin regarding the transaction
documentation and negotiation, the Board formally approved the purchase of Inspired, subject to the issuance of the Warranties
and Indemnity insurance policy in acceptable form.
On July 13, 2016, the Warranties and Indemnity
insurance policy was issued and the Share Sale Agreement and certain related documents were executed and delivered by the parties.
Also on July 13, 2016, Inspired’s existing lenders finalized a two-year extension of Inspired’s debt maturities.
On July 14, 2016, prior to the commencement
of trading in the U.S. capital markets, a press release was issued announcing the execution of the Share Sale Agreement. On July
14, 2016, a Form 8-K was filed with the Securities Exchange Commission referencing the transaction and filing the press release.
On July 19, 2016, Messrs. Weil, Alvarez
and Daniel Silvers held an investor conference call to discuss the transaction. Mr. Silvers is the Managing Member of Matthews
Lane Capital Partners LLC, a consultant to Hydra Industries.
On July 19, 2016, a Form 8-K was filed
describing the transaction in further detail and filing a copy of the Share Sale Agreement.
On July 20, 2016, a Form 8-K/A was filed
to include a final executed copy of the Share Sale Agreement.
The parties and their respective representatives
have continued and expect to continue regular discussions regarding the execution of the Business Combination.
Hydra Industries’
Board of Directors’ Reasons for the Approval of the Business Combination
In
considering the Business Combination, the Board determined that Inspired met its criteria for evaluating prospective targets.
The Board believes that Inspired is an established middle-market business with a proven track record, experienced management team
and strong competitive position with the potential for revenue and earnings growth and attractive free cash flow generation. Our
Board also believes that Inspired could benefit from becoming part of a publicly-traded company. The Board anticipates that the
operating and financial capabilities of our own executive team can complement the capabilities of Inspired’s management,
and that our operating expertise can serve as a catalyst to further develop Inspired’s business. The Board also considered
possible negative aspects of the Business Combination, including, but not limited to, the implications of operating in a variety
of countries and a variety of currencies and the potential effect of the U.K’s advisory referendum vote to exit from the
European Union, and determined to approve the transaction and recommend it to our shareholders.
Satisfaction of
80% Test
It is a requirement under Hydra Industries’
existing charter that any business acquired by Hydra Industries have a fair market value equal to at least 80% of the balance
of the funds in the trust account at the time of the execution of a definitive agreement for an initial business combination.
The Hydra Industries board of directors, in consultation with its financial advisors, determined that the fair market value of
Target was equal to at least 80% of the amount of funds held by Hydra Industries in trust for the benefit of its public stockholders
(excluding any deferred underwriters fees and taxes payable on the income earned on the trust account). The Board’s determination
was based on, among other things, an analysis of public companies deemed comparable to the Target which indicated a range of enterprise
values in excess of $311 million.
Certain Benefits
of Hydra Industries’ Directors and Officers and Others in the Business Combination
When you consider the recommendation of
our board of directors in favor of approval of the Business Combination, you should keep in mind that our board of directors,
officers and nominees to the board of directors have interests in the Business Combination that are different from, or in addition
to, your interests as a stockholder. These interests include, among other things:
|
·
|
the fact that
our Sponsors and our independent directors paid an aggregate of approximately $3,775,000
for their founder shares and placement warrants and such securities should have a significantly
higher value at the time of the Business Combination;
|
|
·
|
the fact that
certain directors and officers may enter into employment agreements with the Company
after the consummation of the Business Combination;
|
|
·
|
the Macquarie
Forward Purchase;
|
|
·
|
the fact that
A. Lorne Weil, our Chairman and Chief Executive Officer and the managing member of our
Hydra Sponsor, has agreed that he will be liable to us, and our Macquarie Sponsor has
agreed to indemnify Mr. Weil for 50% of any such liability, if and to the extent any
claims by a vendor for services rendered or products sold to us, or the Target, reduce
the amount of funds in the Trust Account to below $10.00 per public share or such lesser
amount per public share held in the Trust Account as of the date of the liquidation of
the trust account, due to reductions in value of the trust assets other than due to the
failure to obtain such waiver, in each case net of the amount of interest which may be
withdrawn to pay taxes, except as to any claims by a third party who executed a waiver
of any and all rights to seek access to the Trust Account and except as to any claims
under our indemnity of the underwriters of our IPO against certain liabilities, including
liabilities under the Securities Act;
|
|
·
|
the
fact that our directors and officers will lose their entire investment in the Company
if the Business Combination is not completed;
|
|
·
|
the continuation
of one of our five existing directors as a director of the Company; and
|
|
·
|
the continued
indemnification of current directors and officers of the Company and the continuation
of directors’ and officers’ liability insurance after the Business Combination.
|
These interests may influence our directors
in making their recommendation that you vote in favor of the approval of the Business Combination. These interests were considered
by our Board when our Board approved the Business Combination.
Potential Purchases
of Public Shares
In connection with the stockholder vote
to approve the proposed Business Combination, our directors, officers, or advisors or their respective affiliates may privately
negotiate transactions to purchase shares from stockholders who would have otherwise elected to have their shares redeemed in
conjunction with a proxy solicitation pursuant to the proxy rules for a per-share pro rata portion of the trust account. None
of our directors, officers or advisors or their respective affiliates will make any such purchases when they are in possession
of any material non-public information not disclosed to the seller or during a restricted period under Regulation M under the
Exchange Act. Such a purchase would include a contractual acknowledgement that such stockholder, although still the record holder
of our shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights, and would
include a contractual provision that directs such stockholder to vote such shares in a manner directed by the purchaser. In the
event that our directors, officers or advisors or their affiliates purchase shares in privately negotiated transactions from public
stockholders who have already elected to exercise their redemption rights, such selling stockholders would be required to revoke
their prior elections to redeem their shares. Any such privately negotiated purchases may be effected at purchase prices that
are in excess of the per share pro rata portion of the trust account.
In addition, at any time prior to the special
meeting, during a period when they are not then aware of any material nonpublic information regarding the Company or its securities,
the initial stockholders or their respective affiliates may purchase shares of Hydra Industries common stock from institutional
and other investors who vote, or indicate an intention to vote, against the Business Combination Proposal, or execute agreements
to purchase such shares from them in the future, or they may enter into transactions with such persons and others to provide them
with incentives to acquire shares of Hydra Industries common stock or vote their shares in favor of the Business Combination Proposal.
The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements
that the holders of a majority of the shares present and entitled to vote at the special meeting to approve the Business Combination
Proposal vote in its favor, that the cash requirements of the transaction are met and that the Company will have at least $5,000,001
in net tangible assets upon closing of the Business Combination after taking into account holders of public shares that properly
demanded redemption of their public shares for cash, when it appears that such requirements would otherwise not be met.
The purpose of such purchases would be
to increase the likelihood of obtaining stockholder approval of the Business Combination or, where the purchases are made by our
directors, officers or advisors or their respective affiliates, to reduce the dollar amount of redemptions and thereby enhance
Hydra Industries’ ability to satisfy a closing condition under the Sale Agreement.
Total Shares of
Hydra Industries Common Stock to be Issued in the Business Combination
It is anticipated that, following completion
of the Business Combination and if there are no redemptions, Hydra Industries’ public stockholders will retain an ownership
interest of approximately 42% in Hydra Industries and our initial stockholders and affiliates will retain an ownership interest
of approximately 23% in Hydra Industries, assuming none of Hydra Industries’ stockholders exercise their redemption rights.
If Hydra Industries’ stockholders exercise their redemption rights, the ownership interest in Hydra Industries of Hydra
Industries’ public stockholders will decrease and the ownership interest in Hydra Industries of the Selling Group will increase.
To the extent that there are redemptions of Hydra Industries common stock with respect to 4 million shares, which we believe would
leave approximately $40 million in our trust account, Hydra Industries’ public stockholders will retain an ownership interest
of approximately 21.6% and our initial stockholders and affiliates will retain an ownership interest of approximately 23%.
The illustrative ownership percentages
with respect to Hydra Industries following the Business Combination do not take into account (i) the issuance of any shares upon
completion of the Business Combination under the Company’s proposed 2016 Long-Term Incentive Plan or (ii) any of the 17,500,000
warrants to purchase up to a total of 8,750,000 shares of Hydra Industries common stock that will remain outstanding following
the Business Combination. If the actual facts are different than these assumptions (which they are likely to be), the percentage
ownership retained by Hydra Industries’ existing stockholders in Hydra Industries will be different. See “Summary
of the Proxy Statement — Impact of the Business Combination on Hydra Industries’ Public Float” for further information.
Sources and Uses
of Funding for the Business Combination
The following table summarizes our estimated
sources and uses for funding the Business Combination assuming no redemptions and $80 million of cash in our trust account:
(dollars
(1)
in millions)
|
|
|
|
|
|
|
|
|
Sources
(2)
|
|
|
|
|
|
Uses
(2)
|
|
|
|
|
Cash from Hydra Industries
|
|
$
|
80.0
|
|
|
Cash Consideration
(3)
|
|
$
|
64.2
|
|
Macquarie Forward Purchase
|
|
|
20.0
|
|
|
Transaction Expenses
|
|
|
14.8
|
|
Target Debt under Extension
|
|
|
108.4
|
|
|
Accrued PIK Interest Payment
|
|
|
11.5
|
|
Seller Rollover Shares
|
|
|
73.3
|
|
|
Accrued Cash Interest
|
|
|
2.8
|
|
|
|
|
|
|
|
Target Debt under Extension
|
|
|
108.4
|
|
|
|
|
|
|
|
Seller Rollover Shares
|
|
|
73.3
|
|
|
|
|
|
|
|
Cash to Balance Sheet
|
|
|
6.6
|
|
Total Sources
(4)
|
|
$
|
281.7
|
|
|
Total Uses
(4)
|
|
$
|
281.7
|
|
|
(1)
|
Assumes $1.32/£1.00 exchange rate as of
July 13, 2016
|
|
(2)
|
Expected balances at closing
|
|
(3)
|
Gross of transaction bonuses and seller transaction
costs
|
|
(4)
|
Totals may differ due to rounding
|
The following table summarizes our estimated
sources and uses for funding the Business Combination assuming redemption of 71.1% of the outstanding shares (the maximum redemption
amount before no cash consideration would be paid to the Selling Group if the Business Combination were consummated as of June
30, 2016):
(dollars
(1)
in millions)
|
|
|
|
|
|
|
|
|
Sources
(2)
|
|
|
|
|
|
Uses
(2)
|
|
|
|
|
Cash from Hydra Industries
|
|
$
|
23.1
|
|
|
Cash Consideration
(3)
|
|
$
|
11.3
|
|
Macquarie Forward Purchase
|
|
|
20.0
|
|
|
Transaction Expenses
|
|
|
14.8
|
|
Target Debt under Extension
|
|
|
108.4
|
|
|
Accrued PIK Interest Payment
|
|
|
11.5
|
|
Existing Revolver Drawn at Close
|
|
|
4.0
|
|
|
Accrued Cash Interest
|
|
|
2.8
|
|
Seller Rollover Shares
|
|
|
126.2
|
|
|
Target Debt under Extension
|
|
|
108.4
|
|
|
|
|
|
|
|
Seller Rollover Shares
|
|
|
126.2
|
|
|
|
|
|
|
|
Cash to Balance Sheet
|
|
|
6.6
|
|
Total Sources
(4)
|
|
$
|
281.7
|
|
|
Total Uses
(4)
|
|
$
|
281.7
|
|
|
(1)
|
Assumes $1.32/£1.00 exchange rate as of
July 13, 2016
|
|
(2)
|
Expected balances at closing
|
|
(3)
|
Gross of transaction bonuses and seller transaction
costs
|
|
(4)
|
Totals
may
differ due to rounding
|
Board of Directors
of Hydra Industries Following the Business Combination
Upon the closing of the Business Combination,
and the effectiveness of Proposal 3 of the Charter Proposals, we anticipate increasing the size of our board of directors from
five to seven directors. Four incumbent directors of Hydra Industries, Messrs. Dannhauser, Miller, Shea and Stevens, have submitted
prospective resignations from our board of directors effective immediately upon closing of the Business Combination. Concurrently,
we are nominating Luke Alvarez, [___], [___], [___], [___] and [___] to our Board. If all director nominees are elected and the
Business Combination is consummated, our board of directors will consist of one existing Hydra Industries director, A. Lorne Weil,
and six newly elected directors, including Luke Alvarez, who shall also continue as the CEO of Inspired Entertainment and become
CEO of Hydra Industries, as well as [___],[___],[___],[___] and [___]. See the sections entitled “Director Election Proposal”
and “Management After the Business Combination.”
Certificate of Incorporation
Upon the closing of the Business Combination,
and the effectiveness of the Charter Proposals, our existing charter will be amended promptly to:
|
·
|
increase the Company’s
authorized common stock;
|
|
·
|
provide for the
declassification of our board of directors and make certain related changes;
|
|
·
|
provide for additional
changes, including changing the Company’s name from “Hydra Industries Acquisition
Corp.” to “Inspired Entertainment, Inc.” and making the Company’s
corporate existence perpetual, which our board of directors believes are necessary or
appropriate to address the circumstances and needs of the Company following the Business
Combination; and
|
|
·
|
provide the Company
with the ability to restrict securities ownership by persons who fail to comply with
informational or other regulatory requirements under applicable gaming laws, who are
found unsuitable to hold the Company’s securities by gaming authorities or who
could by holding its securities cause the Company or any affiliate to fail to obtain,
maintain, renew or qualify for a license, contract, franchise or other regulatory approval
from a gaming authority.
|
Name; Headquarters
The name of the Company after the Business
Combination will be Inspired Entertainment, Inc. and our headquarters will be located at 250 W. 57
th
Street, New York,
NY 10107.
Redemption Rights
Pursuant to our existing charter, holders
of public shares may elect to have their shares redeemed for cash at the applicable redemption price per share calculated in accordance
with our existing charter. As of June 30, 2016, this would have amounted to approximately $10.00 per share. If a holder exercises
its redemption rights, then such holder will be exchanging its shares of our common stock for cash and will no longer own shares
of Hydra Industries. Such a holder will be entitled to receive cash for its public shares only if it (i) affirmatively votes for
or against the Business Combination Proposal and (ii) properly requests redemption and delivers its shares (either physically
or electronically) to our transfer agent at least two business days prior to the special meeting in accordance with the procedures
described herein. The requirement that a holder affirmatively vote for or against the Business Combination in order to redeem
its shares does not have any state law precedent. Each redemption of public shares by our public stockholders will decrease the
amount in our trust account, which holds approximately $80 million as of June 30, 2016. See the section entitled “Special
Meeting in Lieu of 2016 Annual Meeting of Hydra Industries Stockholders — Redemption Rights” for the procedures to
be followed if you wish to redeem your shares for cash.
Holders of outstanding units must separate
the underlying public shares and public warrants prior to exercising redemption rights with respect to the public shares.
If you hold units registered in your own
name, you must deliver the certificate for such units to Continental Stock Transfer & Trust Company with written instructions
to separate such units into public shares and public warrants. This must be completed far enough in advance to permit the mailing
of the public share certificates back to you so that you may then exercise your redemption rights with respect to the public shares
upon the separation of the public shares from the units.
If a broker, dealer, commercial bank, trust
company or other nominee holds your units, you must instruct such nominee to separate your units. Your nominee must send written
instructions by facsimile to Continental Stock Transfer & Trust Company. Such written instructions must include the number
of units to be split and the nominee holding such units. Your nominee must also initiate electronically, using DTC’s deposit
withdrawal at custodian (DWAC) system, a withdrawal of the relevant units and a deposit of an equal number of public shares and
public warrants. This must be completed far enough in advance to permit your nominee to exercise your redemption rights with respect
to the public shares upon the separation of the public shares from the units. While this is typically done electronically the
same business day, you should allow at least one full business day to accomplish the separation. If you fail to cause your public
shares to be separated in a timely manner, you will likely not be able to exercise your redemption rights.
Appraisal Rights
There are no appraisal rights available
to our stockholders in connection with the Business Combination.
Anticipated Accounting Treatment
The
Business Combination will be accounted for as a “reverse merger” in accordance with U.S. generally accepted accounting
principles.
Under this method of accounting Hydra will be treated as the “acquired” company for financial reporting
purposes. This determination was primarily based on Target comprising the ongoing operations of the combined entity, designees
of the Selling Group, together with the present CEO of Target, comprising a majority of the governing body of the combined company,
and Target’s senior management comprising a majority of the senior management of the combined company. Accordingly, for
accounting purposes, the Business Combination will be treated as the equivalent of Target issuing stock for the net assets of
Hydra, accompanied by a recapitalization.
The net assets of Hydra
will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination
will be those of Target.
Material U.S. Federal
Income Tax Considerations for Stockholders Exercising Redemption Rights
The following is a discussion of the material
U.S. federal income tax considerations for holders of Hydra Industries common stock that elect to have their Hydra Industries
common stock redeemed for cash if the Business Combination is completed. This summary is based upon the Internal Revenue Code
of 1986, as amended (the “Code”), the regulations promulgated by the U.S. Treasury Department, current administrative
interpretations and practices of the Internal Revenue Services (the “IRS”) and judicial decisions, all as currently
in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance
can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax considerations
described below. No advance ruling has been or will be sought from the IRS regarding any matter discussed in this summary. This
summary does not discuss the impact that U.S. state and local taxes and taxes imposed by non-U.S. jurisdictions could have on
the matters discussed in this summary. This summary does not purport to discuss all aspects of U.S. federal income taxation that
may be important to a particular stockholder in light of its investment or tax circumstances or to stockholders subject to special
tax rules, such as:
|
·
|
certain U.S. expatriates;
|
|
·
|
traders in securities
that elect mark-to-market treatment;
|
|
·
|
U.S. stockholders
(as defined below) whose functional currency is not the U.S. dollar;
|
|
·
|
financial institutions;
|
|
·
|
qualified plans,
such as 401(k) plans, individual retirement accounts, etc.;
|
|
·
|
regulated investment
companies (or RICs);
|
|
·
|
real estate investment
trusts (or REITs);
|
|
·
|
persons holding
Hydra Industries common stock as part of a “straddle,” “hedge,”
“conversion transaction,” “synthetic security” or other integrated
investment;
|
|
·
|
persons subject
to the alternative minimum tax provisions of the Code;
|
|
·
|
tax-exempt organizations;
|
|
·
|
persons that actually
or constructively own 5 percent or more of Hydra Industries common stock; and
|
|
·
|
non-U.S. stockholders
(as defined below, and except as otherwise discussed below).
|
If any partnership (including for this
purpose any entity treated as a partnership for U.S. federal income tax purposes) holds Hydra Industries common stock, the tax
treatment of a partner generally will depend on the status of the partner and the activities of the partner and the partnership.
If you are a partner of a partnership holding Hydra Industries common stock, you should consult your tax advisor. This summary
assumes that stockholders hold Hydra Industries common stock as capital assets within the meaning of Section 1221 of the Code,
which generally means as property held for investment and not as a dealer or for sale to customers in the ordinary course of the
stockholder’s trade or business.
WE URGE HOLDERS OF HYDRA INDUSTRIES COMMON
STOCK CONTEMPLATING EXERCISE OF THEIR REDEMPTION RIGHTS TO CONSULT THEIR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL,
AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES THEREOF.
U.S. Federal Income Tax Considerations
to U.S. Hydra Industries Stockholders
This section is addressed to U.S. holders
of Hydra Industries common stock that elect to have their Hydra Industries common stock redeemed for cash as described in the
section entitled “Special Meeting in Lieu of 2016 Annual Meeting of Hydra Industries Stockholders — Redemption Rights.”
For purposes of this discussion, a “Redeeming U.S. Holder” is a beneficial owner that so redeems its Hydra Industries
common stock and is:
|
·
|
a citizen or resident
of the United States;
|
|
·
|
a corporation
(including an entity treated as a corporation for U.S. federal income tax purposes) created
or organized in or under the laws of the United States or any political subdivision thereof;
|
|
·
|
an estate the
income of which is subject to U.S. federal income taxation regardless of its source;
or
|
|
·
|
any trust if (1)
a U.S. court is able to exercise primary supervision over the administration of such
trust and one or more U.S. persons have the authority to control all substantial decisions
of the trust or (2) it has a valid election in place to be treated as a U.S. person.
|
A Redeeming U.S. Holder will generally recognize capital gain
or loss equal to the difference between the amount realized on the redemption and such stockholder’s adjusted basis in the
Hydra Industries common stock exchanged therefor if the Redeeming U.S. Holder’s ownership of stock in Hydra Industries is
completely terminated or if the redemption meets certain other tests described below. Special constructive ownership rules apply
in determining whether a Redeeming U.S. Holder’s ownership of stock in Hydra Industries is treated as completely terminated.
Pursuant to these constructive ownership rules, a Redeeming U.S. Holder will be deemed to own stock that is actually or constructively
owned by certain members of his or her family (spouse, children, grandchildren and parents) and other related parties including,
for example, certain entities in which such Redeeming U.S. Holder has a direct or indirect interest (including partnerships, estates,
trusts and corporations), as well as shares of stock that such Redeeming U.S. Holder (or a related person) has the right to acquire
upon exercise of an option or conversion right. In addition, if a shareholder lives in a community property state, the community
property laws of that state may have an effect on the constructive ownership rules. Certain exceptions to the family attribution
rules for the purpose of determining a complete termination. If a Redeeming U.S. Holder intends to rely upon these exceptions,
the Redeeming U.S. Holder must file a “waiver of family attribution” statement with the shareholder’s tax return
and must comply with certain other requirements set forth in the Code and the income tax regulations promulgated thereunder. If
gain or loss treatment applies, such gain or loss will be long-term capital gain or loss if the holding period of such stock is
more than one year at the time of the exchange. Stockholders who hold different blocks of Hydra Industries common stock (generally,
shares of Hydra Industries common stock purchased or acquired on different dates or at different prices) should consult their
tax advisors to determine how the above rules apply to them.
Cash received upon redemption that does
not completely terminate the Redeemed U.S. Holder’s interest will still give rise to capital gain or loss, if the redemption
is either (i) “substantially disproportionate” or (ii) “not essentially equivalent to a dividend.” In
determining whether the redemption is substantially disproportionate or not essentially equivalent to a dividend with respect
to a Redeeming U.S. Holder, that Redeeming U.S. Holder is deemed to own not just stock he, she or it actually owned but also,
in some cases, stock owned by certain family members, certain estates and trusts of which the Redeeming U.S. Holder is a beneficiary,
and certain other affiliated entities.
Generally, the redemption will be “substantially
disproportionate” with respect to the Redeeming U.S. Holder if (i) the Redeeming U.S. Holder’s percentage ownership
of the outstanding voting stock (including all classes which carry voting rights) of Hydra Industries is reduced immediately after
the redemption to less than 80% of the Redeeming U.S. Holder’s percentage interest in such stock immediately before the
redemption; (ii) the Redeeming U.S. Holder’s percentage ownership of the outstanding common stock (both voting and
nonvoting) immediately after the redemption is reduced to less than 80% of such percentage ownership immediately before the redemption;
and (iii) the Redeeming U.S. Holder owns, immediately after the redemption, less than 50% of the total combined voting power of
all classes of stock of Hydra Industries entitled to vote. Whether the redemption will be considered “not essentially equivalent
to a dividend” with respect to a Redeeming U.S. Holder will depend upon the particular circumstances of that U.S. holder.
At a minimum, however, the redemption must result in a meaningful reduction in the Redeeming U.S. Holder’s actual or constructive
percentage ownership of Hydra Industries. The IRS has ruled that any reduction in a stockholder’s proportionate interest
generally is a “meaningful reduction” if the stockholder’s relative interest in the corporation is minimal and
the stockholder does not have meaningful control over the corporation.
If none of the redemption tests described
above give rise to capital gain or loss, the consideration paid to the Redeeming U.S. Holder will be treated as dividend income
for U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits. However, for the purposes
of the dividends-received deduction and of “qualified dividend” treatment, due to the redemption right, a Redeeming
U.S. Holder may be unable to include the time period prior to the redemption in the stockholder’s “holding period”
as part of the Redeeming U.S. Holder’s determination as to whether such gain or loss would be treated as short term or long
term for U.S. federal income tax purposes. Any distribution in excess of our earnings and profits will reduce the Redeeming U.S.
Holder’s basis in the Hydra Industries common stock (but not below zero), and any remaining excess will be treated as gain
realized on the sale or other disposition of the Hydra Industries common stock.
These rules are complex and U.S. holders
of Hydra Industries common stock considering exercising their redemption rights should consult their own tax advisors as to whether
the redemption will be treated as a sale or as a distribution under the Code.
Certain Redeeming U.S. Holders who are
individuals, estates or trusts pay a 3.8% tax on all or a portion of their “net investment income” or “undistributed
net investment income” (as applicable), which may include all or a portion of their capital gain or dividend income from
their redemption of Hydra Industries common stock. Redeeming U.S. Holders should consult their tax advisors regarding the effect,
if any, of the net investment income tax.
U.S. Federal Income Tax Considerations
to Non-U.S. Hydra Industries Stockholders
This section is addressed to non-U.S. holders
of Hydra Industries common stock that elect to have their Hydra Industries common stock redeemed for cash as described in the
section entitled “Special Meeting in Lieu of 2016 Annual Meeting of Hydra Industries Stockholders — Redemption Rights.”
For purposes of this discussion, a “Redeeming Non-U.S. Holder” is a beneficial owner (other than a partnership) that
so redeems its Hydra Industries common stock and is not a Redeeming U.S. Holder.
Except as discussed in the following paragraph,
a Redeeming Non-U.S. Holder who elects to have its Hydra Industries common stock redeemed will generally be treated in the same
manner as a U.S. Holder for U.S. federal income tax purposes. See the discussion above under “U.S. Federal Income Tax Considerations
to U.S. Hydra Industries Stockholders.”
Any Redeeming Non-U.S. Holder will generally
not be subject to U.S. federal income tax on any capital gain recognized as a result of the exchange unless:
|
·
|
such stockholder
is an individual who is present in the United States for 183 days or more during the
taxable year in which the redemption takes place and certain other conditions are met,
in which case the Redeeming Non-U.S. Holder will be subject to a 30% tax on the individual’s
net capital gain for the year; or
|
|
·
|
such stockholder
is engaged in a trade or business within the United States and any gain recognized in
the exchange is treated as effectively connected with such trade or business (and, if
an income tax treaty applies, the gain is attributable to a permanent establishment maintained
by such holder in the United States), in which case the Redeeming Non-U.S. Holder will
generally be subject to the same treatment as a Redeeming U.S. Holder with respect to
the exchange, and a corporate Redeeming Non-U.S. Holder may be subject to the branch
profits tax at a 30% rate (or lower rate as may be specified by an applicable income
tax treaty).
|
With respect to any redemption treated
as a distribution rather than a sale, any amount treated as dividend income to a Redeeming Non-U.S. Holder will generally be subject
to U.S. withholding tax at a rate of 30%, unless the Redeeming Non-U.S. Holder is entitled to a reduced rate of withholding under
an applicable income tax treaty. Dividends received by a Redeeming Non-U.S. Holder that are effectively connected with such holder’s
conduct of a U.S. trade or business (and, if an income tax treaty applies, such dividends are attributable to a permanent establishment
maintained by the Redeeming Non-U.S. Holder in the United States), are includible in the Redeeming Non-U.S. Holder’s gross
income in the taxable year received. Although generally not subject to withholding tax, such dividends are taxed at the same graduated
rates applicable to Redeeming U.S. Holders, net of certain deductions and credits, subject to an applicable income tax treaty
providing otherwise. In addition, dividends received by a corporate Redeeming Non-U.S. Holder that are effectively connected with
the holder’s conduct of a U.S. trade or business may also be subject to a branch profits tax at a rate of 30% or such lower
rate as may be specified by an applicable income tax treaty.
Non-U.S. holders of Hydra Industries common
stock considering exercising their redemption rights should consult their own tax advisors as to whether the redemption of their
Hydra Industries common stock will be treated as a sale or as a distribution under the Code.
Under the Foreign Account Tax Compliance
Act (“FATCA”) and U.S. Treasury regulations and administrative guidance thereunder, a 30% United States federal withholding
tax may apply to any dividends paid to (i) a “foreign financial institution” (as specifically defined in FATCA), whether
such foreign financial institution is the beneficial owner or an intermediary, unless such foreign financial institution agrees
to verify, report and disclose its United States “account” holders (as specifically defined in FATCA) and meets certain
other specified requirements or (ii) a non-financial foreign entity, whether such non-financial foreign entity is the beneficial
owner or an intermediary, unless such entity provides a certification that the beneficial owner of the payment does not have any
substantial United States owners or provides the name, address and taxpayer identification number of each such substantial United
States owner and certain other specified requirements are met. In certain cases, the relevant foreign financial institution or
non-financial foreign entity may qualify for an exemption from, or be deemed to be in compliance with, these rules. Redeeming
Non-U.S. Holders should consult their own tax advisors regarding this legislation and whether it may be relevant to their disposition
of Hydra Industries common stock.
Backup Withholding
In general, proceeds received from the
exercise of redemption rights will be subject to backup withholding for a non-corporate U.S. stockholder that:
|
·
|
fails to provide
an accurate taxpayer identification number;
|
|
·
|
is notified by
the IRS regarding a failure to report all interest or dividends required to be shown
on his or her federal income tax returns; or
|
|
·
|
in certain circumstances,
fails to comply with applicable certification requirements.
|
A non-U.S. stockholder generally may eliminate
the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties
of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Any amount withheld under these rules will
be creditable against the U.S. stockholder’s or non- U.S. stockholder’s U.S. federal income tax liability or refundable
to the extent that it exceeds this liability, provided that the required information is timely furnished to the IRS and other
applicable requirements are met.
Vote Required for
Approval
Along with approval of the Director Election
Proposal and Charter Proposals (unless waived), approval of the Business Combination Proposal is a condition to the completion
of the Business Combination. If the Business Combination Proposal is not approved, the Business Combination will not take place.
Approval of the Business Combination Proposal is also a condition to the Charter Proposals, the Director Election Proposal and
the Incentive Plan Proposal. If the Director Election Proposal and Charter Proposals are not approved, unless waived, the Business
Combination Proposal will have no effect (even if approved by the requisite vote of our stockholders at the special meeting or
any adjournment or postponement thereof) and the Business Combination will not occur.
This Business Combination Proposal (and
consequently, the Sale Agreement and the transactions contemplated thereby, including the Business Combination) will be approved
and adopted only if at least a majority of the votes cast in person or by proxy at the special meeting vote “FOR”
the Business Combination Proposal.
Our initial stockholders have agreed to
vote any shares of Hydra Industries common stock owned by them in favor of the Business Combination. As of the record date, such
stockholders beneficially owned 2,000,000 shares of common stock, excluding shares issuable upon the exercise of warrants.
As of the date hereof, our initial stockholders
have not purchased any public shares.
Recommendation of
the Board
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT OUR STOCKHOLDERS VOTE “FOR” THE BUSINESS COMBINATION PROPOSAL.
THE
CHARTER PROPOSALS
The following table sets forth a summary
of the principal changes proposed to be made between our existing charter and the proposed charter. This summary is qualified
by reference to the complete text of the proposed charter, a copy of which is attached to this proxy statement as
Annex C
.
All stockholders are encouraged to read the proposed charter in its entirety for a more complete description of its terms.
|
·
|
increase the Company’s
authorized common stock;
|
|
·
|
provide for the
declassification of our board of directors and make certain related changes;
|
|
·
|
provide for additional
changes, including changing the Company’s name from “Hydra Industries Acquisition
Corp.” to “Inspired Entertainment, Inc.” and making the Company’s
corporate existence perpetual, which our board of directors believes are necessary or
appropriate to address the circumstances and needs of the Company following the Business
Combination; and
|
|
·
|
provide the Company
with the ability to restrict securities ownership by persons who fail to comply with
informational or other regulatory requirements under applicable gaming laws, who are
found unsuitable to hold the Company’s securities by gaming authorities or who
could by holding its securities cause the Company or any affiliate to fail to obtain,
maintain, renew or qualify for a license, contract, franchise or other regulatory approval
from a gaming authority.
|
Reasons for the
Proposed Charter Amendments
Authorization
to Increase the Company’s Authorized Share Capital (Proposal 2)
There
currently are 10,000,000 shares of Company common stock issued and outstanding, consisting of 8,000,000 shares originally sold
as part of units in our IPO and 2,000,000 founder shares that were issued to our Sponsors prior to our IPO. There are currently
no shares of our preferred stock issued and outstanding. There are also 8,000,000 rights outstanding to receive one-tenth (1/10)
of one share of common stock upon consummation of the Business Combination. In addition, there currently are 15,500,000 warrants
of the Company outstanding, consisting of 8,000,000 public warrants originally sold as part of units in our IPO and 7,500,000
private placement warrants issued to our Sponsors in a private placement simultaneously with the consummation of our IPO. An additional
2,000,000 warrants and 2,700,000 shares of common stock will be issuable pursuant to the Macquarie Forward Purchase. Each warrant
entitles the holder thereof to purchase one-half of one share of Company common stock at a price of $5.75 per half share ($11.50
per whole share), subject to adjustment. Warrants may be exercised only for a whole number of shares of our common stock. No fractional
shares will be issued upon exercise of the warrants. In addition, concurrently with the closing of the Business Combination, we
also intend to reserve for issuance up to [___] shares of Company common stock under the Incentive Plan.
In
order to ensure that the Company has sufficient authorized capital for future issuances, including pursuant to the Incentive Plan,
our board of directors has approved, subject to stockholder approval, an amendment to our existing charter to increase the number
of shares of our common stock and preferred stock from 30,000,000, consisting of 29,000,000 shares of Company common stock, and
1,000,000 shares of Company preferred stock, to 50,000,000 shares, consisting of 49,000,000 shares of Company common stock, and
1,000,000 shares of Company preferred stock. This summary is qualified by reference to the complete text of the proposed second
amended and restated charter, a copy of which is attached to this proxy statement as Annex C. All stockholders are encouraged
to read the proposed charter in its entirety for a more complete description of its terms.
Our
board of directors believes that it is important for us to have available for issuance a number of authorized shares of common
stock and preferred stock sufficient to support our growth and to provide flexibility for future corporate needs (including if
needed as part of financing for future growth acquisitions). Assuming approval of this proposal, after taking into account the
reservation of shares dedicated for the Business Combination (assuming [___] million shares of our common stock are redeemed),
and approximately [____] shares of Company common stock issuable upon exercise of outstanding warrants, we would have up to approximately
[___] million authorized shares of Company common stock and [___] million authorized shares of Company preferred stock available
for issuance from time to time at the discretion of the board of directors without further stockholder action, except as may be
required by applicable law or the NASDAQ rules or regulations, which require stockholder approval for certain issuances of stock.
The shares would be issuable for any proper corporate purpose, including future acquisitions, capital raising transactions consisting
of equity or convertible debt, stock dividends or issuances under current and any future stock incentive plans, pursuant to which
we may provide equity incentives to employees, officers and directors.
Our
board of directors believes that these additional shares will provide us with needed flexibility to issue shares in the future
in a timely manner and under circumstances we consider favorable without incurring the risk, delay and potential expense incident
to obtaining stockholder approval for a particular issuance.
Declassification of the Board (Proposal 3)
In connection with the Business Combination,
our board of directors is required to be reconstituted and comprised of seven members, without classification. Our board of directors
believes it is in the best interests of the Company for the board of directors to cease to be classified into two classes effective
upon consummation of the Business Combination.
Approval of Certain Additional Amendments to Existing Charter
in Connection with the Business Combination (Proposal 4)
The exclusive jurisdiction amendment
is intended to assist the Company in avoiding multiple lawsuits in multiple jurisdictions regarding the same matter. The ability
to require such claims to be brought in a single forum will help to assure consistent consideration of the issues, the application
of a relatively known body of case law and level of expertise and should promote efficiency and cost-savings in the resolutions
of such claims. The board of directors believes that the Delaware courts are best suited to address disputes involving such matters
given that the Company is incorporated in Delaware, Delaware law generally applies to such matters and the Delaware courts have
a reputation for expertise in corporate law matters. Delaware offers a specialized Court of Chancery to address corporate law
matters, with streamlined procedures and processes which help provide relatively quick decisions. This accelerated schedule can
minimize the time, cost and uncertainty of litigation for all parties. The Court of Chancery has developed considerable expertise
with respect to corporate law issues, as well as a substantial and influential body of case law construing Delaware’s corporate
law and long-standing precedent regarding corporate governance. This provides stockholders and the Company with more predictability
regarding the outcome of intra-corporate disputes.
In addition, we believe that this exclusive
jurisdiction amendment would promote judicial fairness and avoid conflicting results, as well as make the Company’s defense
of applicable claims less disruptive and more economically feasible, principally by avoiding duplicative discovery.
For these reasons, the board of directors
believes that providing for the Delaware Court of Chancery as the exclusive forum for the types of disputes described above is
in the best interests of the Company and its stockholders. At the same time, the Board believes that the Company should retain
the ability to consent to an alternative forum on a case-by-case basis where the Company determines that its interests and those
of its stockholders are best served by permitting such a dispute to proceed in a forum other than in Delaware.
The parties to the Sale Agreement have
agreed that the name of the combined company should reflect its ongoing operation business and therefore propose to change the
combined company’s corporate name from “Hydra Industries Acquisition Corp.” to “Inspired Entertainment,
Inc.”
Finally, the elimination of certain provisions
related to our status as a blank check company is desirable because these provisions will serve no purpose following the Business
Combination. For example, these proposed amendments remove the requirement to dissolve the Company and allow it to continue as
a corporate entity with perpetual existence following consummation of the Business Combination. Perpetual existence is the usual
period of existence for corporations and the Company’s board of directors believes it is the most appropriate period for
the Company following the Business Combination. In addition, certain other provisions in our existing charter require that proceeds
from the Company’s IPO be held in the trust account until a business combination or liquidation of the Company has occurred.
These provisions cease to apply once the Business Combination is consummated.
Proposed Amendment to Enable Company to Require Divestiture
or Redemption of Shares by Holders Determined to be Unsuitable (Proposal 5)
The purpose of Proposal 5 is to enable
the Company and its affiliates to secure and maintain in good standing all licenses, contracts, franchises and other regulatory
approvals related to the operation of gaming and related businesses, which licenses, contracts, franchises or other approvals
are conditioned upon, among other things, some or all of the holders of the Company’s debt and equity securities possessing
prescribed qualifications. The amendment would enable us to require a holder determined to be an “Unsuitable Person,”
as defined above, to divest such holder’s interest or, at our option, redeem such holder’s interest in such securities.
In such event, the disposition or redemption of the holder’s securities may occur at prices below what the holder would
otherwise receive if permitted to continue to hold the securities or if the holder were able to dispose of such securities at
then current market prices.
Approval of the amendment to the Restated
Certificate of Incorporation requires the affirmative vote of a majority of the shares entitled to vote at the meeting.
Vote Required for
Approval
The affirmative vote of holders of a majority
of the outstanding shares of our common stock is required to approve each of the separate Charter Proposals. Broker non-votes,
abstentions or the failure to vote on any of the Charter Proposals will have the same effect as a vote “AGAINST” any
such Charter Proposal.
Proposals 2, 3, 4 and 5 are conditioned
upon the approval and completion of the Business Combination Proposal. If the Business Combination Proposal is voted down, then
none of the Charter Proposals will have any effect.
Recommendation of
the Board
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT OUR STOCKHOLDERS VOTE “FOR” EACH OF THE CHARTER PROPOSALS.
DIRECTOR
ELECTION PROPOSAL
Hydra Industries’ board of directors
is currently divided into two classes with only one class of directors being elected in each year and each class (except for those
directors appointed prior to our first annual meeting of stockholders) serving a two-year term. If Proposal 3 is approved, the
proposed charter will declassify our board of directors with each director serving until his respective successor is duly elected
and qualified, or until his earlier resignation, removal or death. At the special meeting, stockholders are being asked to elect
six new directors to our board of directors, effective immediately upon the closing of the Business Combination, to serve until
the [2017] annual meeting.
Our board of directors has nominated for
election to the board at the special meeting [____], [___] and [____], the Vitruvian designees, as well as Luke Alvarez, the current
CEO of Inspired and prospective CEO of the Company following the Business Combination, and [___] and [___], each to take office
immediately upon the closing of the Business Combination. Messrs. Dannhauser, Miller, Shea and Stevens, who currently serve on
our board, have submitted prospective resignations from their positions as directors, effective immediately upon the closing of
the Business Combination. A. Lorne Weil, our current CEO and Chairman of the Board, will continue as a director. This proposal
is conditioned upon the approval of Proposal 3, but is not conditioned upon the approval of the Business Combination Proposal.
However, if the Business Combination Proposal is not approved, the proposed amendments to the Company’s existing charter,
including Proposal 3, will not be implemented, the prospective resignations submitted by four of our current directors will not
become effective, and the election of the six new directors will not take effect. The following sets forth information regarding
each nominee.
Luke Alvarez, 48, is the CEO and founder of Inspired.
He previously worked as the Chief Operating Officer of Emap Digital, Vice President of Business Development at boo.com, Case Leader
at Boston Consulting Group and as product manager at several US software companies.
[Biographies to be added.]
For information regarding our continuing
director, Mr. Weil, see “Information About Hydra Industries — Management — Directors and Executive Officers.”
For information regarding _____________________, see “Management After the Business Combination.”
Vote Required for
Approval
If a quorum is present, directors are elected
by a plurality of the votes cast, in person or by proxy. This means that the six nominees will be elected if they receive more
affirmative votes than any other nominee for the same position. Votes marked “FOR” a nominee will be counted in favor
of that nominee. Proxies will have full discretion to cast votes for other persons in the event any nominee is unable to serve.
Failure to vote by proxy or to vote in person at the special meeting and broker non-votes will have no effect on the vote since
a plurality of the votes cast is required for the election of each nominee. Pursuant to the Sale Agreement, the Selling Group
has no obligation to consummate the Business Combination if the Director Election Proposal is not approved.
Recommendation of
the Board
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT OUR STOCKHOLDERS VOTE “FOR” THE ELECTION OF EACH OF THE SIX NOMINEES TO THE BOARD OF DIRECTORS.
INCENTIVE
PLAN PROPOSAL
Overview of Proposal
At the special meeting, our stockholders
will be asked to approve the Inspired Entertainment 2016 Long-Term Incentive Plan (the “Incentive Plan”), which will
allow us to make future stock- and cash-based awards to eligible participants deemed critical for attracting, motivating, rewarding
and retaining a talented team who will contribute to our successes. Stockholder approval of the Incentive Plan will also provide
the Plan Committee (as defined below) with flexibility to grant cash incentive and share awards intended to qualify as performance-based
compensation under Section 162(m) of the Code and incentive stock options under Section 422 of the Code, assuming applicable regulatory
requirements have been satisfied.
Background
On ________________, 2016, our board of
directors adopted the Incentive Plan, subject to approval by our stockholders. The awards of restricted stock and restricted stock
units described below under “New Plan Benefits” were granted as of [_____], 2016 and expressly conditioned on stockholder
approval of the Incentive Plan. Following stockholder approval, additional awards, which are not determinable at this time, may
be granted from time to time in accordance with the terms of the Incentive Plan, in the case of stock-based awards to the extent
share are or become available for such purpose.
Under the Incentive Plan, we will be authorized
to issue up to the
lesser
of (x) [____] shares of common stock or (y) 12% of the shares of common stock issued and outstanding
upon consummation of the Business Combination and after giving effect to the issuance of shares under the Incentive Plan (but
not the issuance of any earn-out shares or shares issuable pursuant to outstanding warrants). Our board of directors believes
that compensation of the type available for grant under the Incentive Plan, a cash- and stock- based incentive plan, furthers
our goal of creating long-term value for our stockholders by fostering an ownership culture that encourages a focus on long-term
performance, retention, and stockholder value creation, and exposes participants to economic diminishment if our share performance
lags.
Alignment of the
Incentive Plan with the Interests of the Company and Stockholders
Our board of directors believes that using
long-term incentive compensation, including equity compensation, to retain and motivate our key employees is critical to the achievement
of our long-term goals and it considered the following factors, among other things, when adopting the Incentive Plan:
|
·
|
the need for shares
for issuance to support our long-term incentive program;
|
|
·
|
the desire to
have flexibility to grant a variety of incentive awards; and
|
|
·
|
our belief that
the Incentive Plan will serve a critical role in attracting, retaining and motivating
high caliber employees, officers, directors and other service providers deemed essential
to our success, and in motivating these individuals to enhance our growth and profitability.
|
Key Features of
the Incentive Plan
The Incentive Plan and our related governance
practices and policies include many features that are designed to protect stockholder interests. A summary of these features follows,
and a more detailed description of the features is included under the heading “Summary of the Incentive Plan” below.
The summaries in this proposal do not provide a complete description of all the provisions of the Incentive Plan and are qualified
in their entirety by reference to the full text of the Incentive Plan, which is attached to this proxy statement as Annex D.
|
·
|
Fixed Reserve
of Shares.
The number of shares of common stock available for grant under the Incentive
Plan is fixed and will not automatically increase because of an “evergreen”
feature— meaning, stockholder approval is required to increase the share reserve
under the Incentive Plan, allowing our stockholders to have direct input on our equity
compensation program.
|
|
·
|
No Repricing.
The Incentive Plan prohibits the repricing of awards without stockholder approval.
|
|
·
|
No Discounted
Stock Options or Stock Appreciation Rights.
Except with respect to substitute
awards granted in connection with a corporate transaction, all stock options and stock
appreciation rights must have an exercise price or base price equal to or greater than
the fair market value of the underlying shares of common stock on the date of grant.
|
|
·
|
Limitation
on Term of Stock Options and Stock Appreciation Rights.
The maximum term of a stock
option or stock appreciation right under the Incentive Plan is 10 years.
|
|
·
|
No Dividends
or Dividend Equivalents on Unearned Awards.
Generally, any cash dividends and share
dividends paid on shares of restricted stock will be withheld by the Company and will
be subject to vesting and forfeiture to the same degree as the shares of restricted stock
to which such dividends relate. The Incentive Plan also prohibits the current payment
of dividends or dividend equivalent rights on unvested or unearned performance awards.
|
|
·
|
Clawback.
Awards granted under the Incentive Plan will be subject to the Company’s clawback
and/or recoupment policies [in respect of unvested stock] in effect at the time of grant
or as otherwise required by applicable law.
|
|
·
|
No Automatic
Grants.
The Incentive Plan does not provide for automatic grants to any participant.
|
|
·
|
Plan Committee.
The Incentive Plan will be administered by a committee of our board of directors
or a subcommittee thereof (the “Plan Committee”), comprised entirely of independent
directors.
|
|
·
|
No Tax Gross-Ups.
The Incentive Plan does not provide for any tax gross-ups.
|
|
·
|
No “Liberal
Share Recycling.”
Liberal Share Recycling is prohibited — meaning that
the Incentive Plan does not recycle shares that were not issued or delivered upon the
net settlement or net exercise of a stock option or stock appreciation right, shares
delivered to or withheld by us to pay the purchase price or withholding taxes relating
to an outstanding award or shares repurchased by us on the open market with the proceeds
of a stock option exercise.
|
Summary of the Incentive
Plan
The following is a summary of certain material
features of the Incentive Plan.
Purpose
The Incentive Plan is designed to assist
us in attracting, retaining, motivating and rewarding certain employees, officers, directors and other service providers of the
Company and its affiliates, and to promote the creation of long-term value for the our stockholders by closely aligning the interests
of such individuals with those of our stockholders.
Administration
The Incentive Plan will be administered
by the Plan Committee, which will have the authority to designate participants, grant awards, determine the number of shares of
common stock to be covered by awards, determine the terms and conditions of any awards, construe and interpret the Incentive Plan
and related award agreements, accelerate the vesting of any outstanding awards and make other decisions and determinations for
the administration of the Incentive Plan. To the extent permitted by applicable law, the Plan Committee is generally permitted
to delegate its authority under the Incentive Plan to our board of directors, a member of our board of directors or an executive
officer of the Company. However, the Plan Committee may not delegate its authority to (i) our board of directors or to an executive
officer of the Company with regard to grants to “covered employees” under Section 162(m) of the Code, or (ii) a member
of our board of directors or an executive officer of the Company with regard to the participation of, or the timing, pricing or
amount of an award to, an officer, director or other person subject to Section 16 of the Exchange Act.
Shares Available
for Issuance Under the Incentive Plan and Limits on Awards
Under the Incentive Plan, we will be authorized
to issue up to the
lesser
of (x) [____] shares of common stock or (y) 12% of the shares of common stock issued and outstanding
upon consummation of the Business Combination and after giving effect to the issuance of shares under the Incentive Plan (but
not the issuance of any Earn-out shares or shares issuable pursuant to outstanding warrants), which
shares may be issued as incentive stock options. On [___], 2016, the closing sales price per share of our common stock as reported
on The NASDAQ Capital Market under the symbol “HDRA” was $[___].
If any award granted under the Incentive
Plan expires or is canceled, forfeited, settled in cash or otherwise terminated without delivery of shares to a participant, the
undelivered shares will again become available for awards under the Incentive Plan. Shares subject to an award will not be again
available for issuance under the Incentive Plan if such shares are: delivered to or withheld by the Company to pay withholding
taxes, subject to an option or stock appreciation right and were not issued upon the net settlement or exercise of such option
or stock appreciation right, delivered to the Company to pay the purchase price related to an outstanding option or stock appreciation
right, or repurchased by the Company on the open market with the proceeds of an option exercise.
Awards and the shares authorized under
the Incentive Plan are subject to adjustment as described below under “Equity Restructuring.”
During any time that the Company is subject
to Section 162(m) of the Code, to the extent an award is intended to qualify as exempt performance-based compensation under Section
162(m) of the Code, (i) the maximum number of shares of common stock subject to stock options, performance awards or stock appreciation
rights that may be granted to any individual in any one calendar year may not exceed
and (ii) the maximum value of a performance award that is valued in dollars (as opposed to shares) and that is intended to qualify
as performance-based compensation under Section 162(m) of the Code that may be granted to any individual in any one year may not
exceed $ __________. In addition, the maximum value of the aggregate cash compensation and shares of common stock that may be
granted to a non-employee director of the Company in any one year may not exceed $
Awards and the shares of common stock authorized
under the Incentive Plan, as well as any individual share limits, are subject to adjustment as described below under “Equity
Restructuring.”
Eligibility
Participants in the Incentive Plan will
consist of such officers, other employees, non-employee directors, consultants, independent contractors and agents of the Company
or its affiliates (and individuals expected to become such service providers of the Company or its affiliates), as selected by
the Plan Committee in its sole discretion. As of [___], 2016, there were approximately employees, including officers, and non-employee
directors who would be eligible to participate in the Incentive Plan, if selected by the Plan Committee.
Grants of Awards
Pursuant to the Incentive Plan, the Plan
Committee may grant awards of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock,
restricted stock units, performance awards (including cash-based performance awards), and other cash-based or stock-based awards.
Stock Options.
The Incentive Plan
allows the grant of both incentive stock options, within the meaning of Section 422(b) of the Code, and non-qualified stock options.
A stock option granted under the Incentive
Plan provides a participant with the right to purchase, within a specified period of time, a stated number of shares of common
stock at the price specified in the applicable award agreement. The exercise price applicable to a stock option will be set by
the Plan Committee at the time of grant and, except with respect to substitute awards granted in connection with a corporate transaction,
will not be less than the fair market value of a share of common stock on the date of grant.
Stock options will vest in accordance with
the terms of the applicable award agreement. The maximum term of a stock option granted under the Incentive Plan is 10 years from
the date of grant (or five years in the case of an incentive stock option granted to a 10% stockholder). Payment of the exercise
price of a stock option may be made in a manner approved by the Plan Committee, which may include any of the following payment
methods: cash, shares of common stock, pursuant to a broker- assisted cashless exercise in accordance with procedures approved
by the Plan Committee, pursuant to a delivery of a notice of “net exercise,” or in any other form of consideration
approved by the Plan Committee.
No incentive stock options may be granted
under the Incentive Plan following the 10th anniversary of the earlier of (i) the date the Incentive Plan was adopted by the Board
and (ii) the date the stockholders of the Company approve the Incentive Plan.
Stock Appreciation Rights.
A stock
appreciation right is a conditional right to receive an amount equal to the value of the appreciation in the shares of common
stock over a specified period. Stock appreciation rights may be settled in shares of common stock, cash or other property, as
specified in the award agreement. The base price applicable to a stock appreciation right will be set by the Plan Committee at
the time of grant and, except with respect to substitute awards granted in connection with a corporate transaction, will not be
less than the fair market value of a common share on the date of grant. The maximum term of a stock appreciation right granted
under the Incentive Plan is 10 years from the date of grant.
Restricted Stock.
An award of restricted
stock is a grant of shares of common stock which are subject to limitations on transfer during a restricted period established
in the applicable award agreement. Holders of restricted stock will generally have the rights and privileges of a stockholder
with respect to their restricted stock. Unless otherwise set forth in an award agreement, dividends with respect to the restricted
stock will be withheld by the Company on behalf of the participant and will be subject to vesting and forfeiture to the same degree
as the shares of restricted stock to which such dividends relate; provided, however, that any dividends with respect to restricted
stock subject to performance-based vesting conditions will be deposited with the Company and subject to the same restrictions
as the shares of common stock to which such distribution was made.
Restricted Stock Units.
A restricted
stock unit is a notional unit representing the right to receive one share of common stock (or, to the extent specified in the
award agreement, the cash value of one share) on a specified settlement date. When a participant satisfies the conditions of the
restricted stock unit award established by the Plan Committee in the applicable award agreement, the award will be settled in
shares of common stock, cash or property, as set forth in the applicable award agreement. Unless otherwise set forth in an award
agreement, a participant will not be entitled to any dividends or dividend equivalents with respect to the restricted stock units
prior to settlement; provided, however, that any dividend equivalents with respect to restricted stock units that are subject
to performance-based vesting conditions will be subject to the same restrictions as the restricted stock units.
Performance Awards.
A performance
award (which may be classified as a performance share, performance unit or cash award) represents the right to receive certain
amounts based on the achievement of pre-determined performance goals during a designated performance period. The terms of each
performance award will be set forth in the applicable award agreement. The Plan Committee will be responsible for setting the
applicable performance goals. For awards intended to comply with, and to the extent required to comply with, Section 162(m) of
the Code, performance goals will be based on specified levels of or increases in one or more of the following business criteria
(alone or in combination with any other criterion, whether gross or net, before or after taxes, and/or before or after other adjustments,
as determined by the Plan Committee in accordance with Section 162(m) of the Code): (i) earnings, including net earnings, total
earnings, operating earnings, earnings growth, operating income, earnings before or after taxes, earnings before or after interest,
depreciation, amortization, book value per share, tangible book value or growth in book value per share; (ii) pre-tax income
or after-tax income; (iii) earnings per share (basic or diluted); (iv) operating profit; (v) revenue, revenue growth,
or rate of revenue growth; (vi) return on assets (gross or net), return on investment, return on capital, return on equity,
or internal rates of return; (vii) returns on sales or revenues; (viii) operating expenses; (ix) stock price appreciation;
(x) cash flow (including, but not limited to, operating cash flow and free cash flow), cash flow return on investment (discounted
or otherwise), net cash provided by operations or cash flow in excess of cost of capital, working capital turnover; (xi)
economic value created; (xii) cumulative earnings per share growth; (xiii) operating margin, profit margin, or gross
margin; (xiv) stock price or total stockholder return; (xv) cost or expense targets, reductions and savings, productivity
and efficiencies; (xvi) sales or sales growth; (xvii) strategic business criteria, consisting of one or more objectives
based on meeting specified market penetration, market share, geographic business expansion, customer satisfaction, employee satisfaction,
human resources management, supervision of litigation, information technology, and goals relating to acquisitions, divestitures
or joint ventures; and (xviii) to the extent that an award is not intended to qualify as performance-based compensation under
Section 162(m) of the Code, other measures of performance selected by the Plan Committee. The business criteria may be combined
with cost of capital, assets, invested capital and stockholders’ equity to form an appropriate measure of performance and
will have any reasonable definitions that the Plan Committee may specify in accordance with Section 162(m) of the Code.
Performance goals may be established on
a Company-wide basis, project or geographical basis or, as the context permits, with respect to one or more business units, divisions,
lines of business or business segments, subsidiaries, products, or other operational units or administrative departments of the
Company (or in combination thereof) or may be related to the performance of an individual participant and may be expressed in
absolute terms, or relative or comparative to (i) current internal targets or budgets, (ii) the past performance of the Company
(including the performance of one or more subsidiaries, divisions, or operating units), (iii) the performance of one or more similarly
situated companies, (iv) the performance of an index covering multiple companies, or (v) other external measures of the selected
performance criteria. Performance objectives may be in either absolute terms or relative to the performance of one or more comparable
companies or an index covering multiple companies.
Except as otherwise determined at the time
of grant or when the performance objectives are established, the Plan Committee will make appropriate adjustments in the method
of calculating the attainment of applicable performance goals to provide for objectively determinable adjustments, modifications
or amendments, as determined in accordance with “generally accepted accounting principles”, to any of the business
criteria described above for one or more of the following items of gain, loss, profit or expense: (i) determined to be extraordinary,
unusual, infrequently occurring, or non- recurring in nature; (ii) related to changes in accounting principles under “generally
accepted accounting principles” or tax laws; (iii) related to currency fluctuations; (iv) related to financing
activities (e.g., effect on earnings per share of issuing convertible debt securities); (v) related to restructuring, divestitures,
productivity initiatives or new business initiatives; (vi) related to discontinued operations that do not qualify as a segment
of business under “generally accepted accounting principles”; (vii) attributable to the business operations of
any entity acquired by the Company during the fiscal year; (viii) non- operating items; and (ix) acquisition or divestiture
expenses.
Other Stock-Based and Cash-Based Performance
Awards.
The Incentive Plan authorizes the Plan Committee to grant other awards that may be denominated in, payable in, valued
in, or otherwise related to the Company’s shares of common stock or cash (including annual or will be set forth in award
agreements.
Clawback.
All awards granted under
the Incentive Plan will be subject to incentive compensation clawback and recoupment policies [in respect of unvested stock] implemented
by our board of directors (or a committee or subcommittee of the board) and in effect at the time of grant or as otherwise required
by applicable law.
No Repricing of Awards.
No awards
may be repriced without stockholder approval. For purposes of the Incentive Plan, “repricing” means any of the following:
(i) changing the terms of the award to lower its exercise price or base price (other than on account of capital adjustments as
described below under “Equity Restructuring”), (ii) any other action that is treated as a repricing under “generally
accepted accounting principles,” and (iii) repurchasing for cash or canceling an award in exchange for another award at
a time when its exercise price or base price is greater than the fair market value of the underlying shares of common stock.
Equity Restructuring
In the event of any equity restructuring
that causes the per share value of common stock to change, such as stock dividends, recapitalizations through extraordinary cash
dividends, stock splits, and reverse stock splits occurring after the award grant date, the Plan Committee will adjust the aggregate
number of shares of common stock which may be granted pursuant to awards, the number of shares of common stock covered by outstanding
awards under the Incentive Plan, and the per-share price of shares of common stock underlying outstanding awards under the Incentive
Plan. In the event of any other change in corporate capitalization, including a merger, consolidation, reorganization or partial
or complete liquidation of the Company, such equitable adjustments described above may be made as determined appropriate and equitable
by the Plan Committee to prevent dilution or enlargement of the rights of participants.
Corporate Events
For purposes of the Incentive Plan, a “corporate
event” means: a “change in control” (as defined in the Incentive Plan); or the reorganization, dissolution
or liquidation of the Company. Except as otherwise provided in an applicable award or other participant agreement, pursuant to
the Incentive Plan, in connection with a corporate event, the Plan Committee may, in its discretion, take any of the following
actions:
|
·
|
require that outstanding
awards be assumed or substituted in connection with such event,
|
|
·
|
accelerate the
vesting of any outstanding awards not assumed or substituted in connection with such
event, subject to the consummation of such event; provided that any awards that
vest subject to the achievement of performance criteria will be deemed earned (i) based
on actual performance through the date of the corporate event or (ii) at the target level
(or if no target is specified, the maximum level), in the event actual performance cannot
be measured through the date of the corporate event, in each case, with respect to any
unexpired performance periods or performance periods for which satisfaction of the performance
criteria or other material terms for the applicable performance period have not been
certified by the Plan Committee prior to the date of the corporate event,
|
|
·
|
cancel outstanding
awards upon the consummation of such event (whether vested or unvested) and provide award
holders with the per-share consideration being received by the Company’s stockholders
in connection with such event in exchange for their cancelled awards (whether vested
or unvested) or, with respect to a performance cash award, the amount payable pursuant
to the award, or unvested) subject to exercise as of the consummation of such event,
and provide the holder at least 10 days to exercise each stock option, stock appreciation
right or other award canceled (whether vested or unvested) prior to the consummation
of such event, or
|
|
·
|
replace outstanding
awards with a cash incentive program that preserves the economic value of the replaced
awards and contains identical vesting and payment conditions.
|
Non-Transferability
of Awards
Except as otherwise provided by the Plan
Committee, awards are generally non-transferable other than by will or the laws of descent and distribution and restricted stock
is generally non-transferable.
Termination and
Amendment
The Board or the Plan Committee may amend
or terminate the Incentive Plan at any time, except that no amendment may, without stockholder approval, violate the stockholder
approval requirements of the national securities exchange on which the shares of common stock are principally listed. Unless sooner
terminated, the Incentive Plan will terminate on the day before the 10th anniversary of the date the stockholders of the Company
approve the Incentive Plan.
Material U.S. Federal
Income Tax Consequences
The following is a brief discussion of
the U.S. federal income tax consequences for awards granted under the Incentive Plan. The Incentive Plan is not subject to the
requirements of the Employee Retirement Income Security Act of 1974, as amended, and it is not, nor is it intended to be, qualified
under Section 401(a) of the Code. This discussion is based on current law, is not intended to constitute tax advice, and does
not address all aspects of U.S. federal income taxation that may be relevant to a particular participant in light of his or her
personal circumstances and does not describe foreign, state, or local tax consequences, which may be substantially different.
Holders of awards under the Incentive Plan are encouraged to consult with their own tax advisors.
Non-Qualified Stock Options and Stock
Appreciation Rights.
With respect to non-qualified stock options and stock appreciation rights, (i) no income is realized
by a participant at the time the award is granted; (ii) generally, at exercise, ordinary income is realized by the participant
in an amount equal to the difference between the exercise or base price paid for the shares and the fair market value of the shares
on the date of exercise (or, in the case of a cash-settled stock appreciation right, the cash received), and the participant’s
employer is generally entitled to a tax deduction in the same amount subject to applicable tax withholding requirements;
and (iii) upon a subsequent sale of the stock received on exercise, appreciation (or depreciation) after the date of exercise
is treated as either short- term or long-term capital gain (or loss) depending on how long the shares have been held, and no deduction
will be allowed to such participant’s employer.
Incentive Stock Options.
No income
is realized by a participant upon the grant or exercise of an incentive stock option, however, such participant will generally
be required to include the excess of the fair market value of the shares at exercise over the exercise price in his or her alternative
minimum taxable income. If shares are issued to a participant pursuant to the exercise of an incentive stock option, and if no
disqualifying disposition of such shares is made by such participant within two years after the date of grant or within one year
after the transfer of such shares to such participant, then (i) upon sale of such shares, any amount realized in excess of the
exercise price will be taxed to such participant as a long-term capital gain, and any loss sustained will be a long-term capital
loss, and (ii) no deduction will be allowed to the participant’s employer for federal income tax purposes.
If shares acquired upon the exercise of
an incentive stock option are disposed of prior to the expiration of either holding period described above, generally (i) the
participant will realize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market
value of such shares at exercise (or, if less, the amount realized on the disposition of such shares) over the exercise price
paid for such shares and (ii) the participant’s employer will generally be entitled to deduct such amount for federal income
tax purposes. Any further gain (or loss) realized by the participant will be taxed as short-term or long-term capital gain (or
loss), as the case may be, and will not result in any deduction by the employer.
Subject to certain exceptions for disability
or death, if an incentive stock option is exercised more than three months following termination of employment, the exercise of
the stock option will generally be taxed as the exercise of a non-qualified stock option.
Other Stock-Based Awards.
The tax
effects related to other stock-based awards under the Incentive Plan are dependent upon the structure of the particular award.
Withholding.
At the time a participant
is required to recognize ordinary compensation income resulting from an award, such income will be subject to federal and applicable
state and local income tax and applicable tax withholding requirements with respect to an employee participant.
Section 162(m).
In general, Section
162(m) of the Code denies a publicly held corporation a deduction for federal income tax purposes for compensation in excess of
$1 million per year per person paid to its chief executive officer and the three other highest-paid executive officers (other
than the chief financial officer) employed at the end of that company’s fiscal year, subject to certain exceptions (including
an exception for performance-based compensation). The Incentive Plan is designed so that stock options and stock appreciation
rights qualify for this exception and it permits the Plan Committee to grant other awards designed to qualify for this exemption,
subject to the satisfaction of applicable regulatory requirements. The Plan Committee is also authorized to grant awards that
are not qualified under Section 162(m) of the Code.
New Plan Benefits
Certain awards of restricted stock and restricted
stock units described below were granted as of [_____], 2016 and expressly conditioned on stockholder approval of the Incentive
Plan. Because awards that may be granted in the future under the Incentive Plan, in the case of stock-based awards to the extent
shares are or become available for such purpose, are at the discretion of the Plan Committee, it is not possible to determine
the benefits or the amounts that may be received by eligible participants under the Incentive Plan and are subject to stockholder
approval of the Incentive Plan.
Vote Required for
Approval
The approval of the Incentive Plan Proposal
and the Incentive Plan requires the affirmative vote of a majority of the votes cast in person or by proxy and entitled to vote
thereon at the special meeting, assuming that a quorum is present. Broker “non-votes” and abstentions will have no
effect with respect to the approval of this proposal.
Recommendation of
the Board
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT OUR STOCKHOLDERS VOTE “FOR” APPROVAL OF THE INCENTIVE PLAN PROPOSAL AND THE 2016 LONG-TERM INCENTIVE PLAN.
THE
ADJOURNMENT PROPOSAL
The Adjournment Proposal, if adopted, will
allow our board of directors to adjourn the special meeting to a later date or dates to permit further solicitation of proxies.
The Adjournment Proposal will only be presented to our stockholders in the event, based on the tabulated votes, there are not
sufficient votes at the time of the special meeting to approve the Business Combination Proposal, the Charter Proposals or the
Director Election Proposal.
Consequences if
the Adjournment Proposal is Not Approved
If the Adjournment Proposal is not approved
by our stockholders, our board of directors may not be able to adjourn the special meeting to a later date in the event, based
on the tabulated votes, there are not sufficient votes at the time of the special meeting to approve the Business Combination
Proposal, the Charter Proposals or the Director Election Proposal.
Vote Required for
Approval
Adoption of the Adjournment Proposal requires
the affirmative vote of a majority of the votes cast in person or by proxy and entitled to vote thereon at the special meeting,
assuming that a quorum is present. Broker “non-votes” and abstentions will have no effect with respect to the approval
of this proposal.
Recommendation of
the Board
OUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE ADJOURNMENT PROPOSAL.
INFORMATION
ABOUT HYDRA INDUSTRIES
General
We are a blank check company incorporated
in Delaware on May 30, 2014 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase,
reorganization or similar business combination with one or more businesses. Prior to our entering into the Sale Agreement, we
sought to capitalize on the global network and investing and operating experience of our management team and board of directors
to identify, acquire and operate one or more businesses in the diversified industrial manufacturing, distribution and services
sectors in the United States, although we were able to pursue a business combination outside these industries.
In October 2014, we consummated our initial
public offering of 8 million units at a price of $10.00 per unit, with each unit consisting of one share of our common stock,
one right to receive one-tenth (1/10) of one share of common stock and one warrant to purchase one-half of one share of our common
stock at an exercise price of $5.75 per one- half of one share ($11.50 per whole share). The shares of our common stock sold as
part of the units in our IPO are referred to in this report as our “public shares.” The units in our IPO were sold
at an offering price of $10.00 per unit, generating total gross proceeds of approximately $80,000,000. Prior to the consummation
of our IPO, in July 2014, our Sponsors purchased 2,875,000 shares of common stock, which are referred to herein as “founder
shares,” for a purchase price of $25,000, or approximately $0.01 per share. In July 2014, our Hydra Sponsor transferred
429,000 and 75,000 founder shares to an affiliate of Mr. Lipkin, our former Executive Vice President, Chief Financial Officer
and Chief Operating Officer, and an affiliate of Mr. Schloss, our Executive Vice President, General Counsel and Secretary, respectively.
In October 2014, affiliates of Mr. Lipkin and Mr. Schloss returned to us, at no cost, 74,750 and 13,068 founder shares, respectively,
which we cancelled. In addition, in October 2014, our Hydra Sponsor transferred an aggregate of 22,000 founder shares to consultants
of Hydra Management LLC (2,422 of which were subsequently forfeited), including 8,899 shares to George Peng, who was appointed
as our Chief Financial Officer in August 2015. In addition, in October 2014 our Hydra Sponsor transferred 25,000 founder shares
to each of Messrs. Miller, Shea, and Stevens, our independent directors (for a total of 75,000 founder shares, none of which were
subject to forfeiture), and our Macquarie Sponsor transferred 25,000 founder shares to Mr. Dannhauser, our Macquarie Sponsor’s
director designee (none of which were subject to forfeiture). As a result of the underwriters’ determination not to exercise
their over-allotment option to purchase additional units, certain of our initial stockholders forfeited an aggregate of 300,000
shares of common stock. The founder shares will be worthless if we do not complete an initial business combination.
In addition, A. Lorne Weil, our Chairman
and Chief Executive Officer and the managing member of our Hydra Sponsor, our Macquarie Sponsor, and another member of our management
team purchased an aggregate of 7,500,000 private placement warrants, each exercisable for one-half of one share of our common
stock at $5.75 per half share, for a purchase price of $3,750,000, or $0.50 per warrant, that will also be worthless if we do
not complete a business combination.
Our Hydra Sponsor’s investment
and voting decisions are determined by A. Lorne Weil, its managing member.
The
net proceeds of our initial public offering deposited into the trust account remain on deposit in the trust account earning interest.
As of June 30, 2016, there was approximately $80 million held in the trust account and approximately $200,000 held outside the
trust account available for working capital purposes.
Effecting Our Initial
Business Combination
We are not presently engaged in, and we
will not engage in, any operations until after the Business Combination. We intend to effect the Business Combination using cash
held in our trust account (after any redemptions), the proceeds of the Macquarie Forward Purchase, additional funds, if any, otherwise
available at closing, and the issuance of shares of our common stock.
Selection of a Target
Business and Structuring of our Initial Business Combination
Under NASDAQ rules, an initial Business
Combination must occur with one or more target businesses that together have a fair market value of at least 80% of our assets
held in the trust account (excluding the deferred underwriting commissions and taxes payable on the income earned on the trust
account) at the time of the agreement to enter into the initial Business Combination. The fair market value of the target or targets
will be determined by our board of directors based upon one or more standards generally accepted by the financial community, such
as discounted cash flow valuation or value of comparable businesses. Subject to this requirement, our management has had virtually
unrestricted flexibility in identifying and selecting one or more prospective target businesses, although we were not permitted
to effectuate our initial business combination with another blank check company or a similar company with nominal operations.
In any case, we determined that we would only complete an initial business combination in which we acquired 50% or more of the
outstanding voting securities of the target or were otherwise not required to register as an investment company under the Investment
Company Act of 1940, as amended.
Redemption Rights
for Holders of Public Shares
We are providing our public stockholders
with the opportunity to redeem their public shares for cash equal to a pro rata share of the aggregate amount then on deposit
in the trust account, including interest but net of taxes payable and amounts released to us for working capital purposes, divided
by the number of then outstanding public shares, upon the consummation of the Business Combination, subject to the limitations
described herein. As of June 30, 2016, the amount in the trust account, net of taxes payable, is approximately $10.00 per public
share. Our initial stockholders, officers and directors have agreed to waive their redemption rights with respect to the founder
shares and any public shares they may hold in connection with the consummation of the Business Combination. The founder shares
will be excluded from the pro rata calculation used to determine the per-share redemption price.
Holders of outstanding units must separate
the underlying public shares and public warrants prior to exercising redemption rights with respect to the public shares. For
more information about how to separate the underlying public shares from units, see the section entitled “The Business Combination
Proposal — Redemption Rights.”
Submission of Our
Initial Business Combination to a Stockholder Vote
We are providing our public stockholders
with redemption rights upon consummation of the Business Combination. Public stockholders electing to exercise their redemption
rights will be entitled to receive the cash amount specified above, provided that such stockholders follow the specific procedures
for redemption set forth in this proxy statement relating to the stockholder vote on a Business Combination. Unlike many other
blank check companies, our public stockholders are not required to vote against the Business Combination in order to exercise
their redemption rights. If the Business Combination is not completed, then public stockholders electing to exercise their redemption
rights will not be entitled to receive such payments.
Our initial stockholders have agreed to
vote any shares of Hydra Industries common stock owned by them in favor of the Business Combination. In addition, our initial
stockholders, officers and directors have agreed to waive their redemption rights with respect to the founder shares and any public
shares they may hold in connection with the consummation of the Business Combination.
Limitation on Redemption
Rights
Notwithstanding the foregoing, our amended
and restated certificate of incorporation provides that a public stockholder, together with any affiliate of such stockholder
or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of
the Exchange Act), will be restricted from seeking redemptions with respect to more than an aggregate of 25% of the shares sold
in our IPO.
Employees
We currently have three (3) officers and
no other employees. These individuals are not obligated to devote any specific number of hours to our matters but they intend
to devote as much of their time as they deem necessary to our affairs until we have completed the Business Combination. We do
not intend to have any full time employees prior to the consummation of the Business Combination.
Management
Directors and Executive Officers
Our directors and executive officers are
as follows:
Name
|
|
Age
|
|
Position
|
A. Lorne Weil
|
|
70
|
|
Chairman of the Board of Directors and Chief Executive Officer
|
George Peng
|
|
46
|
|
Executive Vice President and Chief Financial Officer
|
Martin E. Schloss
|
|
69
|
|
Executive Vice President, General Counsel and Secretary
|
Jonathan S. Miller
|
|
44
|
|
Director
|
Kenneth Shea
|
|
57
|
|
Director
|
M. Brent Stevens
|
|
54
|
|
Director
|
Stephen J. Dannhauser
|
|
65
|
|
Director
|
A. Lorne Weil
, our Chairman and
Chief Executive Officer since our inception, has been a principal of Hydra Management, an investment vehicle formed by Mr. Weil,
since September 2014. Mr. Weil was Chairman of the Board of Scientific Games Corporation (and its predecessor Autotote Corporation)
from October 1991 to November 2013. Mr. Weil also served as the Chief Executive Officer of Scientific Games Corporation (and its
predecessor Autotote Corporation) from 1992 to 2008 and from November 2010 to November 2013 (Mr. Weil had retired in 2008) and
as the President from August 1997 to June 2005. Under Mr. Weil’s stewardship, the company made a number of significant acquisitions
and joint ventures, including the privatization of the off-track betting operations of the State of Connecticut, and the acquisitions
of Scientific Games Holdings Corp., IGT Online Entertainment Systems, Global Draw and WMS Industries, and the privatization of
the Illinois, New Jersey and Italian lotteries. Prior to joining Scientific Games, Mr. Weil was President of Lorne Weil, Inc.,
a firm he founded which provided strategic planning and corporate development services to technology-based industries, a role
he maintained from 1979 to November 1992. From 1974 to 1979, Mr. Weil was Vice President — Corporate Development at General
Instrument Corporation. From 1970 to 1974, Mr. Weil was a manager with the Boston Consulting Group. Mr. Weil received his undergraduate
degree from the University of Toronto, an M.S. degree from the London School of Economics and an M.B.A. from Columbia University,
where he served for more than 10 years on the Board of Overseers. From 2011 to 2013, Mr. Weil was a director of Avantair Inc.
In 2012, Mr. Weil was the sponsor and Chairman of the Board of Andina Acquisition Corp, a NASDAQ-listed blank check company. Mr.
Weil is currently the Non-Executive Chairman of the Board of the successor entity, Tecnoglass Inc. Mr. Weil is also a significant
stockholder and former director of Sportech Plc, a United Kingdom-based sports betting company listed on the London Stock Exchange.
We believe Mr. Weil is well-qualified to serve as a member of our board of directors due to his extensive business experience
in strategic planning and corporate development, his experience successfully overseeing the IPO of Andina and its subsequent merger
with Tecnoglass, the contacts he has fostered over the course of his extensive career, as well as his vast operational experience.
George Peng
, our Chief Financial
Officer since August 2015, has been a principal of Hydra Management since October 2014. Previously, Mr. Peng was an employee of
Highpoint Associates, a firm that served as a consultant to Scientific Games Corporation, from May 2013 to April 2014, where he
assisted in its integration of the acquisition of WMS Industries. Previously, from July 2001 to May 2013 Mr. Peng was a consultant
primarily focused on financial planning and analysis for various industries, including retail and financial services. Previously,
from June 2000 to May 2001, he was Chief Financial Officer of Girlshop, Inc., a privately-held internet apparel retailer. From
August 1998 to March 2000, he was an Associate in the Investment Banking division of Credit Suisse, focusing on private equity,
high yield, and leveraged lending.
Martin E. Schloss
, our Executive
Vice President, General Counsel and Secretary since our inception, has been a principal of Hydra Management since September 2014.
Mr. Schloss was Senior Vice President of Scientific Games Corporation, where he also served as Vice President and General Counsel,
from 1992 to 2006. Mr. Schloss concentrated his efforts on the mergers and acquisitions activities of the company, including the
acquisition of Scientific Games Holdings, the industry leader in the manufacture and sale of instant “scratch off”
lottery tickets, in September 2000. Mr. Schloss also handled the securities offerings of the company, including both equity and
debt offerings, as well as credit agreements and an $825 million debt restructuring. In addition, Mr. Schloss was also responsible
for the compliance function of the company, its government relations activities and its public relations program. Prior to joining
Scientific Games, Mr. Schloss was an Associate General Counsel at General Instrument Corporation (a Fortune 300 company) and Vice
President and General Counsel of its Jerrold Communications division, a leading supplier of cable television equipment and technology,
for a period of approximately 15 years. General Instrument owned a multi-national portfolio of companies in diversified industries,
including microelectronics, semiconductors, cable television technology and computerized wagering systems for pari-mutuel and
lottery applications. Mr. Schloss handled the acquisitions, joint ventures and financing transactions of General Instrument during
his tenure. Mr. Schloss began his career at a New York law firm specializing in corporate and securities law which has since merged
into Cooley LLP. He has also taught courses in the law of mergers and acquisitions and unincorporated business associations at
St. John’s University School of Law. He holds a B.A. degree, cum laude, from the University of Rochester and a J.D. degree
from New York University School of Law, where he was an editor of the Law Review.
Jonathan S. Miller
, our director
since October 24, 2014, is currently a Senior Managing Director at CDG Group, LLC, where he provides restructuring advisory, turnaround
management, value enhancement and mergers and acquisition services to companies, private equity firms, banks and investment funds.
Mr. Miller worked as a certified public accountant at Coopers & Lybrand LLP from 1993 to 1996. Prior to joining CDG Group,
LLC, Mr. Miller worked in the investment banking department at Bear, Stearns & Co. Inc. from 1998 to 2008, most recently as
a Managing Director in the Leveraged Finance and Financial Sponsor Coverage Group. Mr. Miller also worked at Fifth Street Finance
Corp. from 2008 to 2009, a publicly traded business development company that provides debt and equity capital primarily to middle
market private equity firms in the context of completing leveraged buyout transactions. Mr. Miller has a B.S. in Accounting from
New York University, as well as an M.B.A. with a concentration in Finance from the Wharton School of the University of Pennsylvania.
We believe Mr. Miller is qualified to serve as a member of our board of directors due to his extensive experience with corporate
finance, capital markets and accounting, and due to his relationships with companies across a variety of industries and debt and
equity investors.
Kenneth Shea
, our director since
October 24, 2014, is currently a Senior Managing Director at Guggenheim Securities. Mr. Shea is serving as a director in his personal
capacity and not as a representative of Guggenheim Securities, LLC or any of its affiliates. Mr. Shea joined Guggenheim Securities
in September 2014 to develop the Firm’s Real Estate, Gaming and Leisure Investment Banking practices. Previously, Mr. Shea
served as the President of Coastal Capital Management LLC, an affiliate of Coastal Development, LLC, a New York–based, privately-held
developer of resort destinations, luxury hotels and casino gaming facilities from September 2009 to September 2014. Prior to joining
Coastal, from July 2008 to August 2009, Mr. Shea was a Managing Director for Icahn Capital LP, where Mr. Shea had responsibility
for principal investments in the gaming and leisure industries. From 1996 to 2008, Mr. Shea was employed by Bear, Stearns &
Co., Inc., where he was a Senior Managing Director and global head of the Gaming and Leisure investment banking department. Mr.
Shea holds a Bachelor of Arts in Economics, magna cum laude, from Boston College and an M.B.A. from the University of Virginia’s
Darden School. Mr. Shea currently serves on the board of directors of CVR Refining, LP, and on the board of directors of Equity
Commonwealth. We believe Mr. Shea is qualified to serve as a member of our board of directors due to his significant experience
in corporate finance, mergers and acquisitions and investing, and deep knowledge of the capital markets.
M. Brent Stevens
, our director since
October 24, 2014, has been the Chairman and Chief Executive Officer of Peninsula Pacific LLC, an investment advisory firm, since
2012. Previously, Mr. Stevens was the Chairman and Chief Executive Officer of Peninsula Gaming Corporation, a company which he
founded in 1997 and sold to Boyd Gaming Corporation in 2012. From 1990 through 2010, Mr. Stevens was a founding member of the
Investment Banking Department at Jefferies & Company, holding various positions, most recently as an Executive Vice President
and Head of Capital Markets. He was also a member of the firm’s Executive Committee. Mr. Stevens previously worked in the
Investment Banking Department of Drexel Burnham Lambert, from 1989 to 1990 after beginning his career at KPMG from 1983 to 1987.
Mr. Stevens received a Master’s in Business Administration from the Wharton School of the University of Pennsylvania and
a Bachelor of Arts in accounting from the University of Southern California. We believe Mr. Stevens is qualified to serve as a
member of our board of directors due to his significant experience in corporate finance, mergers and acquisitions and investing,
and deep knowledge of the capital markets.
Stephen J. Dannhauser
, our Macquarie
Sponsor director since October 24, 2014, has worked at Weil, Gotshal & Manges LLP since 1975. Mr. Dannhauser was named the
firm’s executive partner in 1989 and served as its chairman from 2002 through 2012. During his tenure at the law firm, Mr.
Dannhauser acted in a key role in crafting and executing business strategies that expanded Weil, Gotshal & Manges LLP from
its headquarters in New York to comprise 20 offices on three continents. During his tenure as chairman and executive partner,
Mr. Dannhauser spent the bulk of his time overseeing the business operations of the firm, building its platform and expanding
and deepening its client base. Mr. Dannhauser has been a member of the following organizations, committees and boards: The Fellows
of the American Bar Foundation; Fellow of The New York Bar Foundation; ABA Law Firm Pro Bono Project Advisory Committee; The National
Minority Business Council; NYC Bar Association Committee to Enhance Diversity; The Partnership for New York City; Chairman of
the Board of Directors of The New York Police and Fire Widows’ and Children’s Benefit Fund; Chairman of the Board
of Directors of Boys & Girls Harbor, Inc.; Member of the Board of Directors of Citizens Committee for New York City; Member
of the Board of Directors of United Way of New York City; Advisory Board Member, New York Needs You; and Honorary Member of the
Honor Legion of the Police Department of the City of New York. Mr. Dannhauser graduated from the State University of New York
at Stony Brook (B.A. with honors, 1972), and from Brooklyn Law School (J.D. with honors in 1975), where he was a member and decisions
editor of the Brooklyn Law Review (1973 – 1975). Mr. Dannhauser spends substantial time on various pro bono and philanthropic
matters. We believe that Mr. Dannhauser is qualified to serve as a member of our board of directors due to his numerous directorship
roles, leadership experience, and business industry contacts.
Stockholder Communications
Stockholders who wish to communicate directly
with our board of directors, or any individual director, should direct questions in writing to our Corporate Secretary, Hydra
Industries Acquisition Corp., 250 W. 57
th
Street, New York, NY 10107. The mailing envelope must contain a clear notation
indicating that the enclosed letter is a “Board Communication” or “Director Communication.” All such letters
must identify the author and clearly state whether the intended recipients are all members of the board of directors or just certain
specified individual directors. The Corporate Secretary will make copies of all such letters and circulate them to the appropriate
director or directors.
Director Independence
NASDAQ listing standards require that a
majority of our board of directors be independent as long as we are not a controlled company. We anticipate that a majority of
our board of directors will be independent as of the closing of the Business Combination. An “independent director”
is defined under the NASDAQ rules generally as a person other than an officer or employee of the company or its subsidiaries or
any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with
the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors
has determined that Messrs. Miller, Shea and Stevens are “independent directors” as defined in the NASDAQ listing
standards and applicable SEC rules. Our independent directors will have regularly scheduled meetings at which only independent
directors are present.
Board of Directors and Committees
During the period from January 1, 2015
through December 31, 2015, our board of directors held five meetings, our audit committee held four meetings and our compensation
committee held no meetings. During such period, our board of directors adopted one set of resolutions by unanimous written consent.
Each of our directors attended 100% of the board meetings and their respective committee meetings. The Company does not have a
policy regarding director attendance at annual meetings, but encourages the directors to attend if possible.
Audit Committee
We have established an audit committee
of the board of directors. Messrs. Miller, Stevens and Dannhauser currently serve as members of our audit committee. Mr. Miller
serves as chairman of the audit committee. Under the NASDAQ listing standards and applicable SEC rules, we are required to have
three members of the audit committee, all of whom must be independent. Messrs. Miller, Stevens and Dannhauser are each independent
under applicable NASDAQ and SEC rules.
Each member of the audit committee is financially
literate and our board of directors has determined that Mr. Miller qualifies as an “audit committee financial expert”
as defined in applicable SEC rules.
We have adopted an audit committee charter,
available on our website, which details the principal functions of the audit committee, including:
|
·
|
the appointment,
compensation, retention, replacement, and oversight of the work of the independent auditors
and any other independent registered public accounting firm engaged by us;
|
|
·
|
pre-approving
all audit and non-audit services to be provided by the independent auditors or any other
registered public accounting firm engaged by us, and establishing pre-approval policies
and procedures;
|
|
·
|
reviewing and
discussing with the independent auditors all relationships the auditors have with us
in order to evaluate their continued independence;
|
|
·
|
setting clear
hiring policies for employees or former employees of the independent auditors;
|
|
·
|
setting clear
policies for audit partner rotation in compliance with applicable laws and regulations;
|
|
·
|
obtaining and
reviewing a report, at least annually, from the independent auditors describing the firm’s
internal quality-control procedures; any material issues raised by the most recent
internal quality-control review, or peer review, of the firm, or by any inquiry or investigation
by governmental or professional authorities, within the preceding five years, respecting
one or more independent audits carried out by the firm, and any steps taken to deal with
any such issues; and to assess the independent auditors’ independence, all
relationships between the independent auditors and the Company;
|
|
·
|
reviewing and
approving any related party transaction required to be disclosed pursuant to Item 404
of Regulation S-K promulgated by the SEC prior to our entering into such transaction;
|
and
|
·
|
reviewing with
management, the independent auditors, and our legal advisors, as appropriate, any legal,
regulatory or compliance matters, including any correspondence with regulators or government
agencies and any employee complaints or published reports that raise material issues
regarding our financial statements or accounting policies and any significant changes
in accounting standards or rules promulgated by the Financial Accounting Standards Board,
the SEC or other regulatory authorities.
|
Audit
Committee Report
The Audit Committee has reviewed and discussed
our audited financial statements with management, and has discussed with our independent registered public accounting firm the
matters required to be discussed by Statement on Auditing Standards No. 61, as amended (Codification of Statements on Auditing
Standards, AU 380), as adopted by the Public Company Accounting Oversight Board (the “PCAOB”) in Rule 3200T. Additionally,
the Audit Committee has received the written disclosures and the letter from our independent registered public accounting firm,
as required by the applicable requirements of the PCAOB, and has discussed with the independent registered public accounting firm
the independent registered public accounting firm’s independence. Based upon such review and discussion, the Audit Committee
recommended to the Board that the audited financial statements be included in this proxy statement for filing with the SEC.
Submitted by:
Audit Committee of the Board of Directors
Jonathan Miller
Brent Stevens
Stephen Dannhauser
Compensation Committee
The board of directors has formed a compensation
committee of the board of directors. The current members of our Compensation Committee are Messrs. Stevens and Miller. Mr. Stevens
is the current chairman of the compensation committee. We have adopted a compensation committee charter, available on our website,
which details the principal functions of the compensation committee, including:
|
·
|
reviewing and
approving on an annual basis the corporate goals and objectives relevant to our Chief
Executive Officer’s compensation, evaluating our Chief Executive Officer’s
performance in light of such goals and objectives and determining and approving the remuneration
(if any) of our Chief Executive Officer’s based on such evaluation;
|
|
·
|
reviewing and
approving the compensation of all of our other executive officers;
|
|
·
|
reviewing our
executive compensation policies and plans;
|
|
·
|
implementing and
administering our equity-based remuneration plans;
|
|
·
|
assisting management
in complying with our SEC filings and annual report disclosure requirements;
|
|
·
|
approving all
special perquisites, special cash payments and other special compensation and benefit
arrangements for our executive officers and employees;
|
|
·
|
producing a report
on executive compensation to be included in our annual proxy statement; and
|
|
·
|
reviewing, evaluating
and recommending changes, if appropriate, to the remuneration for directors.
|
The compensation committee charter also
provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant,
legal counsel or other adviser and is directly responsible for the appointment, compensation and oversight of the work of any
such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other
adviser, the compensation committee will consider the independence of each such adviser, including the factors required by NASDAQ
and the SEC.
Other Board Committees
Our board of directors intends to establish
a nominating and corporate governance committee and adopt a written charter for this committee upon consummation of the Business
Combination. Prior to such time, we do not intend to establish this committee; however, all of our independent directors
will address any nomination process, as required by the rules of NASDAQ, prior to such time that we establish the committee. The
board of directors believes that all of our independent directors can satisfactorily carry out the responsibility of properly
selecting or approving director nominees without the formation of a standing nominating committee.
Code of Conduct and Ethics
We have adopted a Code of Ethics applicable
to our directors, officers and employees. Copies of our Code of Ethics and our audit committee and compensation committee charters
are available, without charge, upon request from us.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires
our executive officers and directors, and persons who own more than ten percent of any publicly traded class of our equity securities,
to file reports of ownership and changes in ownership of equity securities of the Company with the SEC. Officers, directors, and
greater-than-ten-percent stockholders are required by the SEC’s regulations to furnish the Company with copies of all Section
16(a) forms that they file.
Based solely upon a review of Forms
3 and Forms 4 furnished since the effective date of our IPO, we believe that, with one exception, all such forms required to be
filed pursuant to Section 16(a) of the Exchange Act were timely filed, as necessary, by the officers, directors, and security
holders required to file the same. The Form 3 of one greater-than-ten-percent owner was filed late in February 2016.
Director Nominations
We do not have a standing nominating committee,
though we intend to form a corporate governance and nominating committee as and when required to do so by law or NASDAQ rules.
In accordance with Rule 5605(e)(2) of the NASDAQ rules, a majority of the independent directors may recommend a director nominee
for selection by the board of directors. The board of directors believes that the independent directors can satisfactorily carry
out the responsibility of properly selecting or approving director nominees without the formation of a standing nominating committee.
The directors who shall participate in the consideration and recommendation of director nominees are Messrs. Miller, Shea and
Stevens. In accordance with Rule 5605(e)(1)(A) of the NASDAQ rules, Messrs. Miller, Shea and Stevens are independent. As there
is no standing nominating committee, we do not have a nominating committee charter in place.
The board of directors will also consider
director candidates recommended for nomination by our stockholders during such times as they are seeking proposed nominees to
stand for election at the next annual meeting of stockholders (or, if applicable, a special meeting of stockholders). Our stockholders
that wish to nominate a director for election to the Board must follow the procedures set forth in our bylaws.
We have not formally established any specific
minimum qualifications that must be met or skills that are necessary for directors to possess. In general, in identifying and
evaluating nominees for director, the board of directors considers educational background, professional experience, knowledge
of our business, integrity, professional reputation, independence, wisdom, and the ability to represent the best interests of
our stockholders.
Executive Compensation
None of our executive officers or directors
has received any cash (or non-cash) compensation for services rendered to us. Commencing on October 24, 2014 through the earlier
of consummation of our initial business combination and our liquidation, we agreed to pay Lorne Weil, Inc., which agreement was
assigned to Hydra Management LLC, each an affiliate of our Hydra sponsor, a total of $10,000 per month for office space, utilities
and secretarial support. Our sponsors, executive officers and directors, or any of their respective affiliates, will be reimbursed
for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses
and performing due diligence on suitable business combinations. Our audit committee will review on a quarterly basis all payments
that were made to our sponsors, officers, directors or our or their affiliates.
After the completion of our initial business
combination, directors or members of our management team who remain with us may be paid consulting, management or other fees,
or a salary, from the combined company. The amount of such compensation following the Business Combination is not known at this
time, because the directors of the Company following consummation of the Business Combination will be responsible for determining
executive and director compensation. Any compensation to be paid to our officers will be determined by our compensation committee.
We have not taken any action to ensure
that members of our management team maintain their positions with us after the consummation of the Business Combination, although
we anticipate that certain of our executive officers and directors may enter into employment or consulting arrangements to remain
with us after the consummation of the Business Combination. We are not party to any agreements with our executive officers and
directors that provide for benefits upon termination of employment.
Fees and Services
The firm of Marcum LLP has acted as our
independent registered public accounting firm. [Representatives of Marcum LLP will be present at the special meeting and afforded
the opportunity to make a statement and answer questions with respect to their services performed in connection with the Business
Combination.]
The following is a summary of fees paid
to our independent registered public accounting firm for services rendered through December 31, 2015:
Audit Fees
Audit fees consist of fees billed for professional
services rendered for the audit of our year-end financial statements and services that are normally provided by Marcum LLP in
connection with regulatory filings. The aggregate fees billed by Marcum LLP for professional services rendered for the audit of
our annual financial statements, review of the financial information included in our Forms 10-Q for the respective periods, the
registration statement, the closing 8-K and other required filings with the SEC for the year ended December 31, 2015 and for the
period from May 30, 2014 (inception) through December 31, 2014 totaled $52,680 and $80,225, respectively. The above amounts include
interim procedures and audit fees, as well as attendance at audit committee meetings.
Audit-Related Fees
We did not pay Marcum LLP for consultations
concerning financial accounting and reporting standards during the years ended December 31, 2015 and 2014.
Tax Fees
We did not pay Marcum LLP for tax planning
and tax advice for the years ended December 31, 2015 and 2014.
All Other Fees
We did not pay Marcum LLP for other services
for the years ended December 31, 2015 and 2014.
We have engaged Marcum LLP to perform tax
related diligence services in connection with the Business Combination for an aggregate fee not to exceed $12,000.
Pre-Approval Policy
Our audit committee
was formed upon the consummation of our initial public offering. As a result, the audit committee did not pre-approve all of the
foregoing services, although any services rendered prior to the formation of our audit committee were approved by our board of
directors. Since the formation of our audit committee, and on a going-forward basis, the audit committee has approved and will
pre-approve all auditing services and permitted non-audit services to be performed for us by our auditors, including the fees
and terms thereof (subject to the de minimis exceptions for non-audit services described in the Exchange Act which are approved
by the audit committee prior to the completion of the audit).
HYDRA
INDUSTRIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should
be read in conjunction with the financial statements and related notes of Hydra Industries included elsewhere in this proxy statement.
This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning
events and financial trends that may affect our future operating results or financial position. Actual results and the timing
of events may differ materially from those contained in these forward- looking statements due to a number of factors, including
those discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
References in this “Hydra Industries
Management’s Discussion and Analysis of Financial Condition and Results of Operations” section to the “Company,”
“us” or “we” refer to Hydra Industries Acquisition Corp. The following discussion and analysis of the
Company’s financial condition and results of operations should be read in conjunction with the condensed financial statements
and the notes thereto contained elsewhere in this proxy statement. Certain information contained in the discussion and analysis
set forth below includes forward-looking statements that involve risks and uncertainties.
Overview
We are a blank check company incorporated
on May 30, 2014 as a Delaware corporation and formed for the purpose of acquiring, through a merger, capital stock exchange, asset
acquisition, stock purchase, reorganization, recapitalization or other similar business transaction, one or more operating businesses
or assets.
On July 13, 2016, we entered into the
Sale Agreement governing the Business Combination.
The Sale Agreement reflects a transaction
value for the Business Combination of £200 million/$264 million, plus an earn-out of up to $25 million (up to 2.5 million
of the Company’s shares), expected to represent approximately £96 million/$126 million of equity value after adjusting
for the maintenance of debt and certain other liabilities (the foregoing conversions from GBP to USD are based on the current
USD/GBP exchange rate of $1.32/£1.00 as of July 13, 2016. Although equivalent amounts are also expressed in both UK pounds
and US dollars, the payments will be made in UK pounds in the amounts stated.). Exclusive of the potential earn-out, the consideration
to be paid for the equity and shareholder loan notes of the Target Parent and the Inspired Group will be the aggregate of the
Base Consideration (as defined below),
less
a fixed amount of Accruing Negative Consideration (£21,500 per day from
but excluding July 2, 2016 through and including the closing of the Business Combination).
The “Base Consideration” to
be paid for the equity and shareholder loan notes pursuant to the Sale Agreement will equal (i) £100,363,394/$132,479,680,
plus
(ii) any amount by which the Company’s transaction expenses (“Purchaser Costs”) referred to in Schedule
6 to the Sale Agreement exceeds £8,237,909/$10,874,040,
minus
(iii) certain expenses of the Vendors noticed by the
Institutional Vendors’ Representative, not to exceed £3,000,000/$3,960,000,
minus
(iv) certain excess interest
payments owing on the Inspired Group’s existing financing arrangements.
The Vendors will be paid the Base Consideration,
adjusted for the Accruing Negative Consideration (the “Completion Payment”), partially in cash (the “Cash Consideration”),
to the extent available after the payment of transaction expenses and working capital adjustments, if any, and partially in newly-issued
shares of Company common stock (“Purchaser Shares”) at a value of $10.00 per share (the “Stock Consideration”),
as follows:
|
a.
|
The Cash Consideration represents
the cash the Company will have available at closing to pay the Completion Payment. The
Cash Consideration will equal (i) the Company’s current cash in trust, the $20
million proceeds of a private placement to Macquarie Capital, and any other available
funds, minus (ii) an agreed amount of Purchaser Costs (including expenses incurred in
connection with the preparation of the proxy statement and meetings with the Company’s
stockholders), minus (iii) an agreed amount of the Vendors’ transaction expenses,
minus (iv) the amount of repayment required under certain of the Inspired Group’s
financing arrangements, minus (v) £5 million for the purposes of retaining cash
on the Company’s balance sheet.
|
|
b.
|
The Stock Consideration will equal
the Completion Payment minus the Cash Consideration, divided by $10.00 per share.
|
The earn-out payment of up to $25,000,000
(the “Earn-out Consideration”) shall be paid to the Vendors exclusively in Purchaser Shares and will be determined
based on Inspired’s performance in certain jurisdictions through September 30, 2018 pursuant to a formula set forth in Schedule
5 to the Sale Agreement.
The consummation of the Business Combination
is conditioned upon the approval of the Company’s stockholders, certain regulatory approvals pertaining to the gaming industry
and other customary closing conditions.
In connection with our IPO, we entered
into letter agreements with each of our initial stockholders pursuant to which the initial stockholders agreed to vote any shares
of our common stock owned by them in favor of a future business combination proposal. Concurrently with the execution of the Sale
Agreement, our Sponsors each entered into Voting and Support Letter Agreements, which, among other things, confirmed their obligations
under such prior letter agreements to vote their shares in favor of the transaction. The Voting and Support Letter Agreements
also contain, among other things, covenants by our Sponsors not to solicit any alternative business combinations during the pendency
of the Inspired Business Combination.
The foregoing descriptions of the Sale
Agreement and the Voting and Support Letter Agreements do not purport to be complete and are qualified in their entirety by the
full text of such Agreements, copies of which, along with the Warranty Deed delivered in connection with the Sale Agreement, were
filed, or incorporated by reference, as exhibits to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission
on August 1, 2016.
Results of Operations
We have neither engaged in any operations
nor generated any operating revenues to date. All activity from inception to June 30, 2016 relates to our formation, our initial
public offering and private placement and the identification and evaluation of prospective candidates for a business combination.
Since the completion of our initial public offering, we have not generated any operating revenues and will not generate such revenues
until after the completion of the Business Combination. We generate non-operating income in the form of interest income on cash
and securities held, which we expect to be insignificant in view of the low yields on short-term government securities. We expect
to incur increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance).
For the year ended December 31, 2015 and
for the period from May 30, 2014 (inception) through December 31, 2014, we had a net loss of $3,526,206 and $141,529, respectively,
consisting of target identification expenses, operating costs and due diligence expenses.
For the three and six months ended June
30, 2016, we had a net loss of $1,176,421 and $1,422,781, respectively, consisting of $1,210,738 and $1,491,969, respectively,
of target identification expenses, operating costs and due diligence expenses, offset by $37,147 and $58,321, respectively, of
interest income and $(2,830) and $10,867, respectively, of unrealized (loss) gains on marketable securities held in the Trust
Account. For the three and six months ended June 30, 2015, we had a net loss of $1,890,622 and $2,076,909, respectively, primarily
consisting of target identification expenses, operating costs and due diligence expenses.
Liquidity and Capital Resources
On October 29, 2014, we consummated our
initial public offering of 8,000,000 units at a price of $10.00 per unit generating gross proceeds of $80,000,000. Simultaneously
with the closing of our initial public offering, we consummated the private sale of an aggregate of 7,500,000 placement warrants,
each exercisable to purchase one-half of one share of our common stock at $5.75 per half share ($11.50 per whole share), to Mr.
Weil, our Macquarie Sponsor and Mr. Schloss at a price of $0.50 per warrant, generating gross proceeds of $3,750,000. We received
net proceeds from our initial public offering and sale of the placement warrants of $81,326,704, net of $2,000,000 cash paid for
underwriting fees and $423,296 cash paid for offering costs. In addition, up to $2,800,000 of underwriting fees were deferred
until the closing of a Business Combination. Upon the closing of our initial public offering and the private placement, $80,000,000
was placed into a trust account, while the remaining funds of $1,326,704 were placed in an account outside of the trust account
for working capital purposes.
As of June 30, 2016, we had cash and securities
held in the trust account of $80,031,319, substantially all of which is invested in U.S. treasury bills with a maturity of 180
days or less. Interest income on the balance in the trust account may be available to us to pay taxes and up to $50,000 of our
dissolution expenses. Through June 30, 2016, we withdrew $47,348 of interest earned on the trust account. Other than deferred
underwriting fees payable in the event of a Business Combination, no amounts are payable to the underwriters of our initial public
offering.
As of June 30, 2016, we had cash of $216,796
held outside the trust account (mainly from the proceeds of convertible promissory notes), which is available for use by us to
cover the costs associated with identifying a target business, negotiating a Business Combination, due diligence procedures and
other general corporate uses.
We intend to use the funds held outside the
trust account primarily to structure, negotiate and complete the Business Combination and pay taxes to the extent the interest
earned on the trust account is insufficient to pay our taxes.
For the six months ended June 30, 2016,
cash used in operating activities amounted to $586,791, mainly resulting from a net loss of $1,422,781, offset by an increase
in our accounts payable and accrued expenses. As of June 30, 2016, we had current liabilities of $4,038,140, primarily representing
amounts owed to lawyers, accountants and consultants who have advised the Company on matters related to potential business combinations
and the Business Combination. For the year ended December 31, 2015, cash used in operating activities amounted to $866,930, resulting
from a net loss of $3,526,206, offset by an increase in our accounts payable and accrued expenses. As of December 31, 2015, we
had current liabilities of $2,645,838, primarily representing amounts owed to lawyers, accountants and consultants who have advised
the Company on matters related to a potential business combination. There can be no assurance that we will be able to make payment
in full of the amounts due to said advisors. Funds in the trust account are not available for this purpose absent the completion
of a business combination. If a business combination is not consummated, we would lack the resources to pay all of the liabilities
that have been incurred by us to date or after and we may lack the resources needed to consummate another business combination.
We entered into fee arrangements with certain service providers and advisors pursuant to which certain fees incurred by us in
connection with a Terminated Business Combination would be deferred and become payable only if we consummated such Terminated
Business Combination. If the Terminated Business Combination did not occur, we would not be required to pay these contingent fees.
Effective October 26, 2015, all efforts related to such Terminated Business Combination were terminated and, accordingly, all
contingent fees that had been previously incurred are no longer due and payable. We have also entered into other fee arrangements
with certain service providers and advisors pursuant to which certain fees incurred by us in connection with another potential
Business Combination will be deferred and become payable only if we consummate such potential Business Combination. If the potential
Business Combination does not occur, we will not be required to pay these contingent fees. As of June 30, 2016, we incurred approximately
$811,000 of fees, of which approximately $60,000 has been paid, approximately $495,000 is included in accounts payable and accrued
expenses and $256,000 has not been accrued since it is contingent upon the closing of the proposed Business Combination. There
can be no assurances that we will complete the Business Combination.
We intend to use substantially all of the
funds held in the trust account (less amounts used to pay taxes and deferred underwriting commissions) to complete our Business
Combination. We estimate our annual franchise tax obligations, based on our assets and the number of shares of our common stock
authorized and outstanding after the completion of the initial public offering, to be approximately $85,000, for which we anticipate
making quarterly estimated tax payments throughout 2016. Our annual income tax obligations will depend on the amount of interest
income earned in the trust account. We do not expect the interest earned on the amount in the trust account will be sufficient
to pay all of our tax obligations. To the extent that our capital stock or debt is used, in whole or in part, as consideration
to complete our Business Combination, the remaining proceeds held in the trust account will be used as working capital to finance
the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.
Our Macquarie Sponsor entered into a contingent
forward purchase contract to purchase, in a private placement for gross proceeds of approximately $20,000,000 to occur concurrently
with the consummation of our initial Business Combination, 2,000,000 Private Placement Units (which includes 2,000,000 rights
which will be exchanged for 200,000 shares of common stock), on substantially the same terms as the sale of units in our initial
public offering, and 500,000 shares of common stock of Hydra Industries for an aggregate purchase price of $20,004,347. The funds
from the sale of the Private Placement Units may be used as part of the consideration to the sellers in the initial Business Combination;
any excess funds from this private placement may be used for working capital in the post-transaction company. This commitment
is independent of the percentage of stockholders electing to redeem their shares and provides us with an increased minimum funding
level for the initial Business Combination. The contingent forward purchase contract is contingent upon, among other things, our
Macquarie Sponsor approving the Business Combination, which approval can be withheld for any reason.
We may need to raise additional capital through
loans or additional investments from our Sponsors, stockholders, officers, directors, or third parties. On March 16, 2016, we
entered into convertible promissory notes with the Sponsors, whereby the Sponsors loaned us an aggregate of $500,000 (“Convertible
Promissory Notes”) in order to finance transaction costs in connection with a Business Combination. In the event that a
Business Combination does not occur, the Sponsors would become general unsecured creditors of the Company. The Convertible Promissory
Notes are non-interest bearing, and due on the date on which we consummate a Business Combination. Each of the Convertible Promissory
Notes is convertible, in whole or in part, at the election of the Sponsor holding such note, upon the consummation of a Business
Combination. Upon such election, the Convertible Promissory Notes will convert into warrants, at a price of $0.50 per warrant.
These warrants will be identical to the Private Placement Warrants. As such, each warrant is exercisable for one-half of one share
of common stock at an exercise price of $5.75 per half share.
Other than as described above, our officers
and directors may, but are not obligated to, loan us funds, from time to time or at any time, in whatever amount they deem reasonable
in their sole discretion, to meet our working capital needs.
Other than as described above, none of
the Sponsors, stockholders, officers or directors, or third parties are under any obligation to advance us funds, or to invest
in us. Accordingly, we may not be able to obtain additional financing. If we are unable to raise additional capital, we may be
required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing
operations, suspending the pursuit of our business plan, and reducing overhead expenses. We cannot provide any assurance that
new financing will be available to us on commercially acceptable terms, if at all. These conditions raise substantial doubt about
our ability to continue as a going concern.
If we complete our initial Business Combination,
we expect to repay such loaned amounts out of the proceeds of the trust account released to us. Otherwise, such loans would be
repaid only out of funds held outside the trust account. In the event that our initial Business Combination does not close, we
may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds from our
trust account may be used for such repayment. Up to $1,000,000 (including the $500,000 of convertible promissory notes discussed
above) of all loans made to us are convertible at the option of the lender into warrants of the post-Business Combination entity
at a price of $0.50 per warrant. The warrants would be identical to the Private Placement Warrants. The terms of such loans, if
any, by our officers and directors (other than the $500,000 in loans which our sponsors have committed to make in the aggregate)
have not been determined and no written agreements exist with respect to such loans.]
Off-balance sheet financing arrangements
We have no obligations, assets or liabilities
which would be considered off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements,
established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial
assets.
Contractual obligations
We do not have any long-term debt, capital
lease obligations, operating lease obligations or long-term liabilities other than an agreement to pay an affiliate of our Hydra
sponsor a monthly fee of $10,000 for office space, utilities and administrative support provided to us. We began incurring these
fees on October 24, 2014 and will continue to incur these fees monthly until the earlier of the completion of the Business Combination
or the Company’s liquidation.
Significant Accounting Policies
The preparation of financial statements
and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and
income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified
the following significant accounting policy:
Common stock subject to possible redemption
We account for our common stock subject
to possible conversion in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing
Liabilities from Equity.” Common stock subject to mandatory redemption (if any) is classified as a liability instrument
and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that
are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within
our control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity.
Our common stock features certain redemption rights that are considered to be outside of our control and subject to occurrence
of uncertain future events. Accordingly, at June 30, 2016 and December 31, 2015, the common stock subject to possible redemption
is presented as temporary equity, outside of the stockholders’ equity section of our balance sheet.
Recent accounting pronouncements
In August 2014, the FASB issued ASU 2014-15,
“Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”).
ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s
ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required
to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as
a going concern within one year from the date the financial statements are issued. The amendments in ASU 2014-15 are effective
for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is
permitted. We adopted the methodologies prescribed by ASU 2014-15 as of January 1, 2016. The adoption of ASU 2014-15 did not have
a material effect on our financial position or results of operations.
INFORMATION ABOUT
TARGET
Overview of Inspired
Target is a global gaming technology company,
supplying Virtual Sports and Server Based Gaming (“SBG”) systems to regulated lottery, betting and gaming operators
worldwide through an “omni-channel” distribution strategy. Target provides end-to-end digital gaming solutions on
its proprietary and secure network that accommodates a wide range of devices, including land-based gaming machine products, mobile
devices such as smartphones and tablets, as well as PC and social applications. Target believes this omni-channel distribution
strategy, combined with its common technology platform, allows it to keep pace with evolving requirements in game play, security,
technology and regulations in the global gaming and lottery industry.
Target believes it is the global leader
in the supply of Virtual Sports gaming products, with the widest product offering available. As of June 30, 2016, Target’s
Virtual Sports product is placed in more than 30,000 retail venues and to more than 200 websites. Target’s gaming products
are installed in approximately 30 gaming jurisdictions worldwide, including U.K., Italy, Nevada and China.
Target’s Virtual Sports products
typically are offered on a participation basis, with an upfront software license fee. Target’s SBG products are offered
directly to land-based and online casino gaming operators either: (i) on an outright sale basis or (ii) on a participation basis
whereby it receives a portion of gaming revenues generated by its products.
Target is a leading supplier of SBG products,
offering games through approximately 25,000 digital terminals in gaming and lottery venues around the world. Because its products
are fully digital, they can interact with a central server and are provided on a “distributed” basis which allows
Target to realize a number of benefits, including that it is able to access a wider geographic footprint through the Internet
and proprietary networks. Target believes that it offers the only SBG product that operates with a single technology architecture
which is compliant with each of U.K. (B2/B3), Italian (‘6B), G2S (Greek and North American) and China Lottery (CAOS) technical
regulations.
Target’s customer base includes
regulated operators of lotteries, licensed sports books, gaming and bingo halls, casinos and regulated online operators. Some
of Target’s key customers include William Hill, SNAI, Sisal, Lottomatica, Betfred, Betfair, Paddy Power, Ladbrokes, Gala
Coral Group, Genting, Codere, Sky Vegas, Fortuna, AGTech and the China Sports Lottery.
Unlike traditional suppliers to the gaming
industry, Target does not supply traditional slot machines or casino systems. All of its products are provided through multiple
channels by a digital network. Further, all of its products are designed to operate within all applicable gaming and lottery regulations
and all of its customers are regulated gaming or lottery operators.
Target operates in a highly regulated industry. It and its
products, as applicable, are licensed, authorized or certified (as required dependent on local jurisdictions) in a number of key
gaming and lottery jurisdictions. Key licenses, authorizations and certifications include the Gambling Commission of Great Britain,
the Licensing Authority of Gibraltar, the Alderney Gambling Control Commission and the State of New Jersey – Division of
Gaming Enforcement. Target is a member of key associations including the Gaming Standards Association, World Lottery Association
and Association of Gaming Equipment Manufacturers.
Target is headquartered and its primary
facilities are located in the United Kingdom. Additionally, Target has development and distribution offices in other countries
including Portugal, Italy and Colombia. Target also has an online gaming operations center in Gibraltar. Target has over 800 employees
located throughout the world, developing and operating digital games and networks.
Target’s fiscal year ends on the
last Saturday in September.
Product Overview
Target operates its business and evaluates
its business performance at a total consolidated level. Target’s revenue is generated from two principal products. Target’s
products generate revenue through product sales and participation revenue which is maintained on a consolidated basis as presented
in its Consolidated Financial Statements (other than the revenue and cost of revenues information included in its Consolidated
Statements of Income and gaming operations equipment and related accumulated depreciation included in its Consolidated Balance
Sheets). For information about Target’s revenues, net income, assets, liabilities, stockholders equity and cash flows, see
its Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations.”
Target’s two principal products
– Virtual Sports and Server Based Gaming – share common underlying technologies. Both products offer innovative games,
available through a variety of distribution channels, including digital SBG terminals, mobile gaming products, PC/online gaming
products and services, and electronic table games, all operating within a common technological architecture. Target believes this
omni-channel availability of its games is an important differentiator in the market. This distribution strategy allows Target
to update its game and operating software remotely, keeping pace with evolving requirements in game play, security, technology
and regulations.
Virtual Sports offers ultra-high resolution
games that create an always on sports wagering experience, while SBG offers more traditional casino games such as slots, roulette,
and other table games. Target’s Virtual Sports game portfolio includes branded titles such as Rush Football 2
TM Pending
,
Rush Boxing
TM
featuring Mike Tyson, as well as horse racing, tennis, motor racing, cricket and other sports titles.
Based, among other things, on its review of competitors’ websites and product materials, Target believes that it offers
the most comprehensive array of sports titles available in Virtual Sports.
Target’s SBG game portfolio includes
a broad selection of leading SBG slots titles such as Centurion, Diamond Goddess
©
and Rise of Anubis
©
,
which offer customers a wide range of volatilities, return-to-player and other features to suit their needs. Target also offers
more traditional casino games through its SBG network, such as roulette, blackjack and keno.
Target generates revenues in two principal
ways: on a participation basis and through product and software license sales. Participation revenues include a right to receive
a share of revenue generated: (i) from placing Target’s Virtual Sports products with operators, (ii) by its SBG terminals
placed in gaming and lottery venues; (iii) by licensing its game content and intellectual property to third parties; (iv) by its
games on third-party online gaming platforms that are interoperable with its game servers; and (v) from operating a networked
gaming system and application, which is a system that links groups of networked enabled gaming machines to a server in a remote
data center. Under Target’s participation agreements, payments made to it are calculated based upon a percentage of the
net win, which is the earnings generated from patrons of its customers playing the gaming machines, after adjusting for player
winnings and relevant gaming taxes. Product sales include the sale of new SBG terminals and associated parts to gaming and betting
operators. Software license revenues are primarily related to Target’s Virtual Sports product.
Virtual Sports
Target believes it is the global leader
in the supply of Virtual Sports
.
Target offers a wide range of sports and numbers games to more than 30,000 retail venues
and more than 200 websites in more than 35 countries. Target’s customers are many of the largest operators in lottery, gaming
and betting worldwide. Target also supplies Virtual
Sports
and other digital games to Mobile and Online operators in the U.K., US (Nevada and New Jersey), Gibraltar and other regulated
EU markets.
Target’s Virtual Sports product
is comprised of a complex software and networking package that provides fixed odds wagering in the form of a ultra-high definition
computer rendering of a sporting event, such as soccer or boxing. This creates a form of simulated sports betting, in both a streaming
and on-demand environment, overcoming the relative infrequency of live sporting events. Target has developed this product using
an award winning TV and film graphics team with advanced motion capture techniques. By implementing videogame-style graphics that
are familiar to a younger generation of players, Target believes it has created a gaming product that is attractive to this demographic.
Target believes Virtual Sports is a flexible offering that can be deployed as a sports betting, lottery, or gaming product, giving
it a wide range of potential customers in both public and private implementations.
In addition to soccer and boxing, Target’s
virtual sports products also include tennis, speedway (track motorcycle racing), motorcar racing (F1 style cars), velodrome cycle
racing, and greyhound and horse racing, basketball, boxing, darts, cricket as well as various lottery ball draw and other numbers
games. Target has also licensed the use of certain sports figures in its games, including boxer Mike Tyson and others that are
not yet announced.
Target’s customers together offer
millions of Virtual Sports events per day through both land-based, online and mobile platforms, many of them 24 hours per day,
7 days per week, often concurrently within the same location. Target’s first mobile Virtual Sports product launched in 2013,
and it launched a remote game server Virtual Sports product in 2016 which enables the provision of on-demand Virtual Sports events,
alongside the scheduled events which have dominated to date.
Server Based Gaming (SBG) Products
Target is a leading supplier of SBG products,
offering games through approximately 25,000 digital terminals in gaming and lottery venues around the world. Because its products
are fully digital, they can interact with a central server, and are provided on a “distributed” basis which allows
Target to realize a number of benefits, including that it is able to access a wider geographic footprint through the Internet
and proprietary networks. Target believes that it offers the only SBG product that operates with a single technology architecture
which is compliant with each of U.K. (B2/B3), Italian (‘6B), G2S (Greek and North American) and China Lottery (CAOS) technical
regulations.
Target has a strong market position in
the U.K., with approximately 50% of SBG terminal placements and over 100 games. In addition, Target has more than 5,000 terminals
currently contracted to be placed in the EU during fiscal 2017, (subject to regulatory certifications). Target offers SBG terminals
such as the Eclipse, Inceptor, Optimus, and Blaze, each offering a different size, graphics, technology, and price proposition.
Target’s SBG and game portfolio
distributes games to devices via different Game Management Systems (GMS), each tailored to a specific operator and market type.
Target’s CORE
TM
system is designed for distributed street gaming markets
using its or third party cabinets with
Inspired Inside,
and delivering its gaming content and a wide portfolio of independent
game developers. CORE HUB
TM
is Target’s next generation server supported gaming management concept, complementary
to and based on the CORE platform. It uses a new protocol layer to take advantage of the opportunities offered by the open-standard
American Gaming Association G2S gaming protocol. CORE EDGE
TM
is the next iteration of
Target’s
server based gaming management system which uses its VIRGO RGS that is also used to power its web-based and mobile content delivery
platform. This, and the HTML5 based games that are deployed on it, mean that Target can offer an omni-channel game experience
to players, deploying them simultaneously to machines, mobile and online.
Target’s Strategy
Target is focused on executing on three
key strategic priorities to target long-term growth in revenues, profit and cash flow. Target’s strategic priorities
are based on its experience in serving customers in multiple jurisdictions throughout the world as well as on its expectations
for the evolution of the gaming market. Target believes the gaming industry will continue to migrate towards networked,
distributed omni-channel gaming. As a result, Target has been focused on developing products that could be distributed via
its omni-channel strategy, utilizing a common technology platform. This strategy allows Target to update its game and operating
software remotely, keeping pace with evolving requirements in game play, security, technology and regulations.
Target’s three key strategic priorities are as follows:
Seek to extend its leadership positions
in each of Virtual Sports and Server Based Gaming by developing new, omni-channel products
Target continually invests in new product
development in each of the Virtual Sports and Server Based Gaming product lines. Target believes these investments benefit its
existing and new customers by making new products available to them and bringing exciting entertainment experiences to their players.
During the last three years Target has transitioned to a fully digital, interconnected product offering, with every game, terminal
or device connected to a secure network operated by it or by its customers. Target believes that this purely digital approach,
which connects its content to a wide range of devices and is compatible with a wide range of protocols and regulatory standards,
is a differentiator in its industry and creates a significant barrier to competitive advantage. Target has continued to
focus on channels where it believes there is considerable growth available, especially mobile, where it can deploy its RGS product.
Target believes this investment in technology allows it to quickly adapt to changes in player preferences.
Continue to invest in games and
technology in order to grow Target’s existing customers’ revenue
Approximately 93% of Target’s revenue
for the twelve months ended April 8, 2016 was derived from sources that it believes to be recurring in nature due to contracts
that it has in place with the relevant customers. In this participation-based portion of its business, Target’s revenues
typically grow in-line with the growth of its customers’ gaming revenues from these products. Target works closely
with its customers to assist in the optimization of their terminal estates so as to achieve growth in revenue performance, which
Targets believes is to its benefit. Accordingly, Target continually invests in new game and technology offerings which it
believes will enable its customers to keep their offerings fresh so as to offer their players new forms of entertainment. Target
believes its game development is a key aspect of its strategy, as it believes that over time it leads to growth in revenue generated
by its products for its customers, and therefore growth in its revenue. Target intends to continue this strategic priority
in both its server based gaming and virtual sports businesses.
Add new customers by expanding into
underpenetrated markets and newly-regulated jurisdictions
Target believes that its historical growth
has been driven, in part, by its entry into new markets and it expects such geographic expansion to continue. Target also
intends to seek opportunities to enter new product categories within the gaming market where it believes that it may enjoy competitive
advantage relative to any peers that it may have. Target believes that there are major gaming markets in which it has limited
participation to date but where its products are positioned, or can be positioned, for future success. Target’s focus
on its two major products (SBG and Virtual Sports) through two channels (retail and mobile/online) situates it to take advantage
of anticipated growth in Europe and North America. For example, Target is expanding into China via its relationships with each
of AGTech and the China Sports Lottery. Additionally, Target has recently commenced operations of its products in Nevada
with William Hill and has signed contracts with four internet gaming operators for its products in New Jersey, where it is licensed.
Target’s Competitive Strengths
Target intends to execute its strategy
by utilizing its competitive strengths:
Significant Base of Operations with
Recurring Revenue from Long-Term Relationships
Target believes it has good visibility
into its future revenues, as a result of its customer contracts. Over the last three years, approximately 93% of total revenue
was recurring and contracted in nature. Target’s customers include major blue chip lottery, sports betting and gaming operators
(both land based and online) within the regulated U.K. and European markets. Many of these customer relationships are long-standing
and in excess of 10 years.
Hold Leading Position in Virtual
Sports
Based on publicly available industry information,
Target estimates that Target’s Virtual Sports product currently accounts for a substantial majority of all global installs,
generating over $10 billion in player wagers per year. Based, among other things, on its review of competitors’ websites
and product materials, Target believes that its current offering has more virtual sporting events and games than any other competitor
in the market, with a wider range of betting markets and what Target considers to be superior graphics.
History of Strong Content Development
/ Licensed Content
Target releases over 100 new games per
annum across its SBG and Mobile RGS estate. Many of its recent game launches have been omni-channel and leading performers in
their markets, including Centurion in U.K. B3 and Mobile and Diamond Goddess in Italy.
Omni-Channel Digital Gaming Platform
Target’s proprietary digital gaming
platform has been developed internally by development teams based in the U.K. and EU. Target believes that it offers the only
SBG product that operates with a single technology architecture which is compliant with each of U.K. (B2/B3), Italian (‘6B),
G2S (Greek and North American) and China Lottery (CAOS) technical regulations. Target’s 100% digital, omni-channel platform
is able to deliver its content and user experience to devices ranging from SBG terminals to mobile devices.
Experienced Management Team
Target’s seasoned management team
is led by founder Luke Alvarez. The Business Combination with Hydra creates a partnership with Lorne Weil, whose past leadership
includes growing a diversified global gaming technology company.
Industry Overview
Target operates within the global gaming
and lottery industry. Global gaming and lottery growth has been steady and resilient to economic cycles over the last decade.
According to H2 Gambling Capital, it has grown at a 3.8% compounded annual growth rate from 2005 to 2015, driven by increased
consumer spend and the introduction of new regulated markets.
During this period, digital gaming
and lottery (online and mobile) have grown at a faster pace. According to H2 Gambling Capital, it has grown at a 10.6% compound
annual growth rate, driven by rapid growth in the deployment of digital games and technologies such as Virtual Sports and digital
SBG terminals into land-based venues. In markets such as the U.K. and Italy, where regulators have supported the transition to
digital, online and retail channels. According to H2 Gambling Capital, digital now accounts for over 30% of gaming revenues in
the U.K. and 9% of gaming revenues in Italy.
Target believes that the overall global
gaming and lottery industry will continue to grow steadily, with more robust growth in mobile and land-based digital gaming and
lottery markets. Target believes the industry is content driven and, much like music, videogames and motion pictures will continue
to be transformed by the propagation of digitally-networked technologies.
As a gaming and lottery business-to-business
supplier focused solely on digital products and technologies, Target believes it is well-positioned to benefit from these trends
in digital adoption.
Influencers of Digital Adoption
Target believes the digital segment of
the global gaming and lottery industry will continue to grow in line with historic rates driven by the following factors:
Governments: Opening of new gaming
territories
Many national and state governments operating
in developed economies in Europe and the United States are suffering from structural funding deficits. The regulation and liberalization
of gaming and lottery is frequently used to raise new sources of revenue to these governments. Recent examples of gaming or lottery
liberalization include Virtual Sports in Nevada, online in New Jersey, online, VLT (Video Lottery Terminal) and Virtual Sports
in Italy, VLT and online in Greece, online in Spain and venue-based Virtual Sports and in the Philippines. Markets currently considering
new digital gaming liberalization include mainland China, Brazil and many others. In most cases, Target believes such liberalization
does not favor build outs of large new destination resort casinos, but rather focuses on smaller “edge” venues with
lottery, gaming and/or sports betting, combined with online or mobile games.
Digital Multi-Channel Offering: Replacement
of legacy analog machines with larger volume of smart digital devices – retail and mobile
In many established markets, as existing
gaming terminals mature, governments and regulatory authorities have implemented regulations to upgrade established terminal base
to fully digital deployments. Recent examples include new G2S VLT standards in Canadian lotteries, current VLT RFI’s in
various Scandinavian markets, recent U.K. player protection improvements in U.K. land-based and online games, and the Italian
plan for “Remote AWP” which may replace more than 300,000 analog machines with approximately 250,000 “intelligent”
networked devices.
Smartphone / Mobile: Rapid adoption
of gaming and lottery applications on growing volume
In the U.K., mobile play on sports betting
and gaming now exceeds play on PCs. According to H2 Gambling Capital, U.K. mobile gaming revenues have exhibited a 57% compounded
annual growth rate between 2008 and 2015. Mobile gaming and lottery is now expanding in Italy and Spain, and mobile play has recently
been approved in each of Nevada and New Jersey for gaming and for Michigan for lottery. Lottery authorities in mainland China,
a market with approximately 600 million smartphones, are currently considering licenses for mobile lottery.
Benefits of Server Based Gaming
Target believes there are significant
benefits to SBG which drive the accelerating adoption of digitally networked gaming and lottery. SBG allows operators to remotely
manage their estate with minimal disruption to their business. The central system offers flexibility to rotate / change games
which allows operators to tailor game availability by time of day, target specific player demographics and take advantage of seasonal
/ themed marketing opportunities. New games can be phased in seamlessly, overcoming the revenue dip often associated with replacing
games on traditional slot machines.
More games per terminal provides incentives
for operators to test new games and new suppliers. Operators can appeal to a broader base of players with minimal cost or risk
as well as commission games from new third-party party suppliers on an open game interface. The increased number of games per
machine and remote game management eliminates procurement risk for the operator as unsuccessful games can be easily switched out.
The SBG model significantly reduces the
need for on-site repairs and improves terminal up-time. Elimination of machine obsolescence should extend product lifecycles as
well as the time period over which costs can be depreciated.
Regulatory Framework
Target conducts business in a number of different jurisdictions,
of which Great Britain and Italy have historically contributed the most significant recurring revenues. The gaming regulator responsible
for Target’s activities in Great Britain is the Gambling Commission of Great Britain (the "Gambling Commission");
in Italy the operation of gaming machines and remote gaming is regulated by L’Amministrazione autonoma dei monopoli di Stato
("AAMS").
In addition, Target is licensed or certified (as required dependent
on local jurisdictions) in a number of other jurisdictions by regulators such as the Licensing Authority of Gibraltar, the Alderney
Gambling Control Commission and the State of New Jersey – Division of Gaming Enforcement.
British Betting and Gaming Laws and Regulations
In relation to the British market, Target supplies and distributes
Category B2 and B3 gaming machines, and electronic table gaming machines, to third parties who are licensed to operate such machines
in bricks and mortar premises. Target also supplies virtual racing software to local retail venues and to online operators who
are licensed to target the British market. Target supplies its mobile RGS to remote operators who are licensed to target the British
market.
The provision of its products and services in relation to the
British market is authorized by a series of licenses issued by the Gambling Commission, namely remote and non-remote Gaming Machine
Technical (Full) operating licenses, a remote casino operating license, and a gambling software license.
The Gambling Act 2005 (the "GA05") is the principal
legislation in Great Britain governing gambling (other than in relation to the National Lottery which is governed by separate
legislation). The GA05 applies to both land-based gambling (referred to as 'non-remote' gambling) and online gambling (
i.e.
,
'remote' gambling).
The GA05 provides that it is an offense to make a gaming machine
available for use without an operating license. There are a number of different categories of licensable gaming machines (the
GA05 provides for category A to D machines, although no category A machines are currently in operation); each category is subject
to different levels of maximum stakes and prize limits. In addition, there are limits on the number and type of gaming machines
which can be operated from licensed premises: for example, a licensed betting office is permitted to house up to four category
B2 to D machines, while a large casino may house up to 150 category B to D machines (subject to satisfying certain ratios of machines
to gaming tables).
Gaming machine suppliers are required to hold an operating
license in order to manufacture, supply, install, adapt, maintain or repair a gaming machine or part of a gaming machine. Gaming
machine suppliers must also comply with the Gaming Machine Technical Standards published by the Gambling Commission in relation
to each category of machine, and such machines must meet the appropriate testing requirements.
In relation to online (remote) gambling, the GA05 provides
that it is an offense to 'provide facilities' for gambling without an operating license. It is also an offense to manufacture,
supply, install or adapt gambling software without an appropriate gambling software license. Where gambling software is used or
supplied for use in relation to the British market, it must also satisfy the Remote Gambling and Software Technical Standards
published by the Gambling Commission.
The holder of a British gambling operating license is subject
to a variety of ongoing regulatory requirements, including but not limited to the following:
Shareholder disclosure: An entity holding a gambling
license must notify the Gambling Commission of the identity of any shareholder holding 3% or more of the equity or voting rights
in the entity (whether held or controlled either directly or indirectly).
Change of control: Whenever a new person becomes
a “controller” (as defined in section 422 of the Financial Services and Markets Act 2000) of an entity that holds
any gambling licenses, the licensed entity must apply to the Gambling Commission for permission to continue to rely on its gambling
licenses in light of the new controller. A new controller includes any person who holds or controls (directly or indirectly, including
ultimate beneficial owners who hold their interest through a chain of ownership) 10% or more of the equity or voting rights in
the licensed entity (or who is otherwise able to exercise “significant influence” over it). The Gambling Commission
must be supplied with specified information regarding the new controller (which, in the case of an individual, includes detailed
personal disclosure) and this information will be reviewed by the Gambling Commission to assess the suitability of the new controller
to be associated with a licensed entity. If a new controller is found to be unsuitable, the Gambling Commission is required to
revoke the relevant gambling operating licenses. It is possible to apply for approval in advance from the Gambling Commission
prior to becoming a new controller of a licensed entity.
Compliance with the Licence Conditions and Codes
of Practice (LCCP): The LCCP is a suite of license conditions and code provisions which attach to operating licenses issued by
the Gambling Commission. The provision of gambling facilities in breach of a license condition is an offense under the GA05. Certain
specified “Social Responsibility” code provisions are accorded the same weight as license conditions in this regard
(whereas breach of an “ordinary” code provision is not an offense in itself, but may be evidence of unsuitability
to continue to hold a gambling license). The LCCP imposes numerous operational requirements on licensees including compliance
with the Gambling Commission’s Remote Gambling and Software Technical Standards, segregation of customer funds, the implementation
of a variety of social responsibility tools (such as self-exclusion), anti-money laundering measures, age verification of customers
and a host of consumer protection measures. The Gambling Commission regularly reviews and revises the LCCP.
Regulatory returns and reporting of key events: The
LCCP requires licensees to submit quarterly returns to the Gambling Commission detailing prescribed operational data. Licensees
are also required to notify the Gambling Commission as soon as practicable and in any event within 5 working days of becoming
aware of the occurrence of certain specified “key events” which, in summary, are events which could have a significant
impact on the nature or structure of the licensee’s business. Licensees are also required to notify suspicion of offenses
and suspicious gambling activity.
Personal licenses: Key management personnel are required
to maintain personal licenses authorizing them to discharge certain responsibilities on behalf of the operator. These personal
licenses are subject to renewal every three years. Personal licenses are subject to compliance with certain license conditions.
Italian Betting and Gaming Laws and Regulations
In Italy, Target supplies gaming machines for use by operators
in licensed bricks and mortar premises, and also supplies VRS to retail and online operators targeting the Italian market. These
supplies are made by certain branch offices Target has established in Italy.
The categories of machine that Target supplies in Italy (
i.e.
,
VLTs) must be connected to the servers operated by AAMS (the Italian regulator) in order to enable AAMS to monitor the proper
operation of the machines and to verify the level of taxes which are due. An operator of VLTs (which manages the network which
connects those machines to AAMS' servers) is required to hold a license from AAMS for each gaming machine that it operates. Target
acts as a supplier of gaming machines rather than as an operator. As a supplier of gaming machines, Target is not required to
hold a license from AAMS, but it is required to hold a police license (as prescribed by article 86, paragraph 3, of the Italian
United Text of Public Security Law (TULPS) provided by the Royal Decree 18 June 1931, No. 773) and to be enrolled in a registry
prescribed by article 1, paragraph 82 of Law No. 220/2010 (known as the 'Register of Gestori'). Target has two Italian branches
which are enrolled in the Register of Gestori to act as suppliers but not operators.
If a supplier of gaming machines is not enrolled in the Register
of Gestori, then any agreements it enters into regarding the supply of gaming machines is null and void. The issue of the relevant
police license and enrollment in the Register of Gestori are conditioned on a suitability review of the applicant. All gaming
machines (and the games installed on them) must be certified and approved by SOGEI (an entity authorized to conduct such certification
and approval by the Italian Ministry of Finance).
In relation to the supply of online gambling, Article 4 of
Law 13 December 1989 No. 401 makes it a criminal offense to offer games in Italy without holding an Italian remote gaming license
issued by AAMS. Operators are required both to hold a license covering the games that they offer and to undergo a technical approval
process for each gaming platform and game. There is no licensing regime for game suppliers. The obligation to comply with relevant
gambling laws is imposed on the operator of the product rather than the supplier. Target is therefore not required by Italian
laws or regulations to hold a gambling license in relation to its supply of the VRS product. The games and gaming systems that
Target supplies to Italian operators do need to be authorized (such authorization being the responsibility of the operators to
whom it makes its supplies). Target’s system for management of VRS has been approved by AAMS, and the specific games that
it supplies to Italian operators have been certified and approved by SOGEI.
Given that Target is not required under Italian law to obtain
AAMS licenses for its supply of machines or software, it is not required to notify AAMS in the event that it undergoes any change
of control. However, if there is any change in the directorship of those group companies that are enrolled on the Registry of
Gestori, then details of such change must be notified to AAMS by the relevant group company, and affidavits must be produced confirming
that the new directors are not subject to any criminal proceedings or convictions.
Anticipated Accounting Treatment
The Business Combination will be accounted for as a “reverse
merger” in accordance with U.S. generally accepted accounting principles.
Under
this method of accounting Hydra will be treated as the “acquired” company for financial reporting purposes. This determination
was primarily based on Inspired comprising the ongoing operations of the combined entity, Inspired’s senior management comprising
the majority of the senior management of the combined company, and current shareholders of Inspired having a majority of the voting
power of the combined entity. Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent
of Inspired issuing stock for the net assets of Hydra, accompanied by a recapitalization. The net assets of Hydra will be stated
at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination will be
those of Inspired.
EXECUTIVE AND
DIRECTOR COMPENSATION OF TARGET
Compensation of
the Named Executive Officers
This section discusses the material components
of the fiscal year 2015 executive compensation program for Target’s named executive officers who are identified in the 2015
Summary Compensation Table below. The compensation reported in the 2015 Summary Compensation Table is not necessarily indicative
of how we will compensate our named executive officers following the Business Combination. We expect that we will continue to
review, evaluate and modify our compensation framework as a result of Target becoming part of a publicly-traded company and the
compensation program following the Business Combination could vary significantly from Target’s historical practices.
Name and Principal
Position
|
|
Fiscal Year
|
|
Salary (GBP)
|
|
|
Bonus
|
|
|
Pension
(Employer
Cost)
|
|
Luke Alvarez
|
|
2015
|
|
£
|
333,145
|
|
|
£
|
60,000
|
|
|
£
|
20,583
|
|
Dave Wilson
|
|
2015
|
|
£
|
205,020
|
|
|
£
|
50,000
|
|
|
£
|
30,753
|
|
Steve Rogers
|
|
2015
|
|
£
|
192,205
|
|
|
£
|
50,000
|
|
|
£
|
28,977
|
|
Luke Alvarez is the CEO and founder of Inspired. He has previously
worked as the Chief Operating Officer of Emap Digital, Vice President of Business Development at boo.com, Case Leader at Boston
Consulting Group and as product manager at several US software companies.
Dave Wilson, Chief Operating Officer and member of Target’s
board of directors, joined Inspired in April 2004 and is responsible for software delivery and global operations. He previously
served in senior managerial roles at Nortel Networks.
Steve Rogers is Target’s Chief Commercial Officer for
Virtual Sports. He has been at Inspired for over ten years and previously held the role of Chief Operating Officer at Red Vision,
a company acquired by Inspired in 2006.
TARGET’S
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of DMWSL 633's financial
condition and results of operations is intended to clarify the company’s results of operations, certain changes in its financial
position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements
included elsewhere in this proxy statement. The company’s actual results could differ materially from those discussed below.
This discussion should be read in conjunction with, and is qualified by reference to, the other related information contained
in this proxy statement, including the consolidated financial statements and the related notes thereto and the description of
the business as well as the risk factors discussed in “Risk Factors” and “Forward-Looking Statements.”
The following includes a discussion of the interim periods
ended April 9, 2016 and April 11, 2015, as well as the periods ended September 26, 2015, September 27, 2014, and September 28,
2013. The interim financial information (unaudited) can be found on page (__). The audited financial statements can be found on
page (__).
BUSINESS OVERVIEW
DMWSL 633 Limited (the "company", the “group”,
"we", "our", and "us") is a global gaming technology company, supplying Virtual Sports, Mobile and
Server Based Gaming (“SBG”) systems to regulated lottery, betting and gaming operators worldwide. Our strategic priorities
are:
|
i)
|
Seek to extend our leadership positions in each of Virtual
Sports and Server Based Gaming by developing new, omni-channel products
|
|
ii)
|
Continue to invest in content and technology in order to grow
our existing customers’ revenue
|
|
iii)
|
Add new customers by expanding in underpenetrated markets
and newly-regulated jurisdictions
|
We operate our business and evaluate our business performance,
resource allocation and capital spending at a total consolidated level. The company uses its operating results and identified
assets of the consolidated business in order to make prospective operating decisions. Although our revenues and cost of sales,
excluding depreciation and amortization, are tracked separately by primary revenue stream, we track cost and functional expenses,
balance sheet line items and other measures of financial performance only upon a consolidated level.
The company generates revenue from two primary revenue streams:
Server Based Gaming ("SBG") and Virtual Sports, which includes virtual sports (retail and online) and mobile gaming.
SBG and Virtual Sports have been shown separately where it is believed this will aid the reader.
Revenue is generated from SBG through both product sales and
long-term participation agreements with our customers, which includes access to our server based gaming platform and selection
of game titles, over a term usually of three to five years. Our participation contracts are typically structured to pay us a percentage
of net win (defined as net revenue to our customer, after deducting player winnings and any relevant regulatory levies) from SBG
terminals placed in our customers’ facilities, which include retail outlets, casinos and other gaming operations or SBG
gaming software used to facilitate customer players through mobile or online devices. We recognize revenue from these arrangements
on a daily basis over the term of the contract. Our Virtual Sports sales include gaming software and content to virtual sports
retail and digital operators.
Revenue growth for our SBG business is primarily driven by
the number of customers, the number of SBG machines in operation, the net win performance and the net win percentage that is contracted
with our customers.
We generate Virtual Sports revenues from our mobile and virtual
customers from software sales and services. Revenue growth for our digital business is driven by the number of customers, end
points and the net win attributable to our products.
Key events that impacted results for the 28 weeks ended
April 9, 2016
Our UK SBG terminals in Licenced Betting Offices (“LBOs”)
generated gross win (defined as stake less amounts returned to player, before tax deductions) growth of 4% year on year against
a backdrop of increased gaming taxes and increased player protection regulations. Our Italian SBG terminal business experienced
growth in gross win of 9%, due to the release of new titles, including Diamond Goddess and Regina delle Nevi (“Snow Queen”).
In Italy, we also completed contract extensions with Lottomatica and Sisal. In Latin America we introduced new cabinet designs
for the Casino, Arcade and newly regulated Ruta markets.
In our Virtual Sports business, we signed new virtual sports
contracts with Greentube, SNAI and Novomatic in Italy, as well as launched new implementations with Betfair and ATG. We also launched
a new soccer title, Rush Football 2, which features lifelike ultra HD graphics and over 30 betting markets. We expanded our geographical
reach as well, signing our first contracts for Virtual Sports in the US, with William Hill, Resorts World Digital and Golden Nugget.
In our mobile segment, we signed new contracts with Betfred, SNAI, OpenBet and NYX, as well as adding new RGS integrations into
Bet365, William Hill and Betfred and new game titles to our portfolio.
Key events that impacted results for the fiscal period
ended September 26, 2015
In the period, the company made a number of significant developments
in terms of its strategic aims of launching its mobile Remote Gaming Server (“RGS”), increasing the investment and
innovation in our virtual sports games, expanding SBG deployment into markets with relatively low capital expenditure requirements,
whilst focusing strongly on regulatory compliance, player protection and increasing efficiency.
Related to our Virtual Sports business, we launched a new mobile
RGS product, Virgo, and contracted with four tier one operators, three of which were operational prior to the end of the period.
We achieved 15% growth year-over-year in recurring revenues in our virtual sports business (excluding licences), with increases
in all sales territories, and eight new revenue generating contracts.
For our SBG customers, we continued to focus on growing our
market share and expanding machine deployments in markets that require minimal capital expenditure. In April of 2015, the relevant
UK code of conduct was implemented, which required significant changes throughout the UK gaming market, resulting in the changes
to the player's experience and increasing player protection. This required significant modification of our existing platform and
gaming applications which were successfully implemented. In addition, in the UK we completed the finalisation of the upgrade of
the SBG Terminal estate to our new “Eclipse” terminal – bringing the total build and installed base to over
16,000 in less than two years.
We also completed a contract to deploy 4,000 SBG terminals
in Greece, of which approximately one quarter were delivered during the period. These are ready to deploy but have yet to go live
due to regulatory delays in Greece. These terminals will earn revenue on a participation basis.
On December 23, 2014, we acquired 50% of Merkur Inspired Ltd,
now renamed Inspired Gaming (Italy) Ltd, a joint venture with Merkur Gaming GmbH in which we previously owned 50%. The acquisition
of this interest, for consideration of £1, gives us 100% of the equity.
In the period, the acquisition of Inspired Gaming (Italy) Ltd
generated additional revenue for the company of $1.7 million, with extra SG&A costs of $1.7 million for the 9 months. The
acquisition gave us the ability to take control of the existing customer contracts, control all future customer negotiations and
implement cost reductions. At the same time as the equity acquisition we also purchased over 3,000 SBG terminals from Merkur Gaming
for continued supply to the Italian SBG market.
Key events that impacted results for the fiscal period
ended September 27, 2014
The company successfully executed a five-year contract extension
with William Hill for supply of SBG terminals to its estate, with 75% of the terminal contract extended for five years and 25%
for between three and five years. At the period-end over 11,300 Eclipse terminals had been installed across William Hill, Paddy
Power and Betfred retail venues. New Italian SBG contracts were signed with HBG and Cogetech, to deploy a combined total of 1,150
machines. We continued deployment of SBG terminals in Colombia with average volumes increasing over 60% year on year.
In the virtual sports business, ten new customers went live
in Italy, generating in excess of €1.0 billion annually in customer wagers across 7,000 venues. Our contract with our largest
Virtual Sports customer, SNAI was extended for five years. In addition, we launched a second sports channel with William Hill
and successfully extended our contract with Coral to include a second channel and expansion to Mobile.
In our Mobile business we signed three new major contracts
with Betfred, Coral and William Hill. In addition, we successfully executed an omni-channel launch of two games across three channels
with William Hill.
Key events that impacted results for the fiscal period
ended September 28, 2013
The company experienced SBG machine volume deployment growth
in its top three customers of 14%, including the commencement of its new Eclipse terminal rollout with William Hill, Betfred and
Paddy Power, starting in August 2013. The company also successfully renewed contracts with Power Leisure and Betfred, including
the addition of former Tote shops, beginning in January 2014. In addition, the company signed a new Italian SBG contract with
Lottomatica, with deployment of terminals in Lottomatica in September 2013. The company also increased its geographical scope,
with terminals contracts signed for future deployment of machines in two new European countries.
In the virtual sports business, the company continued growth
into new territories and renewal of major contracts securing revenue share (3 -5 years), including Betfred in the UK.
Discontinued operations
On February 8, 2013 we completed the sale of the trade and
assets of our leisure division to Playnation Limited for cash proceeds of $30.8 million resulting in a gain of $10.1 million,
which is reflected as a gain on discontinued operations in our Consolidated Statements of Operations and Comprehensive Loss for
the period ended September 28, 2013. The company had no continuing involvement after the sale of our leisure business. Included
in the Consolidated Statements of Cash Flow for the period ending September 28, 2013 is an inflow of $25.8 million from investing
activities, being cash proceeds less transaction fees less cash transferred with the business of $1.7 million.
The revenue and expenses of the discontinued operations were
as follows:
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
|
|
|
Net revenues
|
|
|
10,074
|
|
Cost of sales, excluding depreciation and amortization
|
|
|
(3,378
|
)
|
Selling, general and administrative
|
|
|
(5,466
|
)
|
Depreciation and amortization
|
|
|
(3,537
|
)
|
Loss from discontinued operations
|
|
|
(2,307
|
)
|
For the 2014 and 2015 financial periods there were no revenues
or expenses classified as discontinued operations.
The sale of the leisure division was part of a wider strategic
shift away from offering analogue products and services in favour of a purely digital product offering. The final material analogue
contract was exited in September 2015. Results pertaining to this contract are included within continued operations, but adjusted
for in the Adjusted EBITDA note (a non GAAP benchmark) below.
Goodwill and intangible impairment charges
A goodwill impairment charge of $1.0 million was recorded in
the period ending September 26, 2015, in relation to the goodwill arising from the acquisition of Merkur Inspired Ltd, due to
uncertainty of future positive cash flows.
Foreign exchange
Our results are impacted by changes in foreign currency exchange
rates as a result of the translation of foreign functional currencies into US dollars and the re-measurement of foreign currency
transactions or balances. The impact of foreign currency exchange rate fluctuations represents the difference between current
rates and prior-period rates applied to current activity. The largest geographic region in which we operate is the United Kingdom
and the British pound is considered to be our functional currency. Our reporting currency is US dollar. Our results are translated
from the functional currency into the reporting currency using average rates for profit and loss transactions and the applicable
spot rates for period end balances. The effect of translating the functional currency into the reporting currency, as well as
translating foreign subsidiaries that have a different functional currency into the functional currency, is reported separately
in Accumulated Other Comprehensive Income. We derived approximately 25%, 19% and 19% of our revenue from sales to customers outside
of the United Kingdom in 2015, 2014 and 2013, respectively.
In the section “Results of Operations” below, the
currency impact shown has been calculated as current period rate used less prior period rate used, multiplied by the current period
amount in the functional currency. The remaining difference is therefore calculated as the difference in the functional currency,
multiplied by the prior period average rate.
CRITICAL ACCOUNTING ESTIMATES
Revenue Recognition
We derive revenue principally from the
sale and rental of our Server Based Gaming (“SBG”) terminals and related services, including content provision and
servicing, to regulated retail betting outlets, casinos and other gaming operators, and licensing of our Virtual Sports gaming
software and related services to regulated virtual sports retail, mobile and online operators. We evaluate the recognition of
revenue based on the criteria set forth in ASC 605, Revenue Recognition ("ASC 605") and ASC 985-605, Software-Revenue
Recognition ("ASC 985"). Revenue is recognized when all of the following criteria are met:
|
1.
|
Persuasive evidence
of an arrangement exists
|
|
2.
|
The price to
the customer is fixed or determinable
|
|
3.
|
Delivery has
occurred, title has been transferred, and any acceptance terms have been fulfilled; and
|
|
4.
|
Collectability
is probable
|
For our multiple-deliverable arrangements
which include hardware containing software that functions together with the hardware to deliver its essential functionality and
undelivered non-software services, deliverables are separated into more than one unit of accounting when: (i) the delivered element(s)
have value to the customer on a stand-alone basis and (ii) delivery of the undelivered element(s) is probable and substantially
in the control of the company. When the final undelivered element(s) are non-software services and non-hardware, those deliverables
are recognized on a ratable basis over the remaining term of the arrangement.
We determine the relative selling price
for deliverables in the scope of ASC 605 based on the following selling price hierarchy:
|
1.
|
Vendor specific objective evidence ("VSOE"), (i.e.,
the price we charge when the product or service is sold separately) if available,
|
|
2.
|
Third-party evidence (“TPE”) of fair value (i.e.,
the price charged by others for similar products and services) if VSOE is not available,
|
|
3.
|
or our best estimate of selling price (“BESP”) if
neither VSOE nor TPE is available.
|
Our multiple-deliverable arrangements
may also contain one or more software deliverables in the scope of ASC 985-605. The revenue for these multiple-deliverable arrangements
is allocated to the software deliverables and the non-software deliverables based on the relative selling prices of all of the
deliverables in the arrangement using the fair value hierarchy outlined above. In circumstances where the company cannot determine
VSOE or TPE of the selling price for any of the deliverables in the arrangement, BESP is used for the purpose of allocating the
arrangement consideration between software and non-software deliverable.
Revenue is allocated to the software
deliverables based on the relative fair value of each element, and fair value is determined using VSOE. Where VSOE does not exist
for the undelivered software element, revenue is deferred until either the undelivered element is delivered or VSOE is established,
whichever occurs first. When the final undelivered software element is services, the related revenue is recognized on a ratable
basis over the remaining service period. When VSOE of a delivered element has not been established, but VSOE exists for the undelivered
elements, the company uses the residual method to recognize revenue when the fair value of all undelivered elements is determinable.
Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement
consideration is allocated to the delivered elements and is recognized as revenue.
In addition to the general policies discussed
above, the following are the specific revenue recognition policies for our revenue streams.
Server Based Gaming
Revenue from SBG terminals, access
to our content and SBG platform, including electronic table gaming products is recognized in accordance with the criteria set
forth in ASC 605 and is usually based upon a contracted percentage of the operator’s net winnings from the terminals’
daily use. Where this is not the case, revenue is based upon a fixed daily or weekly rental fee. We recognize revenue from these
arrangements on a daily basis over the term of the arrangement, or when not specified over the expected customer relationship
period. Performance obligations under these arrangements may include the delivery and installation of our SBG terminals for use
over a term, as well as service obligations related to hardware repairs and server based content and maintenance.
We sometimes bill for SBG arrangements
up front in order to help fund our working capital and development requirements, or at the request of a customer. Upfront fees
on SBG arrangements are deferred and recognized on a straight-line basis over the term of the arrangement or when not specified
over the expected customer relationship period. Hardware sales take the form of a transfer of ownership of our developed gaming
terminals, and are recognized upon delivery as they have value to our customers on a stand-alone basis.
Virtual Sports
Revenue from licensing of our gaming
software is recognized in accordance with the criteria set forth in ASC 985-605. Virtual sports retail revenue, which includes
the provision of virtual sports content and services to retail betting outlets, and virtual sports online and mobile revenue,
which includes the provision of virtual sports content and services to mobile and online operators, is based upon a contracted
percentage of the operator’s net winnings or a fixed rental fee. We recognize revenue for these fees on a daily or weekly
basis over the term of the arrangement, these arrangements typically include a perpetual license billed up front, granted to the
customer for access to our gaming platform and content. As we do not have VSOE for the undelivered elements in virtual sports
arrangements, revenue from the licensing of perpetual licenses is recognized on a straight-line basis over the term of the arrangement,
or when not specified, over the expected customer relationship period.
Revenue from the development of bespoke
games licensed on a perpetual basis to mobile and online operators is recognized on delivery and acceptance by the customer. We
have no ongoing service obligations subsequent to customer acceptance of our bespoke games.
RESULTS OF OPERATIONS
The results of operations have been organized in the following
manner
:
|
-
|
a
discussion of the company's results of operations for the 28 week period ended April
9, 2016 compared to the same period in 2015; and
|
|
-
|
a
discussion of the company's results of operations for the period ended September 26,
2015 compared to the same period in 2014; and
|
|
-
|
a
discussion of the company's results of operations for the period ended September 27,
2014 compared to the same period in 2013.
|
The financial statement periods presented represent a 52 week
period, which approximates a 12 month period. The balance sheet date of each fiscal period represents the Saturday closest to
the 30
th
of September. Each 52 week fiscal year presented within these financial statements and footnotes are herein
referred to as a "period".
28 Week Period ended April 9, 2016 compared to April
11, 2015
|
|
For the period ended
|
|
|
|
|
|
|
April 9,
|
|
|
April 11,
|
|
|
Variance
|
|
|
|
2016
|
|
|
2015
|
|
|
2016 vs 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
61,601
|
|
|
|
63,522
|
|
|
|
(1,921
|
)
|
|
|
(3
|
)%
|
Hardware
|
|
|
2,023
|
|
|
|
2,749
|
|
|
|
(726
|
)
|
|
|
(26
|
)%
|
Total revenue
|
|
|
63,624
|
|
|
|
66,271
|
|
|
|
(2,647
|
)
|
|
|
(4
|
)%
|
Cost of sales, excluding depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service
|
|
|
(8,822
|
)
|
|
|
(8,448
|
)
|
|
|
(374
|
)
|
|
|
4
|
%
|
Cost of hardware
|
|
|
(834
|
)
|
|
|
(1,690
|
)
|
|
|
856
|
|
|
|
(51
|
)%
|
Selling, general and administrative expenses
|
|
|
(33,197
|
)
|
|
|
(34,923
|
)
|
|
|
1,726
|
|
|
|
(5
|
)%
|
Depreciation and amortization
|
|
|
(19,761
|
)
|
|
|
(22,414
|
)
|
|
|
2,653
|
|
|
|
(12
|
)%
|
Net operating income
|
|
|
1,010
|
|
|
|
(1,204
|
)
|
|
|
2,214
|
|
|
|
(184
|
)%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0
|
|
|
|
397
|
|
|
|
(397
|
)
|
|
|
(100
|
)%
|
Interest expense
|
|
|
(31,901
|
)
|
|
|
(30,862
|
)
|
|
|
(1,039
|
)
|
|
|
3
|
%
|
Income/(loss) from equity method investee
|
|
|
0
|
|
|
|
(350
|
)
|
|
|
350
|
|
|
|
(100
|
)%
|
Total other income (expense), net
|
|
|
(31,901
|
)
|
|
|
(30,815
|
)
|
|
|
(1,086
|
)
|
|
|
4
|
%
|
Net loss from continuing operations before income taxes
|
|
|
(30,891
|
)
|
|
|
(32,019
|
)
|
|
|
1,128
|
|
|
|
(4
|
)%
|
Income tax expense
|
|
|
(287
|
)
|
|
|
(249
|
)
|
|
|
(38
|
)
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(31,178
|
)
|
|
|
(32,268
|
)
|
|
|
1,090
|
|
|
|
(3
|
)%
|
|
|
|
|
For the period ended
|
|
|
|
|
|
|
|
|
April 9,
|
|
|
April 11,
|
|
|
Variance
|
|
SBG
|
|
|
|
2016
|
|
|
2015
|
|
|
2016 vs 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
End of period installed base
|
|
(# Live)
|
|
|
26,153
|
|
|
|
25,970
|
|
|
|
183
|
|
|
|
0.7
|
%
|
Average installed base
|
|
(# Live)
|
|
|
26,109
|
|
|
|
25,394
|
|
|
|
716
|
|
|
|
2.8
|
%
|
Customer Gross Win per unit per day
(1)
|
|
£
|
|
£
|
119.38
|
|
|
£
|
114.59
|
|
|
£
|
4.80
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Virtuals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Live Customers #
|
|
|
|
|
63
|
|
|
|
62
|
|
|
|
1
|
|
|
|
1.6
|
%
|
Total Revenue
|
|
£'000
|
|
£
|
12,226
|
|
|
£
|
9,091
|
|
|
£
|
3,135
|
|
|
|
34.5
|
%
|
Revenue Per Customer
|
|
£'000
|
|
£
|
194
|
|
|
£
|
147
|
|
|
£
|
47
|
|
|
|
32.4
|
%
|
(1)
Includes all SBG terminals in which the company
takes a participation revenue share across all territories
Revenue
Revenue declined $2.6 million from $66.3 million to $63.6 million,
including negative currency translation of ($3.3 million). Virtual Sports revenue increased $5.0 million driven by growth from
both existing customers and new customers and increased activity on our RGS, Virgo. This was in part offset in part by declines
in SBG revenue of $4.3 million caused by the exit of our final analogue contract, the impact of increased machine game duty in
the UK (from 20% to 25%) in the UK and a $0.8 million reduction in Italy SBG, primarily driven by tax increases.
Cost of sales, excluding depreciation and amortization
Cost of sales, excluding depreciation and amortization,
which includes machine cost of sales, consumables and royalties and connectivity costs, reduced $0.5 million in the period from
$10.1 million to $9.7 million, attributable to currency translation effects.
Selling, general and administrative expenses
Selling, general, and administrative (“SG&A) expenses
are defined to contain staff costs (including outsourced costs), travel costs, professional fees, technology costs (including
hosting fees, data centres etc.) and professional services. SG&A reduced $1.7 million from $34.9 million to $33.2 million,
which is equal to the currency impact. Labor cost increases in the period of $1.4 million were offset by a reduction in deferred
consideration of the same amount.
Depreciation and amortization
Depreciation and amortization charge decreased by $2.7 million
from $22.4 million to $19.8 million, of which $1.0 million was attributable to currency movements. The remaining variance reflects
reduced depreciation from UK Casino and Bingo and Italian assets as these assets reached residual value, as well as a goodwill
impairment in the prior period of $1.0 million.
Interest income
Interest income reduced by $0.4 million due to reductions in
cash levels held.
Interest expense
Interest expense increased $1.0 million to $31.9 million. Currency
impacts reduced the charge by $1.7 million, resulting in a constancy currency increase of $2.7 million as a result of the compounding
PIK balance (see Liquidity and Capital Resources section)
Income Taxes
We recorded a foreign income tax expense of $0.3 million and
$0.2 million for the periods ended April 9, 2016 and April 11, 2015, respectively.
The effective tax rate for the periods ending April 9, 2016
and April 11, 2015 was (1%) in both periods.
Key Performance Indicators (KPIs)
During the period SBG average live units grew by 2.8% to over
26,000 end points largely through organic growth of the existing customer base. Gross Win per day grew 4.2% to £119 over
the period driven mainly by our core markets of the UK and Italy.
The Virtuals business stream grew revenues 34.5% over the period
to £12.2 million largely from annualisation and growth of the existing customer base.
Period ended September 26, 2015 compared to September
27, 2014 and compared to September 28, 2013
|
|
For the period ended
|
|
|
Variance
|
|
|
|
September 26,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2015 vs 2014
|
|
|
2014 vs 2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
%
|
|
|
$ '000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
115,325
|
|
|
|
120,867
|
|
|
|
104,159
|
|
|
|
(5,542
|
)
|
|
|
(5
|
)%
|
|
|
16,708
|
|
|
|
16
|
%
|
Hardware
|
|
|
12,248
|
|
|
|
25,930
|
|
|
|
10,322
|
|
|
|
(13,682
|
)
|
|
|
(53
|
)%
|
|
|
15,608
|
|
|
|
151
|
%
|
Total revenue
|
|
|
127,573
|
|
|
|
146,797
|
|
|
|
114,481
|
|
|
|
(19,224
|
)
|
|
|
(13
|
)%
|
|
|
32,316
|
|
|
|
28
|
%
|
Cost of sales, excluding depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service
|
|
|
(16,481
|
)
|
|
|
(16,642
|
)
|
|
|
(15,669
|
)
|
|
|
161
|
|
|
|
(1
|
)%
|
|
|
(973
|
)
|
|
|
6
|
%
|
Cost of hardware
|
|
|
(7,746
|
)
|
|
|
(33,496
|
)
|
|
|
(6,281
|
)
|
|
|
25,750
|
|
|
|
(77
|
)%
|
|
|
(27,215
|
)
|
|
|
433
|
%
|
Selling, general and administrative expenses
|
|
|
(65,229
|
)
|
|
|
(66,940
|
)
|
|
|
(59,303
|
)
|
|
|
1,711
|
|
|
|
(3
|
)%
|
|
|
(7,637
|
)
|
|
|
13
|
%
|
Depreciation and amortization
|
|
|
(40,077
|
)
|
|
|
(43,207
|
)
|
|
|
(35,483
|
)
|
|
|
3,130
|
|
|
|
(7
|
)%
|
|
|
(7,724
|
)
|
|
|
22
|
%
|
Net operating income(loss)
|
|
|
(1,960
|
)
|
|
|
(13,487
|
)
|
|
|
(2,255
|
)
|
|
|
11,527
|
|
|
|
(85
|
)%
|
|
|
(11,232
|
)
|
|
|
498
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
646
|
|
|
|
474
|
|
|
|
21
|
|
|
|
172
|
|
|
|
36
|
%
|
|
|
453
|
|
|
|
2157
|
%
|
Interest expense
|
|
|
(58,100
|
)
|
|
|
(56,106
|
)
|
|
|
(45,785
|
)
|
|
|
(1,994
|
)
|
|
|
4
|
%
|
|
|
(10,321
|
)
|
|
|
23
|
%
|
Other finance income/(costs)
|
|
|
(153
|
)
|
|
|
271
|
|
|
|
13
|
|
|
|
(424
|
)
|
|
|
(156
|
)%
|
|
|
258
|
|
|
|
1985
|
%
|
Income/(loss) from equity method investee
|
|
|
(340
|
)
|
|
|
606
|
|
|
|
(1,054
|
)
|
|
|
(946
|
)
|
|
|
(156
|
)%
|
|
|
1,660
|
|
|
|
(157
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(57,947
|
)
|
|
|
(54,755
|
)
|
|
|
(46,805
|
)
|
|
|
(3,192
|
)
|
|
|
6
|
%
|
|
|
(7,950
|
)
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(59,908
|
)
|
|
|
(68,242
|
)
|
|
|
(49,060
|
)
|
|
|
8,334
|
|
|
|
(12
|
)%
|
|
|
(19,182
|
)
|
|
|
39
|
%
|
Income tax expense
|
|
|
(631
|
)
|
|
|
(308
|
)
|
|
|
(367
|
)
|
|
|
(323
|
)
|
|
|
105
|
%
|
|
|
59
|
|
|
|
(16
|
)%
|
Net loss from continuing operations
|
|
|
(60,538
|
)
|
|
|
(68,550
|
)
|
|
|
(49,427
|
)
|
|
|
8,012
|
|
|
|
(12
|
)%
|
|
|
(19,123
|
)
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
0
|
|
|
|
0
|
|
|
|
(2,307
|
)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
2,307
|
|
|
|
(100
|
)%
|
Gain on sale of assets
|
|
|
0
|
|
|
|
0
|
|
|
|
10,081
|
|
|
|
0
|
|
|
|
N/A
|
|
|
|
(10,081
|
)
|
|
|
(100
|
)%
|
Income tax expense
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
|
N/A
|
|
Net income from discontinued operations
|
|
|
0
|
|
|
|
0
|
|
|
|
7,774
|
|
|
|
0
|
|
|
|
N/A
|
|
|
|
(7,774
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(60,538
|
)
|
|
|
(68,550
|
)
|
|
|
(41,653
|
)
|
|
|
8,012
|
|
|
|
(12
|
)%
|
|
|
(26,897
|
)
|
|
|
65
|
%
|
|
|
|
|
For the period ended
|
|
|
|
|
|
|
|
|
September 26,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
Variance
|
|
SBG
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2015 vs 2014
|
|
|
2014 vs 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
End of period installed base
|
|
(# Live)
|
|
|
26,374
|
|
|
|
25,612
|
|
|
|
23,236
|
|
|
|
762
|
|
|
|
3.0
|
%
|
|
|
2,376
|
|
|
|
10.2
|
%
|
Average installed base
|
|
(# Live)
|
|
|
25,609
|
|
|
|
24,636
|
|
|
|
22,918
|
|
|
|
973
|
|
|
|
3.9
|
%
|
|
|
1,718
|
|
|
|
7.5
|
%
|
Customer Gross Win per unit per day
(1)
|
|
£
|
|
£
|
113.07
|
|
|
£
|
112.98
|
|
|
£
|
112.01
|
|
|
£
|
0.09
|
|
|
|
0.1
|
%
|
|
£
|
0.97
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Virtuals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Live Customers #
|
|
|
|
|
64
|
|
|
|
54
|
|
|
|
42
|
|
|
|
10
|
|
|
|
18.5
|
%
|
|
|
12
|
|
|
|
28.6
|
%
|
Total Revenue
|
|
£'000
|
|
£
|
17,532
|
|
|
£
|
15,430
|
|
|
£
|
7,943
|
|
|
£
|
2,102
|
|
|
|
13.6
|
%
|
|
£
|
7,487
|
|
|
|
94.2
|
%
|
Revenue Per Customer
|
|
£'000
|
|
£
|
274
|
|
|
£
|
286
|
|
|
£
|
189
|
|
|
£
|
(12
|
)
|
|
|
(4.1
|
)%
|
|
£
|
97
|
|
|
|
51.1
|
%
|
(1)
Includes all SBG terminals in which the company
takes a participation revenue share across all territories
Customer Gross Win per unit per day is a key performance
indicator used by our internal decision makers to (i) assess impact on the company’s revenue, (ii) determine changes in
the strength of the overall market and (iii) evaluate the impacts of regulatory change and our new content releases on our customers.
Customer Gross Win per unit per day is the total cash generated in all SBG terminals in which the company takes a participation
revenue share across all territories in the period, being the difference between the amounts staked less winnings to players divided
by the average installed base of SBG terminals in the period which is divided by the number of days in the period. SBG revenue
share income accrued in the period is derived from Customer Gross Win accrued in the period after deducting gaming duties (defined
as taxes paid by the customer to government bodies) and applying the company’s revenue share percentage. Our internal decision
makers believe Customer Gross Win is a meaningful measure because it represents a transparent view of customer operating performance
that is unaffected by our revenue share percentage and allows management to (i) readily view operating trends, (ii) perform analytical
comparisons and benchmarking between customers and (iii) identify strategies to improve operating performance in the different
markets in which we operate.
Period ended September 26, 2015 compared to September
27, 2014
Revenues
Revenue decreased by $19.2 million, from $146.8 million to
$127.6 million, including currency translation impact of $8.6 million. The variance reflects a reduction in non-profit making
hardware sales of $15.7 million (at constant currency) and reduction in UK SBG performance of $0.8 million as a result of machine
gaming duty increases. This was offset by increases in UK SBG hardware sales of $1.8 million and Virtual Sports of $4.1 million,
driven by strong growth of existing UK based customers and annualisation of Italian customers.
Cost of sales, excluding depreciation and amortization
Cost of sales, excluding depreciation and amortization,
decreased by $25.9 million, from $50.1 million to $24.2 million, including a reduction due to currency impacts of $1.6 million.
This reflects decreases in costs associated with machine sales in the UK of $27.1 million and $1.0 million associated with Italy.
This was offset by increases in costs associated with additional hardware sales to Greece of $2.0 million, consumables associated
with UK SBG terminals of $1.1 million and other increases of $0.8 million.
Selling, general and administrative expenses
SG&A expenses decreased by $1.7 million, from $66.9 million
to $65.2 million, including a reduction due to exchange rate movements of $4.4 million. The increases in underlying spend include
increases in a number of categories, representing increased development in key strategic areas. The key movements include an increase
in staff costs of $2.3 million, pension cost effects of $0.7 million and items classed internally as exceptional costs (see Adjusted
EBITDA benchmark below) of $1.1 million, offset in part by an increase in capitalized labor due to the change in composition of
the labor force, with an increase in development resource.
Depreciation and amortization
Depreciation and amortization expense declined by $3.2 million,
from $43.2 million to $40.0 million. This was driven predominantly by currency impacts of $2.7 million.
Interest income
Interest income increased by $0.2 million to $0.6 million reflecting
increased cash balances as well as the impact prior period including $0.4 million of gains in relation to fair valuing of forward
contracts – as detailed in note 13 of the audited consolidated financial statements.
Interest expense
Interest expense increased from $56.1 million to $58.1 million.
Currency translation impacts reduced the charge by $3.9 million, leaving a constant currency increase of $5.9 million, attributable
primarily to the increased average external funding levels, giving a $3.8 million increase and compounding PIK note levels, $4.7
million increase. Partially offsetting this is the amortisation of loan notes being higher in the period to September 27, 2014
due to a write off of fees equal to $2.0 million relating to previous financing. The remaining difference is attributable to a
change in forward contract fair values as well as retranslation of cash balances.
Other finance income/(Costs)
This represents difference between expected return on pension
scheme assets and interest on pension scheme liabilities, being a net cost when interest is higher. In the period ending September
27, 2014 the net position was a gain of $0.3 million, versus a loss in the period ending September 26, 2015 of $0.2 million.
Income taxes
We recorded an income tax expense $0.6 million and $0.3
million for the periods ended September 26, 2015 and September 27, 2014, respectively. The effective tax rates for the periods
ending September 26, 2015 and September 27, 2014 were (1%) and (0.5%) respectively. Within the UK, the company has operating losses
available which offset the majority of taxable income. The company only pays income taxes in certain foreign tax jurisdictions
where taxable income is present. UK taxes included in the income tax expense for the period ending September 26, 2015 were $0.2
million and $0.1 million for the period ending September 27, 2014. Foreign taxes, predominantly relating to mainland Europe, included
in the income tax expense were $0.5 million and $0.2 million for the periods ended September 26, 2015 and September 27, 2014,
respectively.
Key Performance Indicators (KPIs)
During the period SBG average live units grew 4% to 25,600
end points largely through organic growth of the existing customer base. Gross Win per day remained in line versus the previous
period at £113 driven by strong growth in the UK market which was offset by weaker Italy trading.
The Virtuals business stream grew revenues by 14% over the
period to £17.5 million attributable to growth in the existing customer base and 10 new customer launches. Due to this the
annual average revenue per customer fell slightly by 4%.
Period ended September 26, 2014 compared to September
28, 2013
Revenues
Revenue increased $32.3 million from $114.5 million to $146.8
million, including currency impacts of $7.8 million. There was $15.5 million in additional hardware sales within the UK SBG market
and an increase in other UK SBG revenue of $3.1 million due to new product impacts and average unit increases of approximately
2,800. Virtual Sports increased $11.3 million, driven by the Italian Virtuals market. These increases were in part offset by reductions
of $1.3 million due to the winding down of the analogue estate and $3.6 million due to changes in the Italian SBG market following
tax increases and volume reductions.
Cost of sales, excluding depreciation and amortization
Cost of sales, excluding depreciation and amortization,
increased overall $28.2 million, from $21.9 million to $50.1 million, including currency impacts of $2.7 million. The majority
of the increase, $26.2 million, was due to SBG costs relating to hardware sales, offset by reductions in UK SBG costs of $2.4
million and Italy of $1.3 million. Royalty increases in Virtual Sports of $2.8 million account for the majority of the remaining
increase.
Selling, general and administrative expenses
SG&A expenses increased $7.6 million from $59.3 million
to $66.9 million, including $3.5 million due to exchange rate differences. Staff costs increased $3.2 million, there were refinancing
professional fee costs of $3.9 million (see Adjusted EBITDA reconciliation below) which offset in part by broad savings of $1.6
million, as well increased labour capitalization of $1.5 million reflecting an increase in development resource.
Depreciation and amortization
Depreciation and amortization increased $7.7 million, from
$35.5 million to $43.2 million, including $2.3 million as a result of currency translation. The remaining increase is driven by
increased investment in UK SBG terminals following the estate upgrade to Eclipse terminals.
Interest income
Interest income increased to $0.5 million to reflecting increased
cash balances and gains from foreign exchange forward contracts of $0.4 million.
Interest expense
Interest expense increased by $10.3 million, from $45.8 million
to $56.1 million, including currency translation impact of $3.0 million. The underlying increase was driven by compounding interest
on the PIK loan notes of $3.3 million, a higher principal amount of external debt of $1.9 million and the write-off of deferred
financing costs of $2.0 million.
Discontinued operations
There were no results from discontinued operations in the period
ending September 2014.
Income Taxes
The income tax expense for the period ended September 28, 2013
and the period ended September 27, 2014, was $0.4 million and $0.3 million respectively. The tax for the period ended September
28, 2013 was all in respect of operations in Mainland Europe. No tax was paid in the UK where carried forward tax losses were
available for offset. No tax was paid on the sale of the trade and assets of the leisure division on February 8, 2013 as capital
losses were available to offset the taxable gain on the disposal.
Key Performance Indicators (KPIs)
During the period SBG average live units grew by 7% to 24,636
end points through organic growth of the existing UK customer base plus exclusive supply to Betfred’s newly acquired business
offset by a 10% decline in average live Italian volumes. Gross Win per day showed modest growth of 1% versus the previous period
explained, similarly to volumes, by growth in the UK market offset by weaker Italy trading.
The Virtuals business nearly doubled its revenue stream to
£15.4 million (94%) mainly through the launch of a Virtuals market in Italy. This was a newly regulated market and went
live in January 2014. The annual average revenue per customer grew by nearly £0.1 million primarily through the launch of
eight new Italian concessions.
Non-GAAP Financial Metrics
The company uses certain non-GAAP financial measures, such
as EBITDA and Adjusted EBITDA, to enable the company to analyze its performance and financial condition. The company utilizes
these financial measures to manage its business on a day-to-day basis and believes that they are the most relevant measures of
performance. We believe that these measures are commonly used in the industry to measure performance. The company believes these
non-GAAP measures provide expanded insight to measure revenue and cost performance, in addition to the standard GAAP-based financial
measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, they may not be comparable
to measures used by other companies within the industry. The presentation of non-GAAP financial information should not be considered
in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.
You should read this discussion and analysis of the company’s financial condition and results of operations together with
the consolidated financial statements of the company and the related notes thereto also included within
EBITDA
is defined as net loss excluding depreciation
and amortization, interest expense, interest income and income tax expense.
Adjusted EBITDA
is
defined as net loss
excluding depreciation and amortization, interest expense, interest income and income tax expense
,
and other supplemental
adjustments
.
The company believes Adjusted EBITDA, when considered along with other performance measures, is a useful measure
as it reflects certain operating drivers of the business, such as sales growth, operating costs, selling and administrative expense
and other operating income and expense.
The company believes Adjusted EBITDA can provide a more complete understanding
of the underlying operating results and trends and an enhanced overall understanding of the company’s financial performance
and prospects for the future.
While Adjusted EBITDA is not a recognized measure under GAAP, management uses this financial
measure to evaluate and forecast business performance.
Adjusted EBITDA is not intended to be a measure of liquidity or
cash flows from operations or a measure comparable to net income or loss as it does not take into account certain requirements
such
as
it excludes non-recurring gains and losses which are not deemed to be a normal part of the underlying business
activities
.
The company's use of Adjusted EBITDA may not be comparable to other companies within the industry. Management
compensates for these limitations by using Adjusted EBITDA as only one of several measures for evaluating its business performance.
In addition, capital expenditures, which impact depreciation and amortization, interest expense, and income tax benefit (expense),
are reviewed separately by management.
Reconciliations from Net Loss per the Consolidated Statement
of Operations and Comprehensive Loss to Adjusted EBITDA for both the 28 and 52 week periods are shown below.
|
|
For the period ended
|
|
|
|
September
|
|
|
September
|
|
|
September
|
|
|
April 9,
|
|
|
April 11,
|
|
|
|
26, 2015
|
|
|
27, 2014
|
|
|
28, 2013
|
|
|
2016
|
|
|
2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(60,538
|
)
|
|
|
(68,550
|
)
|
|
|
(41,653
|
)
|
|
|
(31,178
|
)
|
|
|
(32,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of Leisure Division
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,081
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss attributable to discontinued operations of Leisure Division
|
|
|
-
|
|
|
|
-
|
|
|
|
2,307
|
|
|
|
-
|
|
|
|
-
|
|
Profit attributable to other discontinued analogue activities
|
|
|
(3,374
|
)
|
|
|
(3,622
|
)
|
|
|
(3,762
|
)
|
|
|
(69
|
)
|
|
|
(1,812
|
)
|
Pension charge/(credit)
|
|
|
459
|
|
|
|
(172
|
)
|
|
|
450
|
|
|
|
224
|
|
|
|
234
|
|
Recognition of asset related obligations
|
|
|
(88
|
)
|
|
|
(70
|
)
|
|
|
-
|
|
|
|
(41
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items to be considered to be Exceptional in nature:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of group restructure
|
|
|
3,363
|
|
|
|
-
|
|
|
|
-
|
|
|
|
121
|
|
|
|
2,134
|
|
Italian tax related costs
|
|
|
1,025
|
|
|
|
-
|
|
|
|
-
|
|
|
|
305
|
|
|
|
-
|
|
Pension items one off in nature
|
|
|
763
|
|
|
|
586
|
|
|
|
-
|
|
|
|
285
|
|
|
|
132
|
|
Costs relating to former operations
|
|
|
243
|
|
|
|
142
|
|
|
|
-
|
|
|
|
7
|
|
|
|
68
|
|
Refinancing costs
|
|
|
-
|
|
|
|
3,880
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Investment impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
564
|
|
|
|
-
|
|
|
|
-
|
|
Deferred consideration write back
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,434
|
)
|
|
|
-
|
|
PRS legal disute
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
417
|
|
|
|
-
|
|
Hydra Acquisition Transaction fees incurred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,601
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
40,077
|
|
|
|
43,207
|
|
|
|
35,483
|
|
|
|
19,761
|
|
|
|
22,414
|
|
Net interest expense
|
|
|
57,608
|
|
|
|
55,361
|
|
|
|
45,751
|
|
|
|
31,901
|
|
|
|
30,465
|
|
Income tax
|
|
|
631
|
|
|
|
308
|
|
|
|
367
|
|
|
|
287
|
|
|
|
249
|
|
Adjusted EBITDA
|
|
|
40,169
|
|
|
|
31,070
|
|
|
|
29,426
|
|
|
|
22,187
|
|
|
|
21,572
|
|
As a result of nil margin hardware sales (which may also be
loss making when considered in isolation) distorting revenue, and therefore growth, ‘Revenue excluding nil margin sales’
is considered internally. A reconciliation of this is shown below for the periods under review.
|
|
For the period ended
|
|
|
|
September 26,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
April 9,
|
|
|
April 11,
|
|
$'000
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues per Financial Statements
|
|
|
127,573
|
|
|
|
146,798
|
|
|
|
114,481
|
|
|
|
63,624
|
|
|
|
66,271
|
|
Less Nil Margin Sales
|
|
|
(2,224
|
)
|
|
|
(17,610
|
)
|
|
|
(1,112
|
)
|
|
|
38
|
|
|
|
(140
|
)
|
Less Analogue Revenues
|
|
|
(3,995
|
)
|
|
|
(5,757
|
)
|
|
|
(6,716
|
)
|
|
|
(70
|
)
|
|
|
(2,138
|
)
|
Revenue Excl. Nil Margin and Analogue $USD
|
|
|
121,354
|
|
|
|
123,431
|
|
|
|
106,654
|
|
|
|
63,591
|
|
|
|
63,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Excl. Nil Margin and Analogue £GBP
|
|
|
78,259
|
|
|
|
74,563
|
|
|
|
68,028
|
|
|
|
43,019
|
|
|
|
41,175
|
|
RECENTLY ISSUED ACCOUNTING GUIDANCE
For a description of recently issued accounting pronouncements,
see Note 1 of the financial statements (Nature of Operations and Summary of Significant Accounting Policies).
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Summary - A Three Year Comparative
|
|
For the period ended
|
|
|
Variance
|
|
|
|
September 26,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
|
|
|
|
(U.S . Dollars, '000)
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2015 to 2014
|
|
|
2014 to 2013
|
|
Net loss excluding profit on Leisure disposal
|
|
|
(60,538
|
)
|
|
|
(68,550
|
)
|
|
|
(51,734
|
)
|
|
|
8,012
|
|
|
|
(16,816
|
)
|
Non-cash interest expense
|
|
|
41,911
|
|
|
|
34,977
|
|
|
|
31,829
|
|
|
|
6,934
|
|
|
|
3,148
|
|
Other net cash provided by operating activities
|
|
|
43,878
|
|
|
|
54,825
|
|
|
|
14,901
|
|
|
|
(10,947
|
)
|
|
|
39,924
|
|
Net cash provided by/(used in) operating activities
|
|
|
25,251
|
|
|
|
21,252
|
|
|
|
(5,004
|
)
|
|
|
3,999
|
|
|
|
26,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activites
|
|
|
(39,203
|
)
|
|
|
(53,306
|
)
|
|
|
(7,696
|
)
|
|
|
14,103
|
|
|
|
(45,610
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(123
|
)
|
|
|
34,253
|
|
|
|
(5,373
|
)
|
|
|
(34,376
|
)
|
|
|
39,626
|
|
Effect of exchange rates on cash
|
|
|
(1,117
|
)
|
|
|
(147
|
)
|
|
|
(965
|
)
|
|
|
(970
|
)
|
|
|
818
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(15,192
|
)
|
|
|
2,052
|
|
|
|
(19,038
|
)
|
|
|
(17,244
|
)
|
|
|
21,090
|
|
Period ended September 26, 2015 compared to September
27, 2014
Net cash from operating activities
Cash flow from operating activities
increased by $4.0
million during the period. Net loss excluding the non-cash interest expense decreased $14.9 million, as detailed in Results of
Operations for the same period. Other net cash provided by operating activities decreased $10.9 million, primarily driven by higher
production activity levels and timing of sales invoices.
Net cash from investing activities
Net cash used in investing activities decreased by approximately
$14.1 million during the period to $39.2 million. The decreased spending was primarily attributable to lower spend on property,
plant and equipment purchases compared to the high balance the prior period (see below). The period ended September 26, 2015 included
expansionary expenditure on machines for roll out into the Greece market and the purchase of Italian slant top machines in association
with the acquisition of the remaining 50% of Merkur Inspired Ltd. This period also saw the final part of the UK SBG estate upgrade
with new Eclipse machines. This was partially offset by cash acquired from the purchase of the former Italian joint venture, which
gave a cash inflow of $1.0 million.
Net cash from financing activities
There was $0.1 million of cash used in the payment of finance
leases in the period ended September 26, 2015. Cash flow from the proceeds of the issuance of long term debt contributed $34.4
million net of cash during the period ended September 27, 2014. Refer to Note 12 in the Financial Statements for further information.
Period ended September 27, 2014 compared to September
28, 2013
Net cash from operating activities
Cash flow from our operating activities increased by $26.3
million during the period. Net loss excluding profit on the disposition of our Leisure division and the non-cash interest expense
reduced by $13.7 million. Changes in trading and deferred revenue levels resulted in an $8.9 million inflow. This was more
than offset by other operating activity cash inflows, including an unwind in accrued expenses of $21.1 million, principally as
a result of a reduction of the Amusement Machine License Duty creditor of $15.8 million following a regulatory change in the UK,
as well as changes in production activity levels leading to a $14.0 million inventory movement benefit, prepaid and accrued income
taxes $6.7 million benefit and accounts payable $6.2 million benefit.
Net cash from investing activities
Net cash from investing activities decreased by $45.6 million
during the period to an outflow of $53.3 million. The increased spending was mainly attributable to higher spend on upgrading
the machine estates following the renewal of a number of long term contracts, including the Eclipse upgrade, as well as the prior
period including $25.8m in relation to the sale proceeds from the leisure disposal.
Net cash from financing activities
Cash flow from the proceeds of the issuance of long term debt
contributed $34.3 million of cash during the period ended September 26, 2014, being $121.2 million from new long term debt, less
$86.7 million in relation to the repayment of the previous debt. For the period ended September 28, 2013 a total of $5.4 million
of long term debt was repaid.
Funding Needs and Sources
The company has historically relied on
a combination of cash flows provided by operations and the incurrence of additional debt and/or the refinancing of existing debt
to fund the company’s obligations. As of September 26, 2015, the company had liquidity of $4.0 million in cash and cash
equivalents, compared to $19.3 million in the prior period. The company had a working capital deficit of $5.2 million as of September
26, 2015 as compared to a working capital surplus of $28.6 million as of September 27, 2014 and $23.4 million surplus as of September
28, 2013. The level of working capital surplus or deficit operated by the company varies with the level of machine production
and capitalization. In periods where significant levels of machines are being manufactured, the levels of inventory and creditors
are very high and there is a natural timing difference between converting the stock into sellable or capitalized plant and settling
payment to the suppliers. This and movements in trading activity levels can result in significant working capital volatility.
In periods of low activity the working capital elements return to a more normalized level. Working capital is reviewed and managed
to an extent to ensure that the current liabilities are covered by the level of cash held and the expected level of short term
receipts.
Long term and Other Debt
Debt consists of senior bank debt and loan notes payable to
the owners of Ordinary A shares (referred to as Payment in Kind (“PIK”) Loan Notes).
During 2014, the company re-financed the existing senior bank
facility of $86.7 million with a new senior bank facility of $121.2 million. During 2014, unamortized senior bank debt issuances
fees of $2.0 million, were written off. The new senior bank facility has a cash interest rate on outstanding borrowings for this
line of credit being the Bank of England’s bank’s base rate plus the base rate margin or LIBOR rate plus the bank’s
LIBOR rate margin. The loan agreement includes a PIK interest rate on the outstanding borrowings that can be paid for or added
to the outstanding debt. Capitalized debt issuance fees of $5.4 million were realized in 2014 with the issuance of new debt. Note,
due to foreign currency translation, these figures are then revised at each Balance Sheet date.
The senior bank debt also included a revolving facility commitment
for $28.5 million. The revolver facility has an interest rate on unutilized borrowings of 2%. The line of credit is scheduled
to mature on September 30, 2017, although agreement has been reached to extend this by two years on successful acquisition. No
revolver had been drawn on any of the period ends, but an amount of the facility had been utilized in each year for the Duty Deferment
guarantee and the company credit card scheme. The amounts utilized at September 26, 2015, September 27, 2014 and September 28,
2013 amounted to $0.5million, $0.7 million, and $1.6 million, respectively.
The company also has 13.5% PIK loan notes payable to a syndicate
of investors where interest of 13.5% is added to the loan amount and has a maturity of July 6, 2018. The total PIK loan balance
at September 26, 2015, September 27, 2014 and September 28, 2013 amounted to $307.4 million, $289.7 million, and $250.4 million,
respectively.
Debt Covenants
The DMWSL 633 Ltd Group is subject to covenant testing at quarterly
intervals. The covenant testing is set at the DMWSL 631 Ltd group level and comprises tests on Leverage (Net Debt/EBITDA), Interest
Cover (EBITDA/Interest Costs) and Super Senior Leverage (Net Debt + Revolver/EBITDA). These are measured under UK GAAP.
All trading in the DMWSL 633 Group is included within the DMWSL
631 Ltd Group, the only difference between the two groups relating to a small level (approx. $0.3 million per annum) of overhead
and director costs.
The financial results of the DMWSL 631 Ltd Group need to pass
the covenant levels set at each quarter end to avoid being in a covenant breach. Besides the quarterly tests, there is also an
annual requirement that no more than £3 million can be spent on non-machine additions excluding labor capitalization.
In the period ended September 26, 2014 the DMWSL 631 Ltd group
refinanced its debt. As part of the refinancing, the covenant testing was reviewed and amended to the tests as defined above.
Prior to the refinancing, the covenant testing was similar to current testing although with different ratios required for passes.
There have been no breaches of debt covenants in the periods
ending September 26, 2015, September 27, 2014 and September 28, 2013.
Contractual obligations
As of September 26, 2015, the company's contractual obligations
were as follows:
|
|
|
|
|
Less
than
|
|
|
|
|
|
|
|
|
More
than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
6,362
|
|
|
|
1,707
|
|
|
|
2,679
|
|
|
|
1,746
|
|
|
|
230
|
|
Interest on long-term debt
|
|
|
27,658
|
|
|
|
11,898
|
|
|
|
15,760
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior bank debt – principal repayment
|
|
|
110,280
|
|
|
|
0
|
|
|
|
110,280
|
|
|
|
0
|
|
|
|
0
|
|
Senior bank debt – compounded PIK debt interest
|
|
|
17,091
|
|
|
|
0
|
|
|
|
17,091
|
|
|
|
0
|
|
|
|
0
|
|
Finance lease payments
|
|
|
321
|
|
|
|
132
|
|
|
|
184
|
|
|
|
5
|
|
|
|
0
|
|
Interest on non-utilisation fees
|
|
|
1,258
|
|
|
|
601
|
|
|
|
657
|
|
|
|
0
|
|
|
|
0
|
|
PIK loan notes - principal repayment
|
|
|
158,435
|
|
|
|
0
|
|
|
|
158,435
|
|
|
|
0
|
|
|
|
0
|
|
PIK loan notes – compound PIK interest
|
|
|
279,307
|
|
|
|
0
|
|
|
|
279,307
|
|
|
|
0
|
|
|
|
0
|
|
Off-Balance Sheet Arrangements
As of September 26, 2015, there were no off-balance sheet arrangements,
as defined in Item 303(a)(4)(ii) of Regulation S-K.
MANAGEMENT AFTER
THE BUSINESS COMBINATION
Management and Board of Directors
[To come when finalized.]
Director Independence
NASDAQ listing standards require that a
majority of our board of directors be independent as long as we are not a controlled company. We anticipate that a majority of
our board of directors will be independent as of the closing of the Business Combination. An “independent director”
is defined under the NASDAQ rules generally as a person other than an officer or employee of the company or its subsidiaries or
any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with
the director’s exercise of independent judgment in carrying out the responsibilities of a director. We anticipate that our
board of directors will determine that Messrs. are “independent directors” as defined in the NASDAQ listing standards
and applicable SEC rules. Our independent directors will have regularly scheduled meetings at which only independent directors
are present.
Leadership Structure and Risk Oversight
Committees of the Board of Directors
The standing committees of our board of
directors currently consists of an Audit Committee and a Compensation Committee, and after the Business Combination will also
consist of a Nominating and Corporate Governance Committee. Each of the committees will report to the board of directors as they
deem appropriate and as the board may request.
Audit Committee
For information regarding the duties and
responsibilities of the Audit Committee, see “Information About Hydra Industries — Management — Audit Committee.”
Compensation Committee
For information regarding the duties and
responsibilities of the Compensation Committee, see “Information About Hydra Industries — Management — Compensation
Committee.”
Corporate Governance and Nominating Committee
Our Corporate Governance and Nominating
Committee will be responsible for, among other matters: (1) identifying individuals qualified to become members of our board of
directors, consistent with criteria approved by our board of directors; (2) overseeing the organization of our board of directors
to discharge the board’s duties and responsibilities properly and efficiently; (3) identifying best practices and recommending
corporate governance principles; and (4) developing and recommending to our board of directors a set of corporate governance
guidelines and principles applicable to us.
[Compensation Committee Interlocks and Insider Participation
During 2015, no officer or employee served
as a member of the Compensation Committee. None of our executive officers serve as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving on our board of directors or Compensation Committee.
Code of Ethics
Director Compensation
Following the completion of the Business
Combination, our compensation committee will make a recommendation to our board of directors regarding the annual compensation
to be paid to the members of our board of directors. Directors’ fees after the Business Combination have yet to be determined,
but are expected to consist of two components: a cash payment and the issuance of restricted stock units.
Executive Compensation
[To come when finalized.]
[Employment Agreements]
[To come when finalized.]
Stockholders Agreement
The Stockholders Agreement which is expected
to be executed and delivered by Hydra Industries, our Sponsors and the Selling Group at the closing of the Business Combination,
as described in Schedule 4 to the Sale Agreement, provides, among other things, for the composition of the Company’s board
of directors following the Business Combination and certain related matters, as described below.
Generally
. Following consummation
of the Business Combination, the board of directors shall initially be comprised of seven (7) directors designated as follows:
(i) Three
(3) directors designated by Vitruvian (on behalf of the Vitruvian Group) (the “Vitruvian Designees”); provided, that
(A) the number of Vitruvian Designees to be designated by Vitruvian shall be reduced to two (2) directors at such time as the
Vitruvian Group holds less than thirty percent (30%) but at least fifteen percent (15%) or more of all Shares, (B) the number
of Vitruvian Designees to be designated by Vitruvian shall be reduced to one (1) director at such time as the Vitruvian Group
holds less than fifteen percent (15%) but at least five percent (5%) or more of all Shares, and (C) Vitruvian shall have no right
to designate any director at such time as the Vitruvian Group in the aggregate holds less than five percent (5%) of all Shares.
At least two out of three Vitruvian Designees, or one out of two Vitruvian Designees, must satisfy the Independence Qualification;
for the avoidance of doubt, if the Vitruvian Group is only entitled to one Vitruvian Designee, such Vitruvian Designee shall not
be required to satisfy the Independence Qualification.
(ii) One
(1) director who shall be the then-current Chief Executive Officer of the Company (the “Chief Executive Officer Designee”)
for so long as such person is the Chief Executive Officer of the Company.
(iii) One
(1) director designated by the Hydra Sponsor (on behalf of the Hydra Sponsor Group) (the “Hydra Sponsor Designee”);
provided, that the Hydra Sponsor shall have no right to designate any director at such time as the Hydra Sponsor Group in the
aggregate holds less than five percent (5%) of all Shares.
(iv) The
remaining two (2) directors designated jointly by the Macquarie Sponsor and the Hydra Sponsor (the “MIHI/HS Designees”);
provided, that MIHI and the Hydra Sponsor shall have no right to designate the MIHI/HS Designees at such time as MIHI and the
Hydra Sponsor in the aggregate hold less than five percent (5%) of all Shares. MIHI/HS Designees must satisfy the Independence
Qualification to the extent necessary to ensure that (provided that Vitruvian Designees satisfy the Independence Qualification
to the extent required) a majority of all directors satisfy the Independence Qualification.
In the event of any increase in the size
of the board of directors, vacancies so created shall be filled in proportion to the designation rights set forth above (with
any number of directors ending in a fraction of one-half (1/2) or greater being rounded up to the next whole number of directors).
Initial Directors. The initial Vitruvian
Designees shall be [___], [___] and [___]. The initial Chief Executive Officer Designee shall be Luke Alvarez. The initial Hydra
Sponsor Designee shall be A. Lorne Weil. The initial MIHI/HS Designees shall be [___] and [___].
Requirements. The Company shall, at any
annual or special meeting of stockholders of the Company at which directors are to be elected, subject to certain requirements,
nominate the Stockholder Designees for election to the board of directors and use all commercially reasonable efforts to cause
the Stockholder Designees to be elected as directors of the board of directors. Any Stockholder Designee shall be reasonably acceptable
to the board of director’s Nominating and Corporate Governance Committee.
Removal; Vacancies. No director may be
removed from the board of directors (for any reason) except at the written direction of the stockholder or stockholders entitled
to designate such director, which stockholder will thereupon be entitled to designate an alternative director to fill the vacancy;
provided, however, that at least 50% of the directors (excluding the director subject to potential removal) may (i) remove a director
for cause (as defined) and (ii) remove the Chief Executive Officer Designee at any time when such Person is no longer serving
as the Chief Executive Officer of the Company and elect the then-current Chief Executive Officer of the Company as the new Chief
Executive Officer Designee. In the event of any vacancy on the board of directors, whether created by the removal, resignation,
death, disability or retirement of a director or otherwise, the board of directors shall promptly elect to the board of directors
a replacement director designated by the stockholder or stockholders entitled to designate such director, subject to the fulfillment
of certain requirements. If the number of directors that a stockholder has the right to designate to the board of directors is
decreased, then such stockholder shall designate one of more of such stockholder’s designees to resign, or be removed, from
the board of directors.
Committee Membership. Subject to applicable
law and the listing standards of the Nasdaq Capital Market (or other United States national securities exchange on which the Common
Stock is listed, if any) and applicable law, the Company will offer the Stockholder Designees an opportunity to sit on each regular
committee of the board of directors in relative proportion to the number of Stockholder Designees on the board of directors. If
a Stockholder Designee fails to satisfy the applicable qualifications under law or stock exchange listing standard to sit on any
committee of the board of directors, then the board of directors shall offer such Stockholder Designee the opportunity to attend
(but not vote) at the meetings of such committee as an observer.
Observer Rights. MIHI, for so long as it
holds at least five percent (5%) of all shares of common stock, shall be entitled to designate one (1) person (the “Observer”)
to attend, as a non-voting observer, all meetings (including telephonic meetings) of the board of directors and any committees
thereof.
Quorum. The presence of a majority of the
directors (with at least one (1) director designated by Vitruvian and one (1) director designated jointly by MIHI and the Hydra
Sponsor present, for so long as Vitruvian or MIHI and the Hydra Sponsor jointly (as the case may be) have the right to designate
one (1) or more directors shall be necessary and sufficient to constitute a quorum for the transaction of business at any meeting
of the board of directors.
Access Rights. For so long as the Vitruvian
Group owns at least five percent (5%) of all Shares, the Company will permit Vitruvian to visit and inspect any of the properties
of the Company and its subsidiaries, to examine all its books of account, records, reports and other papers, and to discuss its
affairs, finances and accounts with its officers, directors, key employees and independent public accountants or any of them,
all at such reasonable times and as often as may be reasonably requested, subject to reasonable confidentiality restrictions.
Transfer Restrictions. Each stockholder
undertakes, to each other stockholder and to the Company, that for a period of one hundred and eighty (180) days after the Business
Combination it shall not at any time transfer any or all of its shares to any Person, except to a Permitted Transferee of such
stockholder.
Definitions. As used in the Stockholders
Agreement, the following terms have the following meanings:
“
Affiliate
”
of any Person means any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled
by, or is under common Control with such first Person;
provided
,
however
, that with respect to Vitruvian, Affiliates
shall not include any portfolio companies of Vitruvian or any of its affiliated funds.
“
Control
” means, with
respect to a Person, the power, directly or indirectly, to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by contract, agreement, arrangement, commitment or otherwise (and
the terms “
Controlling
” and “
Controlled
” have meanings correlative to the foregoing).
“
Hydra Sponsor Group
”
means, collectively, the Hydra Sponsor and any of its Affiliates.
“
Independence Qualification
”
means an individual is “independent” as defined in the listing standards of the Nasdaq Capital Market (or other United
States national securities exchange on which the Common Stock is listed, if any) and applicable law.
“
MIHI
” means, MIHI LLC.
“
MIHI Group
” means,
collectively, MIHI and any of its Affiliates.
“
Permitted
Transferee
” means, with respect to any Person that is not a natural person, (i) any Affiliate of such Person or funds
(or similar vehicles) managed by such Person’s Affiliates, or existing or future co-investors in such funds (“
Affiliated
Entities
”), or (ii) any managing director, principal, member, shareholder, limited or general partner or retired partner
of such Person or its Affiliated Entities, the estates and immediate families of any such persons and of their spouses, and any
trusts for the benefit of any of the foregoing persons, and with respect to any natural person, the estate and immediate family
of such person and of such person’s spouse, and any trusts for the benefit of any of the foregoing persons.
“
Person
”
means an individual or a corporation, partnership, limited liability company, trust, estate, unincorporated organization, association
or other entity.
“
Shares
”
means shares of Common Stock, par value $0.0001 per share of the Company, and any reference to “all Shares” shall
mean the aggregate number of Shares then issued and outstanding.
“
Stockholder
”
means the Hydra Sponsor, MIHI and the parties listed as Vendors on the signature pages to the Stockholders Agreement.
“
Stockholder
Designees
” means the Hydra Sponsor Designee, the MIHI/HS Designees and the Vitruvian Designees, and, with respect to
any Stockholder, the particular Director or Directors designated by such Stockholder.
“
Transfer
”
means any direct or indirect sale, assignment, transfer, exchange, gift, pledge, grant of a security interest, conveyance or other
disposition, whether voluntary, by operation of law or otherwise, including in connection with any bankruptcy, insolvency or similar
proceeding, judicial order, legal process, execution or attachment or involuntary event, and “
Transfer
,” used
as a verb, has a corresponding meaning.
“
Vitruvian
”
means Landgame S.a.r.l.
“
Vitruvian
Group
” means, collectively, Vitruvian and any of its Affiliates.
DESCRIPTION
OF SECURITIES
The following summary of the material
terms of the Company’s securities following the Business Combination is not intended to be a complete summary of the rights
and preferences of such securities. We urge you to read our proposed second amended and restated certificate of incorporation
(the “proposed charter”) in its entirety for a complete description of the rights and preferences of the Company’s
securities following the Business Combination. The proposed charter is described in “The Charter Proposals,” and the
full text of the proposed charter is attached as
Annex C
to this proxy statement.
Authorized and Outstanding Stock
The proposed charter authorizes the issuance
of 50,000,000 million shares, consisting of 49,000,000 million shares of common stock, $0.0001 par value per share, and 1,000,000
million shares of preferred stock, $0.0001 par value. The outstanding shares of our common stock are, and the shares of Hydra
Industries common stock issuable to Target stockholders pursuant to the Business Combination will be, duly authorized, validly
issued, fully paid and non-assessable. As of the record date for the special meeting, there were [_____] shares of Hydra Industries
common stock outstanding, held of record by holders of common stock,
holders of units and
holders of warrants. Such numbers do not include DTC participants or beneficial owners holding shares through nominee names.
Common Stock
The proposed charter, which we will adopt
if the Charter Proposals are approved, provides that the common stock will have identical rights, powers, preferences and privileges.
Voting Power
Except as otherwise required by law or
as otherwise provided in any certificate of designation for any series of preferred stock, the holders of common stock possess
all voting power for the election of our directors and all other matters requiring stockholder action. Holders of common stock
are entitled to one vote per share on matters to be voted on by stockholders.
Dividends
Holders of common stock will be entitled
to receive such dividends, if any, as may be declared from time to time by our board of directors in its discretion out of funds
legally available therefor. In no event will any stock dividends or stock splits or combinations of stock be declared or made
on common stock unless the shares of common stock at the time outstanding are treated equally and identically.
Liquidation, Dissolution and Winding Up
In the event of our voluntary or involuntary
liquidation, dissolution, distribution of assets or winding- up, the holders of the common stock will be entitled to receive an
equal amount per share of all of our assets of whatever kind available for distribution to stockholders, after the rights of the
holders of the preferred stock have been satisfied.
Preemptive or Other Rights
There are no sinking fund provisions applicable
to the common stock, except that we will provide our stockholders with the opportunity to redeem their public shares for cash
equal to their pro rata share of the aggregate amount then on deposit in the trust account, including interest (which interest
shall be net of taxes payable), upon completion of the Business Combination, subject to the limitations described herein.
Common Stock Prior to the Business Combination
We are providing stockholders with the
opportunity to redeem their shares upon the consummation of the Business Combination at a per-share price, payable in cash, equal
to the aggregate amount then on deposit in the trust account, including interest but net of taxes payable, divided by the number
of then outstanding public shares, subject to the limitations described herein. Our initial stockholders, officers and directors
have agreed to waive their redemption rights with respect to the founder shares and any public shares they may hold in connection
with the consummation of the Business Combination.
We will consummate the Business Combination
only if a majority of the stock voted at the special meeting, in person or by proxy, is voted in favor of the Business Combination
Proposal and the other conditions under the Sale Agreement to the parties’ obligations to close, as described above under
“The Business Combination Proposal — The Sale Agreement — Conditions to Closing of the Business Combination”,
are satisfied or, where permitted, waived. However, the participation of our Sponsors, officers, directors, advisors or their
affiliates could result in the approval of the Business Combination even if holders who currently own a majority of the outstanding
public shares indicate their intention to vote against the Business Combination.
Our initial stockholders have agreed to
vote any shares of Hydra Industries common stock owned by them in favor of the Business Combination. As of the date of filing
this proxy statement, our initial stockholders do not currently hold any public shares. Public stockholders may elect to redeem
their public shares whether they vote for or against the Business Combination.
Pursuant to our amended and restated certificate
of incorporation, if we are unable to consummate a business combination by October 29, 2016 (subject to the requirements of law),
we will (a) cease all operations except for the purpose of winding up, (b) as promptly as reasonably possible but not more than
ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then
on deposit in the trust account, including interest (which interest shall be net of taxes payable and working capital released
to us, and less up to $50,000 of interest to pay dissolution expenses) divided by the number of then outstanding public shares,
which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive
further liquidation distributions, if any), subject to applicable law, and (c) as promptly as reasonably possible following such
redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve and liquidate, subject
in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable
law. Our initial stockholders have entered into letter agreements with us, pursuant to which they have agreed to waive their redemption
rights with respect to their founder shares and public shares in connection with the completion of our initial business combination.
In addition, our initial stockholders have agreed to waive their rights to liquidating distributions from the trust account with
respect to their founder shares if we fail to complete our business combination within the prescribed time frame. However, if
our Sponsors or any of our officers, directors or affiliates acquires public shares, they will be entitled to liquidating distributions
from the trust account with respect to such public shares if we fail to complete our initial business combination within the prescribed
time frame.
In the event of a liquidation, dissolution
or winding up of the company after our initial business combination, our stockholders are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock,
if any, having preference over the common stock. Our stockholders have no preemptive or other subscription rights.
Founder Shares
The founder shares are identical to the
shares of common stock included in the units that were sold in our IPO, and holders of founder shares have the same stockholder
rights as public stockholders, except that (i) the founder shares are subject to certain transfer restrictions, as described in
more detail below, and (ii) our initial stockholders have entered into letter agreements with us, pursuant to which they have
agreed (A) to waive their redemption rights with respect to their founder shares and public shares in connection with the completion
of our business combination and (B) to waive their rights to liquidating distributions from the trust account with respect to
their founder shares if we fail to complete our business combination by October 29, 2016 (subject to the requirements of law),
although they will be entitled to liquidating distributions from the trust account with respect to any public shares they hold
if we fail to complete our business combination within such time period. Our initial stockholders have agreed to vote their founder
shares and any public shares purchased during, or after, our IPO in favor of the Business Combination.
With certain limited exceptions, the founder
shares are not transferable, assignable or salable (except to our officers and directors and other persons or entities affiliated
with our Sponsors, each of whom will be subject to the same transfer restrictions) until the earlier of one year after the completion
of our initial business combination or earlier if, (x) subsequent to our business combination, the last sale price of the common
stock equals or exceeds $[___] per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and
the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after our initial business combination,
or (y) the date following the completion of our initial business combination on which we complete a liquidation, merger, stock
exchange or other similar transaction that results in all of our stockholders having the right to exchange their shares of common
stock for cash, securities or other property.
The holders of founder shares have also
agreed (A) to vote any shares owned by them in favor of any proposed business combination and (B) not to redeem any shares in
connection with a stockholder vote to approve a proposed initial business combination.
Registration Rights
Pursuant to the Sale Agreement, we will
enter into a Registration Rights Agreement, at the closing of the Business Combination, obligating us to file one or more resale
“shelf” registration statements under the Securities Act to register the Purchaser Shares (and other Registrable Securities,
if any, as defined) to be issued to Target stockholders in the Business Combination. The shares purchased by our Macquarie Sponsor
in the Macquarie Forward Purchase are also subject to similar registration rights. The Registration Rights Agreement will provide
that at any time and from time to time on or after the consummation of the Business Combination, holders of at least a majority
in interest of the then outstanding number of Purchaser Securities (and other Registrable Securities, if any) may make a written
demand for registration under the Securities Act for all or part of the Registrable Securities, in which case the Company is to
effect such registration as soon as practicable, but not more than 45 days after such demand (or 90 days in the event the SEC
reviews and has written comments on the registration statement). The Company will not be obligated to effect more than three such
registrations for each requesting holder. The Registration Rights Agreement will also provide for unlimited “piggyback”
rights to register Registrable Securities under any registration statement otherwise filed by the Company (with certain limited
exceptions), and for unlimited registration of Registrable Securities on Form S-3 or any similar “short-form” registration
statement that may be available at the time. The expenses of the registration will be borne by the Company (although incremental
selling expenses such underwriters’ commissions and discount and brokerage fees will be borne by the selling holders). The
Registration Rights Agreement will contain certain customary provisions regarding such matters as the possible participation of
other security holders, potential reduction of shares registered in an underwritten offering or in a piggyback registration, the
Company’s right to temporarily defer registration under certain specified circumstances, the Company’s indemnification
of selling holders of Registrable Securities against certain potential claims arising under the Registration Statement, and other
matters. The shares purchased by our Macquarie Sponsor in the Macquarie Forward Purchase will be subject to substantially similar
registration rights.
Warrants
Public Warrants
There are currently 8,000,000 public warrants
of Hydra Industries outstanding, which were originally sold as part of units in Hydra Industries’ IPO. Each warrant entitles
the registered holder to purchase one-half of one share of our common stock at a price of $5.75 per one-half of one share ($11.50
per whole share), subject to adjustment as discussed below, at any time commencing 30 days after the completion of our initial
business combination. Warrants may be exercised only for a whole number of shares of our common stock. No fractional shares will
be issued upon exercise of the warrants. The warrants become exercisable 30 days after the completion of our initial business
combination and will expire five years after the completion of our initial business combination, at 5:00 p.m., New York City time,
or earlier upon redemption or liquidation.
We will not be obligated to deliver any
shares of common stock pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless
a registration statement under the Securities Act with respect to the shares of common stock underlying the warrants is then effective
and a prospectus relating thereto is current, subject to our satisfying our obligations described below with respect to registration.
No warrant will be exercisable for cash or on a cashless basis, and we will not be obligated to issue any shares to holders seeking
to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities
laws of the state of the exercising holder, unless an exemption is available. In the event that the conditions in the two immediately
preceding sentences are not satisfied with respect to a warrant, the holder of such warrant will not be entitled to exercise such
warrant and such warrant may have no value and expire worthless. In no event will we be required to net cash settle any warrant.
In the event that a registration statement is not effective for the exercised warrants, the purchaser of a unit containing such
warrant will have paid the full purchase price for the unit solely for the share of common stock underlying such unit.
We have agreed that as soon as practicable,
but in no event later than fifteen (15) business days, after the closing of our initial business combination, we will use our
best efforts to file with the SEC a registration statement for the registration, under the Securities Act, of the shares of common
stock issuable upon exercise of the warrants. Until such time as the shares issuable upon exercise of public warrants are registered
under the Securities Act, we will be required, commencing on the 61st day following the closing of the Business Combination, to
permit holders to exercise their warrants on a cashless basis under certain circumstances specified in the warrant agreement.
However, no warrant will be exercisable for cash or on a cashless basis, and we will not be obligated to issue any shares to holders
seeking to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the
securities laws of the state of the exercising holder, unless an exemption is available. In no event will we be required to issue
cash, securities or other compensation in exchange for the warrants in the event that we are unable to register or qualify the
shares underlying the warrants under the Securities Act or applicable state securities laws. If the issuance of the shares upon
exercise of the warrants is not so registered or qualified, the holder of such warrant shall not be entitled to exercise such
warrant and such warrant may have no value and expire worthless. In such event, holders who acquired their warrants as part of
a purchase of units will have paid the full unit purchase price solely for the shares of common stock included in the units.
We will use our best efforts to cause the
same to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto,
until the expiration or redemption of the warrants in accordance with the provisions of the warrant agreement. Notwithstanding
the above, if our common stock is at the time of any exercise of a warrant not listed on a national securities exchange such that
it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, we may, at our option,
require holders of public warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section
3(a)(9) of the Securities Act and, in the event we so elect, we will not be required to file or maintain in effect a registration
statement or register or qualify the shares under blue sky laws.
Once the warrants become exercisable, we
may call the warrants for redemption:
|
·
|
in whole and not
in part;
|
|
·
|
at a price of
$0.01 per warrant;
|
|
·
|
upon not less
than 30 days’ prior written notice of redemption (the “30-day redemption
period”) to each warrant holder; and
|
|
·
|
if, and only if,
the reported last sale price of the common stock equals or exceeds $24.00 per share for
any 20 trading days within a 30-trading day period ending on the third trading day prior
to the date we send the notice of redemption to the warrant holders.
|
If and when the warrants become redeemable
by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under
all applicable state securities laws.
We have established the last of the redemption
criteria discussed above to prevent a redemption call unless there is at the time of the call a significant premium to the warrant
exercise price. If the foregoing conditions are satisfied and we issue a notice of redemption of the warrants, each warrant holder
will be entitled to exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common
stock may fall below the $24.00 redemption trigger price as well as the warrant exercise price of $5.75 per one-half of one share
($11.50 per whole share) after the redemption notice is issued.
If we call the warrants for redemption
as described above, our management will have the option to require any holder that wishes to exercise his, her or its warrant
to do so on a “cashless basis.” In determining whether to require all holders to exercise their warrants on a “cashless
basis,” our management will consider, among other factors, our cash position, the number of warrants that are outstanding
and the dilutive effect on our stockholders of issuing the maximum number of shares of common stock issuable upon the exercise
of our warrants. If our management takes advantage of this option, all holders of warrants would pay the exercise price by surrendering
their warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number
of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and
the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean
the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior to the
date on which the notice of redemption is sent to the holders of warrants. If our management takes advantage of this option, the
notice of redemption will contain the information necessary to calculate the number of shares of common stock to be received upon
exercise of the warrants, including the fair market value in such case. Requiring a cashless exercise in this manner will reduce
the number of shares to be issued and thereby lessen the dilutive effect of a warrant redemption. We believe this feature is an
attractive option to us if we do not need the cash from the exercise of the warrants after our initial business combination. If
we call our warrants for redemption and our management does not take advantage of this option, our Sponsors and their permitted
transferees would still be entitled to exercise their placement warrants for cash or on a cashless basis using the same formula
described above that other warrant holders would have been required to use had all warrant holders been required to exercise their
warrants on a cashless basis, as described in more detail below.
A holder of a warrant may notify us in
writing in the event it elects to be subject to a requirement that such holder will not have the right to exercise such warrant,
to the extent that after giving effect to such exercise, such person (together with such person’s affiliates), to the warrant
agent’s actual knowledge, would beneficially own in excess of 9.8% (or such other amount as a holder may specify) of the
shares of common stock outstanding immediately after giving effect to such exercise.
If the number of outstanding shares of
common stock is increased by a stock dividend payable in shares of common stock, or by a split-up of shares of common stock or
other similar event, then, on the effective date of such stock dividend, split-up or similar event, the number of shares of common
stock issuable on exercise of each warrant will be increased in proportion to such increase in the outstanding shares of common
stock. A rights offering to holders of common stock entitling holders to purchase shares of common stock at a price less than
the fair market value will be deemed a stock dividend of a number of shares of common stock equal to the product of (i) the number
of shares of common stock actually sold in such rights offering (or issuable under any other equity securities sold in such rights
offering that are convertible into or exercisable for common stock) multiplied by (ii) one (1) minus the quotient of (x) the price
per share of common stock paid in such rights offering divided by (y) the fair market value. For these purposes (i) if the rights
offering is for securities convertible into or exercisable for common stock, in determining the price payable for common stock,
there will be taken into account any consideration received for such rights, as well as any additional amount payable upon exercise
or conversion and (ii) fair market value means the volume weighted average price of common stock as reported during the ten (10)
trading day period ending on the trading day prior to the first date on which the shares of common stock trade on the applicable
exchange or in the applicable market, regular way, without the right to receive such rights.
In addition, if we, at any time while the
warrants are outstanding and unexpired, pay a dividend or make a distribution in cash, securities or other assets to the holders
of common stock on account of such shares of common stock (or other shares of our capital stock into which the warrants are convertible),
other than (a) as described above, (b) certain ordinary cash dividends, (c) to satisfy the redemption rights of the holders of
common stock in connection with a proposed initial business combination, (d) as a result of the repurchase of shares of common
stock by the Company if the proposed initial business combination is presented to the stockholders of the Company for approval,
or (e) in connection with the redemption of our public shares upon our failure to complete our initial business combination, then
the warrant exercise price will be decreased, effective immediately after the effective date of such event, by the amount of cash
and/or the fair market value of any securities or other assets paid on each share of common stock in respect of such event.
If the number of outstanding shares of
our common stock is decreased by a consolidation, combination, reverse stock split or reclassification of shares of common stock
or other similar event, then, on the effective date of such consolidation, combination, reverse stock split, reclassification
or similar event, the number of shares of common stock issuable on exercise of each warrant will be decreased in proportion to
such decrease in outstanding shares of common stock.
Whenever the number of shares of common
stock purchasable upon the exercise of the warrants is adjusted, as described above, the warrant exercise price will be adjusted
by multiplying the warrant exercise price immediately prior to such adjustment by a fraction (x) the numerator of which will be
the number of shares of common stock purchasable upon the exercise of the warrants immediately prior to such adjustment, and (y)
the denominator of which will be the number of shares of common stock so purchasable immediately thereafter.
In case of any reclassification or reorganization
of the outstanding shares of common stock (other than those described above or that solely affects the par value of such shares
of common stock), or in the case of any merger or consolidation of us with or into another corporation (other than a consolidation
or merger in which we are the continuing corporation and that does not result in any reclassification or reorganization of our
outstanding shares of common stock), or in the case of any sale or conveyance to another corporation or entity of the assets or
other property of us as an entirety or substantially as an entirety in connection with which we are dissolved, the holders of
the warrants will thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified
in the warrants and in lieu of the shares of our common stock immediately theretofore purchasable and receivable upon the exercise
of the rights represented thereby, the kind and amount of shares of stock or other securities or property (including cash) receivable
upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or transfer,
that the holder of the warrants would have received if such holder had exercised their warrants immediately prior to such event.
However, if such holders were entitled to exercise a right of election as to the kind or amount of securities, cash or other assets
receivable upon such consolidation or merger, then the kind and amount of securities, cash or other assets for which each warrant
will become exercisable will be deemed to be the weighted average of the kind and amount received per share by such holders in
such consolidation or merger that affirmatively make such election, and if a tender, exchange or redemption offer has been made
to and accepted by such holders (other than a tender, exchange or redemption offer made by the Company in connection with redemption
rights held by stockholders of the Company as provided for in the Company’s amended and restated certificate of incorporation
or as a result of the repurchase of shares of common stock by the Company if a proposed initial business combination is presented
to the stockholders of the Company for approval) under circumstances in which, upon completion of such tender or exchange offer,
the maker thereof, together with members of any group (within the meaning of Rule 13d-5(b)(1) under the Exchange Act) of which
such maker is a part, and together with any affiliate or associate of such maker (within the meaning of Rule 12b-2 under the Exchange
Act) and any members of any such group of which any such affiliate or associate is a part, own beneficially (within the meaning
of Rule 13d-3 under the Exchange Act) more than 50% of the outstanding shares of common stock, the holder of a warrant will be
entitled to receive the highest amount of cash, securities or other property to which such holder would actually have been entitled
as a stockholder if such warrant holder had exercised the warrant prior to the expiration of such tender or exchange offer, accepted
such offer and all of the common stock held by such holder had been purchased pursuant to such tender or exchange offer, subject
to adjustments (from and after the consummation of such tender or exchange offer) as nearly equivalent as possible to the adjustments
provided for in the warrant agreement. Additionally, if less than 70% of the consideration receivable by the holders of common
stock in such a transaction is payable in the form of common stock in the successor entity that is listed for trading on a national
securities exchange or is quoted in an established over-the-counter market, or is to be so listed for trading or quoted immediately
following such event, and if the registered holder of the warrant properly exercises the warrant within thirty days following
public disclosure of such transaction, the warrant exercise price will be reduced as specified in the warrant agreement based
on the per share consideration minus the Black-Scholes value (as defined in the warrant agreement) of the warrant.
The warrants were issued in registered
form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. You should review
a copy of the warrant agreement for a complete description of the terms and conditions applicable to the warrants. The warrant
agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct
any defective provision, but requires the approval by the holders of at least 65% of the then outstanding public warrants to make
any change that adversely affects the interests of the registered holders of public warrants.
The warrants may be exercised upon surrender
of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the
reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price
(or on a cashless basis, if applicable), by certified or official bank check payable to us, for the number of warrants being exercised.
The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise
their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants,
each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
No fractional shares will be issued upon
exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a
share, we will, upon exercise, round down to the nearest whole number the number of shares of common stock to be issued to the
warrant holder.
Placement Warrants
Our Sponsors purchased 7,500,000 placement
warrants, each exercisable for one-half of one share of our common stock at $5.75 per half share, for a purchase price of $3,750,000,
or $0.50 per warrant in a private placement that occurred concurrently with the consummation of our IPO. The placement warrants
are identical to the warrants sold in the IPO, except that, if held by our Sponsors or their permitted assigns, they (a) may be
exercised for cash or on a cashless basis; and (b) are not subject to being called for redemption. The proceeds from the
sale of the placement warrants are held in our trust account for the benefit of our public stockholders. If we do not complete
one or more business combinations, the placement warrants will become worthless.
The placement warrants were sold in a private
placement pursuant to Regulation D of the Securities Act and were exempt from the registration requirements under the federal
securities laws. However, the holders of these placement warrants have agreed that they will not exercise them if, at the time
of exercise, an effective registration statement and a current prospectus relating to the common stock issuable upon exercise
of the public warrants is not available, unless, at that time, the public warrants are exercisable on a cashless basis.
The placement warrants will become worthless
if we do not consummate our initial business combination. The personal and financial interests of holders of the placement warrants
may influence their motivation in identifying and selecting a target business and completing our initial business combination
in a timely manner. Consequently, our officers’ and directors’ discretion in identifying and selecting a suitable
target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular
business combination are appropriate and in our stockholders’ best interest.
Rights
Each holder of a right will receive one-tenth
(1/10) of one share of common stock upon consummation of our initial business combination, even if the holder of such right redeemed
all shares of common stock held by it in connection with the initial business combination. No additional consideration will be
required to be paid by a holder of rights in order to receive its additional shares upon consummation of an initial business combination,
as the consideration related thereto has been included in the unit purchase price paid for by investors in this offering. If we
enter into a definitive agreement for a business combination in which we will not be the surviving entity, the definitive agreement
will provide for the holders of rights to receive the same per share consideration the holders of the common stock will receive
in the transaction on an as-converted into common stock basis, and each holder of a right will be required to affirmatively convert
its rights in order to receive the 1/10 share underlying each right (without paying any additional consideration) upon consummation
of the business combination. More specifically, the right holder will be required to indicate its election to convert the rights
into underlying shares as well as to return the original rights certificates to us.
If we are unable to complete an initial
business combination within the required time period and we liquidate the funds held in the trust account, holders of rights will
not receive any such funds with respect to their rights, nor will they receive any distribution from our assets held outside of
the trust account with respect to such rights, and the rights will expire worthless.
As soon as practicable upon the consummation
of our initial business combination, we will direct registered holders of the rights to return their rights to our rights agent.
Upon receipt of the rights, the rights agent will issue to the registered holder of such rights the number of full shares of common
stock to which it is entitled. We will notify registered holders of the rights to deliver their rights to the rights agent promptly
upon consummation of such business combination and have been informed by the rights agent that the process of exchanging their
rights for shares of common stock should take no more than a matter of days. The foregoing exchange of rights is solely ministerial
in nature and is not intended to provide us with any means of avoiding our obligation to issue the shares underlying the rights
upon consummation of our initial business combination. Other than confirming that the rights delivered by a registered holder
are valid, we will have no ability to avoid delivery of the shares underlying the rights. Nevertheless, there are no contractual
penalties for failure to deliver securities to the holders of the rights upon consummation of an initial business combination.
Additionally, in no event will we be required to net cash settle the rights. Accordingly, the rights may expire worthless.
The shares issuable upon exchange of the rights will be freely
tradable (except to the extent held by affiliates of ours). We will not issue fractional shares upon exchange of the rights. If,
upon exchange of the rights, a holder would be entitled to receive a fractional interest in a share, we will, upon exchange, either
round up to the nearest whole number the number of shares to be issued to the right holder or otherwise comply with Section 155
of the Delaware General Corporation Law (which provides that Delaware companies shall either (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those
entitled to receive
Dividends
Hydra Industries has not paid any cash
dividends on its common stock to date and does not intend to pay cash dividends prior to the completion of the Business Combination.
The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and
general financial condition subsequent to completion of our initial business combination. The payment of any cash dividends subsequent
to our initial business combination will be within the discretion of our board of directors at such time. In addition, our board
of directors is not currently contemplating and does not anticipate declaring any stock dividends in the foreseeable future. Further,
are we are maintaining Target’s indebtedness in connection with the Business Combination, our ability to declare dividends
may be limited by restrictive covenants in connection therewith.
Our Transfer Agent and Warrant Agent
The transfer agent for our common stock
and warrant agent for our warrants is Continental Stock Transfer & Trust Company. We have agreed to indemnify Continental
Stock Transfer & Trust Company in its roles as transfer agent and warrant agent, its agents and each of its stockholders,
directors, officers and employees against all claims and losses that may arise out of acts performed or omitted in that capacity,
except for any liability due to any gross negligence or intentional misconduct of the indemnified person or entity.
Certain Anti-Takeover Provisions of Delaware
Law
We are subject to the provisions of Section
203 of the DGCL regulating corporate takeovers. This statute prevents certain Delaware corporations, under certain circumstances,
from engaging in a “business combination” with:
|
·
|
a stockholder
who owns 15% or more of our outstanding voting stock (otherwise known as an “interested
stockholder”);
|
|
·
|
an affiliate of
an interested stockholder; or
|
|
·
|
an associate of
an interested stockholder, for three years following the date that the stockholder became
an interested stockholder.
|
A “business combination” includes
a merger or sale of more than 10% of our assets. However, the above provisions of Section 203 do not apply if:
|
·
|
our board of directors
approves the transaction that made the stockholder an “interested stockholder,”
prior to the date of the transaction;
|
|
·
|
after the completion
of the transaction that resulted in the stockholder becoming an interested stockholder,
that stockholder owned at least 85% of our voting stock outstanding at the time the transaction
commenced, other than statutorily excluded shares of common stock; or
|
|
·
|
on or subsequent
to the date of the transaction, the business combination is approved by our board of
directors and authorized at a meeting of our stockholders, and not by written consent,
by an affirmative vote of at least two-thirds of the outstanding voting stock not owned
by the interested stockholder.
|
Rule 144
Pursuant to Rule 144, a person who has
beneficially owned restricted shares of our common stock or warrants for at least six months would be entitled to sell their securities
provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three
months preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least three months
before the sale and have filed all required reports under Section 13 or 15(d) of the Exchange Act during the 12 months (or such
shorter period as we were required to file reports) preceding the sale.
Persons who have beneficially owned restricted
shares of our common stock or warrants for at least six months but who are our affiliates at the time of, or at any time during
the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell
within any three-month period only a number of securities that does not exceed the greater of:
|
·
|
1% of the total
number of shares of common stock then outstanding; or
|
|
·
|
the average weekly
reported trading volume of the common stock during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale.
|
Sales by our affiliates under Rule 144
are also limited by manner of sale provisions and notice requirements and to the availability of current public information about
us.
For purposes of the six-month holding period
requirement of Rule 144, a person who beneficially owns restricted shares of our common stock issued pursuant to a cashless exercise
of a warrant shall be deemed to have acquired such shares, and the holding period for such shares shall be deemed to have commenced
on the date the warrant was originally issued.
Restrictions on the Use of Rule 144 by Shell Companies or
Former Shell Companies
Rule 144 is not available for the resale
of securities initially issued by shell companies (other than business combination related shell companies) or issuers that have
been at any time previously a shell company. However, Rule 144 also includes an important exception to this prohibition if the
following conditions are met:
|
·
|
the issuer of
the securities that was formerly a shell company has ceased to be a shell company;
|
|
·
|
the issuer of
the securities is subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act;
|
|
·
|
the issuer of
the securities has filed all Exchange Act reports and material required to be filed,
as applicable, during the preceding 12 months (or such shorter period that the issuer
was required to file such reports and materials), other than Form 8-K reports; and
|
|
·
|
at least one year
has elapsed from the time that the issuer filed current Form 10 type information with
the SEC, which is expected to be filed promptly after completion of the Business Combination,
reflecting its status as an entity that is not a shell company.
|
As of the date of this proxy statement,
we had 10,000,000 shares of common stock outstanding. Of these shares, the 8,000,000 shares sold in our IPO are freely tradable
without restriction or further registration under the Securities Act, except for any shares purchased by one of our affiliates
within the meaning of Rule 144 under the Securities Act. All of the 2,000,000 founder shares owned by our Sponsors, officers,
independent directors and advisor are restricted securities under Rule 144, since they were issued in private transactions not
involving a public offering.
As of the date of this proxy statement,
there are 15,500,000 warrants of Hydra Industries outstanding, consisting of 8,000,000 public warrants originally sold as part
of units in Hydra Industries’ IPO and 7,500,000 placement warrants that were issued to our Sponsors in a private sale concurrently
with the consummation of Hydra Industries’ IPO. Each warrant is exercisable for one-half of one share of our common stock,
in accordance with the terms of the warrant agreement governing the warrants. 8,000,000 of these warrants are public warrants
and are freely tradable. In addition, we will be obligated to file no later than 15 business days after the closing of the Business
Combination a registration statement under the Securities Act covering the 4,000,000 shares of our common stock that may be issued
upon the exercise of the public warrants and use reasonable best efforts to cause such registration statement to become effective
and maintain the effectiveness of such registration statement until the expiration of the warrants.
Registration Rights
The holders of the founder shares and placement
warrants have registration rights to require a sale of any of our securities held by them pursuant to a registration rights agreement
signed in connection with our IPO. These holders are entitled to make up to three demands, excluding short form registration demands,
that we register such securities for sale under the Securities Act. In addition, these holders have “piggy-back” registration
rights to include such securities in other registration statements filed by us and rights to require us to register for resale
such securities pursuant to Rule 415 under the Securities Act.
We have agreed that as soon as practicable,
but in no event later than fifteen (15) business days, after the closing of our initial business combination, we will use our
best efforts to file with the SEC a registration statement for the registration, under the Securities Act, of the shares of common
stock issuable upon exercise of the warrants. We will use our best efforts to cause the same to become effective and to maintain
the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration or redemption
of the warrants in accordance with the provisions of the warrant agreement.
In addition, pursuant to the Sale Agreement,
we will enter into a Registration Rights Agreement, at the closing of the Business Combination, obligating us to file one or more
resale “shelf” registration statements under the Securities Act to register the Purchaser Shares (and other Registrable
Securities, if any, as defined) to be issued to Target stockholders in the Business Combination. The shares purchased by our Macquarie
Sponsor in the Macquarie Forward Purchase are also subject to similar registration rights. The Registration Rights Agreement will
provide that at any time and from time to time on or after the consummation of the Business Combination, holders of at least a
majority in interest of the then outstanding number of Purchaser Securities (and other Registrable Securities, if any) may make
a written demand for registration under the Securities Act for all or part of the Registrable Securities, in which case the Company
is to effect such registration as soon as practicable, but not more than 45 days after such demand (or 90 days in the event the
SEC reviews and has written comments on the registration statement). The Company will not be obligated to effect more than three
such registrations for each requesting holder. The Registration Rights Agreement will also provide for unlimited “piggyback”
rights to register Registrable Securities under any registration statement otherwise filed by the Company (with certain limited
exceptions), and for unlimited registration of Registrable Securities on Form S-3 or any similar “short-form” registration
statement that may be available at the time. The expenses of the registration will be borne by the Company (although incremental
selling expenses such underwriters’ commissions and discount and brokerage fees will be borne by the selling holders). The
Registration Rights Agreement will contain certain customary provisions regarding such matters as the possible participation of
other security holders, potential reduction of shares registered in an underwritten offering or in a piggyback registration, the
Company’s right to temporarily defer registration under certain specified circumstances, the Company’s indemnification
of selling holders of Registrable Securities against certain potential claims arising under the Registration Statement, and other
matters.
Listing of Securities
We have applied to continue the listing
of our common stock and warrants on NASDAQ under the new symbols ‘INSE and “INSEW” respectively, upon the closing
of the Business Combination.
BENEFICIAL
OWNERSHIP OF SECURITIES
The following table sets forth information
known to the Company regarding (i) the actual beneficial ownership of our common stock as of the record date (pre-Business Combination)
and (ii) expected beneficial ownership of our common stock immediately following consummation of the Business Combination (post-Business
Combination), assuming that no public shares of the Company are redeemed, and alternatively the maximum number of shares of the
Company are redeemed, by:
|
·
|
each person who
is, or is expected to be, the beneficial owner of more than 5% of the outstanding shares
of our common stock;
|
|
·
|
each of our current
executive officers and directors;
|
|
·
|
each person who
will become a named executive officer or director of the Company post- Business Combination;
and
|
|
·
|
all executive
officers and directors of the Company as a group pre-Business Combination and post-Business
Combination.
|
At any time prior to the special meeting,
during a period when they are not then aware of any material nonpublic information regarding the Company or its securities, the
initial stockholders and/or their affiliates may enter into a written plan to purchase the Company’s securities pursuant
to Rule 10b5-1 of the Exchange Act, and may engage in other public market purchases, as well as private purchases, of securities.
See “Risk Factors — Risks Related to Hydra Industries and the Business Combination — Our initial stockholders
and/or their affiliates may enter into agreements concerning our securities prior to the special meeting, which may have the effect
of increasing the likelihood of consummation of the Business Combination, decreasing the value of our common stock or reducing
the public “float” of our common stock.” The ownership percentages listed below do not include any such shares
that may be purchased after the record date.
Beneficial ownership is determined according
to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses
sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or
exercisable within 60 days.
The expected beneficial ownership of our
common stock pre-Business Combination is based on 10,000,000 shares of common stock issued and outstanding as of the record date.
The expected beneficial ownership percentages
set forth in the table below with respect to Hydra Industries following the Business Combination do not take into account (i)
the issuance of any shares upon completion of the Business Combination under the proposed Incentive Plan or (ii) any or all of
the 17,500,000 warrants to purchase up to a total of 8,750,000 shares of Hydra Industries common stock that will remain outstanding
following the Business Combination. If the actual facts are different than these assumptions (which they are likely to be), the
percentage ownership retained by Hydra Industries’ existing stockholders in Hydra Industries will be different.
The expected beneficial ownership of shares
of our common stock post-Business Combination assuming none of our public shares are redeemed has been determined based upon the
following: (i) no Hydra Industries stockholder has exercised its redemption rights to receive cash from the trust account in exchange
for its shares of Hydra Industries common stock and we have not issued any additional shares of our common stock and (ii) there
will be an aggregate of 20,800,000 shares of our common stock issued and outstanding at closing.
The expected beneficial ownership of shares
of our common stock post-Business Combination assuming 4,000,000 public shares have been redeemed has been determined based on
the following: (i) Hydra Industries stockholders (other than the stockholders listed in the table below) have exercised their
redemption rights with respect to 4,000,000 shares of our common stock and (ii) there will be an aggregate of 20,800,000 shares
of our common stock issued and outstanding at closing.
Unless otherwise indicated, we believe
that all persons named in the table below have sole voting and investment power with respect to all shares of common stock beneficially
owned by them.
Name of Beneficial Owners
(1)
|
|
Number of Shares Beneficially
Owned
|
|
|
Approximate Percentage
of
Outstanding Common Stock
(2)
|
|
Hydra Industries Sponsor LLC
(3)
|
|
|
1,186,308
|
|
|
|
11.9
|
|
MIHI LLC
(4)(5)
|
|
|
323,750
|
|
|
|
3.2
|
|
A. Lorne Weil
|
|
|
1,186,308
|
|
|
|
11.9
|
|
George Peng
|
|
|
8,899
|
|
|
|
*
|
|
Martin E. Schloss
(9)
|
|
|
55,114
|
|
|
|
*
|
|
Jonathan S. Miller
|
|
|
25,000
|
|
|
|
*
|
|
Kenneth Shea
|
|
|
25,000
|
|
|
|
*
|
|
M. Brent Stevens
|
|
|
25,000
|
|
|
|
*
|
|
Stephen J. Dannhauser
(5)
|
|
|
25,000
|
|
|
|
*
|
|
All directors and officers as a group (7 persons)
|
|
|
1,350,321
|
|
|
|
13.5
|
|
AQR Capital Management, LLC
(6)
|
|
|
639,900
|
|
|
|
6.4
|
|
Polar Asset Management Partners Inc.
(7)
|
|
|
1,289,300
|
|
|
|
12.9
|
|
TD Asset Management Inc.
(8)
|
|
|
786,000
|
|
|
|
7.9
|
|
Weiss Asset Management LP
(10)
|
|
|
556,716
|
|
|
|
5.6
|
|
|
(1)
|
Unless otherwise noted, the business address of each of the
persons and entities listed above is 250 West 57
th
Street, Suite 2223, New York, NY 10107.
|
|
(2)
|
Excludes shares underlying the contingent forward purchase contract, as such shares may not
be voted or disposed of by MIHI LLC within 60 days of the date of this proxy statement.
|
|
(3)
|
The shares held by our Hydra sponsor are beneficially owned by A. Lorne Weil, who has sole
voting and dispositive power over the shares held by our Hydra sponsor. Mr. Weil, B. Luke Weil, a son of Mr. Weil, and trusts
owned by Mr. Weil’s children, B. Luke Weil, Nicholas Weil, Francesca Weil, and Alexander Weil, own all of the membership
interests in our Hydra sponsor. Other than Mr. Weil, none of the owners of our Hydra sponsor are on our management team.
|
|
(4)
|
MIHI LLC is an affiliate of Macquarie Group and Macquarie Capital (USA) Inc. The business
address of MIHI LLC is c/o Macquarie Capital (USA) Inc., 125 West 55
th
Street, L-22, New York, NY 10019-5396.
|
|
(5)
|
Mr. Dannhauser disclaims beneficial ownership of shares held by MIHI LLC as he does not have
control over voting or disposition of such shares. The business address of Mr. Dannhauser is 767 Fifth Avenue, New York, NY
10153.
|
|
(6)
|
According to Schedule 13G/A filed with the SEC on June 6, 2016 on behalf of AQR Capital
Management, LLC, a Delaware company (“AQR Capital”). AQR Capital serves as the investment manager to the AQR Diversified
Arbitrage Fund, an open-end registered investment company, which holds 6.07% of the shares held by AQR Capital Management,
LLC. AQR Capital is a wholly-owned subsidiary of AQR Management Holdings, LLC. The business address of AQR Capital is Two
Greenwich Plaza, Greenwich, CT 06830.
|
|
(7)
|
According to a Schedule 13G/A filed with the SEC on February 10, 2016 on behalf of Polar Asset
Management Partners Inc., a Canadian corporation (“Polar”) and Polar Multi Strategy Master Fund, a Cayman Islands
fund (“PMSMF”). Polar serves as investment manager to PMSMF with respect to the shares held by this stockholder.
The business address of this stockholder is 401 Bay Street, Suite 1900, PO Box 19, Toronto, Ontario M5H 2Y4, Canada.
|
|
(8)
|
According to a Schedule 13G/A filed with the SEC on February 12, 2016 on behalf of TD Asset
Management Inc., a Canadian corporation (“TDAM”). TDAM is a wholly-owned subsidiary of TD Bank Financial Group.
The business address of this stockholder is Canada Trust Tower, BCE Place, 161 Bay Street, 35
th
Floor, Toronto,
Ontario, M5J 2T2, Canada.
|
|
(9)
|
Represents shares of common stock held by MS Hercules LLC. Martin E. Schloss,
the Executive Vice President, General Counsel and Secretary of Hydra Industries, is the sole member of MS Hercules LLC. Mr.
Schloss has sole voting and dispositive control over such securities.
|
|
(10)
|
According to a Schedule 13G filed with the SEC on May 2, 2016 on behalf of Weiss Asset Management
LP (“Weiss”), BIP GP, WAM GP LLC (“WAM GP”) and Andrew M. Weiss. Shares reported for BIP GP include
shares beneficially owned by a private investment partnership (the “Partnership”) of which BIP GP is the sole
general partner. Weiss is the sole investment manager to the Partnership. WAM GP is the sole general partner of Weiss. Andrew
Weiss is the managing member of WAM GP and BIP GP. Shares reported for WAM GP, Andrew Weiss and Weiss Asset Management include
shares beneficially owned by the Partnership (and reported above for BIP GP). The business address of this stockholder is
222 Berkeley St., 16th Floor, Boston, Massachusetts 02116.
|
The table above does not include the
shares of common stock underlying the public warrants, public rights, private placement warrants, private placement units or private
placement shares because these securities are not exercisable within 60 days of this proxy statement.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Hydra Industries Related Person Transactions
In July 2014, we and each of our sponsors
entered into a securities subscription agreement, pursuant to which our sponsors purchased an aggregate of 2,875,000 shares of
our common stock for an aggregate purchase price of $25,000, or approximately $0.01 per share. In order that the shares held by
our initial stockholders would represent 20% of the outstanding shares upon completion of our initial public offering, in October
2014, our sponsors and certain other stockholders returned to us, at no cost, an aggregate of 487,182 founder shares, which we
cancelled. As a result of the underwriters’ election not to exercise their over-allotment option for our initial public
offering, certain of our initial stockholders (other than our independent directors) forfeited an aggregate of 300,000 founder
shares on December 8, 2014.
In July 2014, our sponsors transferred
429,000 founder shares to an affiliate of Mr. Lipkin, our former Executive Vice President, Chief Financial Officer and Chief Operating
Officer, and 75,000 founder shares to an affiliate of Mr. Schloss, our Executive Vice President, General Counsel and Secretary,
respectively (39,000 and 6,818 (giving effect to the cancellations discussed below) of which were subsequently forfeited, respectively).
In order that the shares held by our initial stockholders would represent 20% of the outstanding shares upon completion of our
initial public offering, in October 2014, Mr. Lipkin and Mr. Schloss returned to us, at no cost, 74,750 and 13,068 founder shares,
respectively, which we cancelled. In addition, in October 2014, our Hydra sponsor transferred an aggregate of 22,000 founder shares
to consultants of Hydra Management LLC (2,422 of which were subsequently forfeited), including 8,899 shares to George Peng, who
was appointed as our Chief Financial Officer in August 2015. In addition, in October 2014 our Hydra sponsor transferred 25,000
founder shares to each of Messrs. Miller, Shea, and Stevens, our independent directors (for a total of 75,000 founder shares,
none of which were subject to forfeiture), and our Macquarie Sponsor transferred 25,000 founder shares to Mr. Dannhauser, our
Macquarie Sponsor’s director (none of which were subject to forfeiture).
Our initial stockholders have agreed not
to transfer, assign or sell any of their founder shares, private placement shares or shares of our common stock underlying the
rights included in the private placement units (except to our officers and directors and other persons or entities affiliated
with our sponsors, each of whom will be subject to the same transfer restrictions) until the earlier to occur of: (A) one year
after the completion of our initial business combination or (B) the date following the completion of our initial business combination
on which we complete a liquidation, merger, stock exchange or other similar transaction that results in all of our stockholders
having the right to exchange their shares of common stock for cash, securities or other property. Notwithstanding the foregoing,
in the event our Macquarie Sponsor withholds consent to consummate a business combination because of regulatory reasons or because
the business combination involves a competitor to our Macquarie Sponsor, its affiliates, or an entity in which our Macquarie Sponsor
or an affiliate has an equity interest, then our Macquarie Sponsor shall be permitted to sell its founder shares (provided, that
the transferee agrees to be bound by the transfer restrictions, lock-up provisions, voting obligations, registration rights and
other such restrictions and rights of the founder shares), and our Hydra sponsor will use its best efforts to facilitate a sale
of our Macquarie Sponsor’s founder shares. Notwithstanding the foregoing, if the last sale price of our common stock equals
or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for
any 20 trading days within any 30-trading day period commencing at least 150 days after our initial business combination, the
founder shares, private placement shares and shares of our common stock underlying the rights included in the private placement
units will be released from the lock-up.
Simultaneously with the consummation of
our initial public offering on October 29, 2014, A. Lorne Weil, our Chairman and Chief Executive Officer and the managing member
of our Hydra sponsor, our Macquarie Sponsor, and Mr. Schloss, pursuant to a written agreement, purchased an aggregate of 7,500,000
private placement warrants for a purchase price of $0.50 per warrant in a private placement for total proceeds of $3,750,000.
Each private placement warrant entitles the holder to purchase one-half of one share of our common stock at $5.75 per share. Other
than transfers to our executive officers or their affiliates, the private placement warrants (including the common stock issuable
upon exercise of the private placement warrants) may not, subject to certain limited exceptions, be transferred, assigned or sold
by our sponsors until 30 days after the completion of our initial business combination.
On October 24, 2014, our Macquarie Sponsor
entered into a contingent forward purchase contract with us to purchase, in a private placement for gross proceeds of approximately
$20,000,000 to occur concurrently with the consummation of our initial business combination, 2,000,000 units (which includes 2,000,000
warrants and 2,000,000 rights) on substantially the same terms as the sale of units in our initial public offering and 500,000
shares of common stock on the same terms as the sale of shares of common stock to our sponsors prior to our initial public offering.
The funds from the sale of the private placement units may be used as part of the consideration to the sellers in the initial
business combination; any excess funds from this private placement may be used for working capital in the post-transaction company.
This commitment is independent of the percentage of stockholders electing to redeem their shares and provides us with an increased
minimum funding level for the initial business combination.
The contingent forward purchase contract
is subject to the following closing conditions:
•
the representations and warranties made by us in the contingent forward purchase contract shall be true and correct in all material
respects;
•
all covenants, agreements and conditions contained in the contingent forward purchase contract shall have been performed by us;
•
we have obtained all blue sky law permits and qualifications required by any state for the offer and sale of the private placement
securities; and
•
our Macquarie Sponsor has provided its consent to the business combination, which it may withhold for any reason; provided, that
if our Macquarie Sponsor does not consent because of regulatory reasons or because the business combination involves a competitor
to our Macquarie Sponsor, its affiliates, or an entity in which our Macquarie Sponsor or an affiliate has an equity interest,
then we may proceed with such business combination but our Macquarie Sponsor will not be obligated to settle the purchase of securities
under the contingent forward purchase contract.
The holders of the founder shares, private
placement shares, private placement units and private placement warrants will have registration rights to require us to register
a sale of any of our securities held by them (including the shares of common stock underlying such securities) pursuant to a registration
rights agreement signed on October 24, 2014. Each of our sponsors will be entitled to make up to three demands, excluding short
form registration demands, that we register such securities for sale under the Securities Act. In addition, these holders will
have “piggy-back” registration rights to include such securities in other registration statements filed by us and
rights to require us to register for resale such securities pursuant to Rule 415 under the Securities Act. However, the registration
rights agreement provides that we will not permit any registration statement filed under the Securities Act to become effective
until termination of the applicable lock-up period, which occurs in the case of the founder shares, and the private placement
shares and the shares of our common stock underlying the rights included in the private placement units, upon (except to our officers
and directors and other persons or entities affiliated with our sponsors, each of whom will be subject to the same transfer restrictions)
until the earlier of (A) one year after the completion of our initial business combination or earlier if, subsequent to our business
combination, the last sale price of the common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends,
reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least
150 days after our initial business combination, or (B) the date following the completion of our initial business combination
on which we complete a liquidation, merger, stock exchange or other similar transaction that results in all of our stockholders
having the right to exchange their shares of common stock for cash, securities or other property, and in the case of the private
placement warrants and the respective common stock underlying such warrants, 30 days after the completion of our initial business
combination. In the case of the private placement units and their constituent securities, we may file a registration statement
immediately following the business combination. We will bear the costs and expenses of filing any such registration statements.
We have also entered into an agreement
with our sponsors pursuant to which we have agreed as follows:
•
our sponsors will use best efforts so as not to permit us to enter into a contract involving amounts in excess of $25,000 (other
than an underwriting agreement and our initial business combination) without the approval of one of our Hydra sponsor designees
and our Macquarie Sponsor designee to our board of directors;
•
our sponsors agreed to take any action necessary to ensure that, our board of directors will consist of five persons in total,
two Hydra sponsor designees (one of whom is deemed by applicable rules and regulations to be an independent director), one Macquarie
Sponsor designee and two persons mutually selected by our sponsors who are deemed by applicable rules and regulations to be independent
directors; and
•
we agree not to consummate our initial business combination without our Macquarie Sponsor’s consent; provided, however,
that if we fail to consummate a business combination within the required time period, and our board of directors (other than our
Macquarie Sponsor designee) unanimously votes in favor of a proposed business combination and our Macquarie Sponsor decides to
withhold its vote on such business combination (for reasons other than regulatory reasons or because the business combination
involves a competitor to our Macquarie Sponsor, its affiliates, or an entity in which our Macquarie Sponsor or an affiliate has
an equity interest), our Macquarie Sponsor will be, subject to certain conditions, obligated to pay a $740,000 fee to our Hydra
sponsor and the private placement warrants purchased by our Macquarie Sponsor, Mr. Weil and another member of our management will
expire worthless. Notwithstanding the foregoing, in the event our Macquarie Sponsor withholds consent to consummate a business
combination because of regulatory reasons or because the business combination involves a competitor to our Macquarie Sponsor,
its affiliates, or an entity in which our Macquarie Sponsor or an affiliate has an equity interest, then our Macquarie Sponsor
is not obligated to pay the $740,000 fee, we may proceed with such business combination, our Macquarie Sponsor shall be permitted
to sell its private placement warrants and founder shares (provided, that the transferee agrees to be bound by the transfer restrictions,
lock-up provisions, voting obligations, registration rights and other such restrictions and rights of the transferred private
placement warrants and founder shares), our Hydra sponsor will use its best efforts to facilitate a sale of our Macquarie Sponsor’s
private placement warrants and founder shares, and the term of our Macquarie Sponsor’s designee on the board of directors
shall automatically terminate and such board seat shall remain vacant until filled by a successor duly appointed by our Hydra
sponsor.
We entered into a letter agreement with
Macquarie Capital (USA) Inc., pursuant to which we have agreed that prior to the third anniversary of the date of the letter agreement,
we will engage Macquarie Capital (USA) Inc., or an affiliate of Macquarie Capital (USA) Inc. designated by it, to act, on any
and all transactions with a notional value greater than $30 million, as:
•
a bookrunning managing underwriter, a bookrunning managing placement agent, or a bookrunning managing initial purchaser, as the
case may be, in connection with any offering or placement of securities (including but not limited to, debt, equity, preferred
and other hybrid equity securities or equity linked securities) by us or any of our subsidiaries, in each case with Macquarie
Capital (USA) Inc. receiving total compensation in respect of any such transaction that is equal to or better than 40% of the
total compensation received by all underwriters, placement agents, and initial purchasers, as the case may be, in connection with
such transaction and not less than the compensation received by any individual underwriter, placement agent or initial purchaser,
as the case may be; and
•
a financial advisor in connection with any restructuring (through a recapitalization, extraordinary dividend, stock repurchase,
spin-off, joint venture or otherwise) by us or any of our subsidiaries, acquisition or disposition of a business, asset or voting
securities by us or debt or equity financing or any refinancing of any portion of any financing by us or any of our subsidiaries,
in each case with Macquarie Capital (USA) Inc. receiving total compensation in respect of any such transaction that is equal to
or greater than 40% of the total compensation received by all financial advisors in connection with such transaction (50% in the
case of the initial business combination), and not less than the compensation received by any individual financial advisor.
Macquarie
Capital (USA) Inc. may decline any such engagement in its sole and absolute discretion, in which event Macquarie Capital (USA)
Inc. would not be entitled to any fees from such engagement. Any engagement pursuant to the letter agreement will be on Macquarie
Capital (USA) Inc.’s customary terms (including, as applicable, representations, warranties, covenants, conditions, indemnities
and fees based upon the prevailing market for similar services for global, full-service investment banks), and such terms, including
the amount of proposed fees of Macquarie for such engagement (but not the obligation to retain Macquarie Capital (USA) Inc.),
shall be subject to the review of our audit committee’s policies and procedures relating to transactions that may present
conflicts of interest. Macquarie Capital (USA) Inc. will not be retained to render a fairness opinion on our initial business
combination.
Macquarie Capital (USA) Inc. has not yet
been retained for a specific financial advisory, underwriting, capital raising or other transaction and so we are not able to
quantify the fees for any such engagement. No funds will be paid out of the trust to fund any such fee payments and it is not
expected that any fees would be paid prior to the consummation of a business combination. The actual amount of fees received will
vary significantly based on the size of any transaction and the extent to which other investment banks are involved.
If any of our officers or directors (other
than our independent directors) becomes aware of a business combination opportunity that falls within the line of business of
any entity other than us to which he or she has then current fiduciary or contractual obligations, he or she may be required to
present such business combination opportunity to such entity prior to presenting such business combination opportunity to us.
Our executive officers and directors currently have certain relevant fiduciary duties or contractual obligations that may take
priority over their duties to us. Additionally, our amended and restated certificate of incorporation provides that the doctrine
of corporate opportunity, or any other analogous doctrine, will not apply to our Macquarie Sponsor’s board member.
On October 24, 2014, we entered into an
Administrative Services Agreement with Lorne Weil, Inc., which agreement was assigned to Hydra Management LLC effective March
5, 2015, each an affiliate of our Hydra sponsor, pursuant to which we pay a total of $10,000 per month for office space, utilities
and secretarial support. Upon completion of our initial business combination or our liquidation, we will cease paying these monthly
fees. Accordingly, in the event the consummation of our initial business combination takes the maximum 24 months, affiliates of
our Hydra sponsor will be paid a total of $240,000 ($10,000 per month) for office space, utilities and secretarial support and
will be entitled to be reimbursed for any out-of-pocket expenses.
Our sponsors, executive officers and directors,
or any of their respective affiliates, will be reimbursed for any out-of-pocket expenses incurred in connection with activities
on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations.
Our audit committee will review on a quarterly basis all payments that were made to our sponsors, officers, directors or our or
their affiliates and will determine which expenses and the amount of expenses that will be reimbursed. In the event our business
combination is completed, there is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred by such persons in
connection with activities on our behalf.
On July 25, 2014, we entered into a promissory
note with each of our sponsors, whereby our sponsors agreed to loan us up to an aggregate of $125,000 each (“Promissory
Notes”) to be used in part for expenses incurred in connection with the Initial Public Offering. The Promissory Notes were
non-interest bearing, unsecured and due at the earlier of March 31, 2015 or the closing of our initial public offering. The Promissory
Notes were repaid upon the consummation of the initial public offering.
On March 16, 2016, we entered into
convertible promissory notes with our Sponsors, whereby the Sponsors loaned us an aggregate of $500,000 (“Convertible Promissory
Notes”) in order to finance transaction costs in connection with a business combination. The Convertible Promissory Notes
are non-interest bearing, and due on the date on which we consummate a business combination. In the event that a business combination
does not occur, the Sponsors would become general unsecured creditors of Hydra Industries. If we complete an initial business
combination, we expect to repay such loaned amounts out of the proceeds of the trust account released to us. Otherwise, such loans
would be repaid only out of funds held outside the trust account. In the event that the initial business combination does not
close, we may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds
from our trust account would be used for such repayment. Each of the Convertible Promissory Notes is convertible, in whole or
in part, at the election of the Sponsor holding such note, upon the consummation of a business combination. Upon such election,
the Convertible Promissory Notes will convert into warrants, at a price of $0.50 per warrant. These warrants will be identical
to the Private Placement Warrants. As such, each warrant is exercisable for one-half of one share of our common stock at an exercise
price of $5.75 per half share.
After our initial business combination,
members of our management team who remain with us may be paid consulting, management or other fees, or a salary, from the combined
company with any and all amounts being fully disclosed to our stockholders, to the extent then known, in the tender offer or proxy
solicitation materials, as applicable, furnished to our stockholders. It is unlikely the amount of such compensation will be known
at the time of distribution of such tender offer materials or at the time of a stockholder meeting held to consider our initial
business combination, as applicable, as it will be up to the directors of the post-combination business to determine executive
and director compensation.
Our audit committee must review and approve
any related person transaction we propose to enter into. Our audit committee charter details the policies and procedures relating
to transactions that may present actual, potential or perceived conflicts of interest and may raise questions as to whether such
transactions are consistent with the best interest of the company and our stockholders. A summary of such policies and procedures
is as follows:
Any potential related party transaction
that is brought to the audit committee’s attention will be analyzed by the audit committee, in consultation with outside
counsel or members of management, as appropriate, to determine whether the transaction or relationship does, in fact, constitute
a related party transaction. At each of its meetings, the audit committee will be provided with the details of each new, existing
or proposed related party transaction, including the terms of the transaction, the business purpose of the transaction, and the
benefits to us and to the relevant related party.
In determining whether to approve a related
party transaction, the audit committee must consider, among other factors, the following factors to the extent relevant:
•
whether the terms of the transaction are fair to us and on the same basis as would apply if the transaction did not involve a
related party;
•
whether there are business reasons for us to enter into the transaction;
•
whether the transaction would impair the independence of an outside director; and
•
whether the transaction would present an improper conflict of interest for any director or executive officer.
Any member of the audit committee who
has an interest in the transaction under discussion must abstain from voting on the approval of the transaction, but may, if so
requested by the Chairman of the audit committee, participate in some or all of the Committee’s discussions of the transaction.
Upon completion of its review of the transaction, the audit committee may determine to permit or to prohibit the transaction.
Policies and Procedures for Related Person Transactions
Effective upon the consummation of the
Business Combination, our board of directors will adopt a written related person transaction policy that will set forth the policies
and procedures for the review and approval or ratification of related person transactions. Our policy will require that a “related
person” (as defined in paragraph (a) of Item 404 of Regulation S-K) must promptly disclose to our general counsel any “related
person transaction” (defined as any transaction that is reportable by us under Item 404(a) of Regulation S-K in which we
are or will be a participant and the amount involved exceeds $120,000 and in which any related person has or will have a direct
or indirect material interest) and all material facts with respect thereto. The general counsel will promptly communicate such
information to our audit committee or another independent body of our board of directors. No related person transaction will be
entered into without the approval or ratification of our audit committee or another independent body of our board of directors.
It is our policy that directors interested in a related person transaction will recuse themselves from any such vote. Our policy
does not specify the standards to be applied by our audit committee or another independent body of our board of directors in determining
whether or not to approve or ratify a related person transaction, although such determinations will be made in accordance with
Delaware law.
PRICE
RANGE OF SECURITIES AND DIVIDENDS
Hydra Industries
Price Range of Hydra Industries Securities
Our units, common stock, rights and warrants
are each quoted on NASDAQ under the symbols “HDRAU,” “HDRA,” “HDRAR” and “HDRAW,”
respectively. Our units commenced public trading on October 24, 2014; our common stock, rights and warrants each commenced
separate public trading on December 11, 2014.
The following table includes the high and
low sales prices for our units, common stock, rights and warrants for the periods presented.
On July 12, 2016, the trading date before
the public announcement of the Business Combination, the closing sales price of the Company’s units, common stock, rights
and warrants were $10.12, $9.93, $0.21 and $0.19, respectively.
Dividend Policy of Hydra Industries
Hydra Industries has not paid any cash
dividends on its common stock to date and does not intend to pay cash dividends prior to the completion of the Business Combination.
The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and
general financial condition subsequent to completion of our initial business combination. The payment of any cash dividends subsequent
to our initial business combination will be within the discretion of our board of directors at such time. In addition, our board
of directors is not currently contemplating and does not anticipate declaring any stock dividends in the foreseeable future. Further,
are we are maintaining Target’s indebtedness in connection with the Business Combination, our ability to declare dividends
may be limited by restrictive covenants in connection therewith.
Target
Price Range of Target Securities
Historical market price information regarding
Target is not provided because there is no public market for Target’s common stock.
As of the date of this proxy statement,
the members of the Selling Group were the sole stockholders of Target Parent common stock.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Representatives of our independent registered
public accounting firm, Marcum LLP, will be present at the special meeting of the stockholders. The representatives will have
the opportunity to make a statement if they so desire and they are expected to be available to respond to appropriate questions.
If the Business Combination is completed,
Marcum LLP will audit the financial statements of the Company for the year ending December 31, 2016.
The financial statements of Hydra Industries
Acquisition Corp. as of December 31, 2015 and 2014 and for the year ended December 31, 2015 and for the period from May 30, 2014
(inception) through December 31, 2014 appearing in this proxy statement have been audited by Marcum LLP, independent registered
public accounting firm, as set forth in their report thereon appearing elsewhere in this proxy statement, and are included in
reliance on such report given on the authority of such firm as an expert in accounting and auditing.
APPRAISAL
RIGHTS
Our stockholders do not have appraisal
rights in connection with the Business Combination under Delaware law.
DELIVERY
OF DOCUMENTS TO STOCKHOLDERS
Pursuant to the rules of the SEC, we and
servicers that we employ to deliver communications to our stockholders are permitted to deliver to two or more stockholders sharing
the same address a single copy of this proxy statement and the accompanying Annual Report on Form 10-K for the year ended December
31, 2015. Upon written or oral request, we will deliver a separate copy of this proxy statement and the accompanying Annual Report
on Form 10-K for the year ended December 31, 2015 to any stockholder at a shared address to which a single copy of this proxy
statement as well as the accompanying Annual Report on Form 10-K for the year ended December 31, 2015 was delivered and who wishes
to receive separate copies in the future. Stockholders receiving multiple copies of this proxy statement as well as the accompanying
Annual Report on Form 10-K for the year ended December 31,
2015 may likewise request that we deliver
single copies of our proxy statement and the accompanying Annual Report on Form 10-K for the year ended December 31, 2015 in the
future. Stockholders may notify us of their requests by calling or writing us at our principal executive offices at 250 W. 57th
Street, New York, New York 10107.
TRANSFER
AGENT AND REGISTRAR
The transfer agent for our securities is
Continental Stock Transfer & Trust Company.
SUBMISSION
OF STOCKHOLDER PROPOSALS
Our board of directors is aware of no other
matter that may be brought before the special meeting. Under Delaware law, only business that is specified in the notice of special
meeting to stockholders may be transacted at the special meeting.
FUTURE
STOCKHOLDER PROPOSALS
If you intend to present a proposal at
the 2017 annual meeting of stockholders, or if you want to nominate one or more directors, you must give timely notice thereof
in writing to the Company. Our Secretary must receive this notice at the principal executive offices of the Company no earlier
than, 2017 and no later than , 2017; provided, however, that in the
event that the 2017 annual meeting is called for a date that is not within 45 days before or after the anniversary of the special
meeting, notice by the stockholder to be timely must be so received no earlier than the opening of business on the 120th day before
the 2017 annual meeting and not later than the later of (x) the close of business on the 90th day before the 2017 annual meeting
or (y) the close of business on the 10th day following the day on which public announcement of the date of the 2017 annual meeting
is first made by the Company.
If you intend to present a proposal at
the 2017 annual meeting, or if you want to nominate one or more directors at the 2017 annual meeting, you must comply with the
advance notice provisions of our bylaws. You may contact our Chairman and Chief Executive Officer at our principal executive offices
for a copy of the relevant bylaw provisions regarding the requirements for making stockholder proposals and nominating director
candidates.
If you intend to have your proposal included
in our proxy statement and proxy card for our 2017 annual meeting, the proposal must be received at our principal executive offices
by , 2017, but if the 2017 annual meeting is called for a date that is
not within 30 days before or after the anniversary of the special meeting, then the deadline is a reasonable time before we begin
to print and send our proxy materials for our 2017 annual meeting of stockholders. Stockholder proposals for the 2017 annual meeting
must comply with the notice requirements described in this paragraph and the other requirements set forth in SEC Rule 14a-8 to
be considered for inclusion in our proxy materials relating to our 2017 annual meeting.
WHERE
YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other
information with the SEC as required by the Exchange Act. You can read Hydra Industries’ SEC filings, including this proxy
statement as well as the accompanying Annual Report on Form 10-K for the year ended December 31, 2015, over the Internet at the
SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at the SEC public reference
room located at 100 F Street, N.E., Room 1580 Washington, D.C., 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of the materials described above at prescribed
rates by writing to the SEC, Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.
If you would like additional copies of
this proxy statement or if you have questions about the Business Combination or the proposals to be presented at the special meeting,
you should contact us by telephone or in writing:
Martin E. Schloss,
Executive Vice President,
General Counsel and Secretary
Hydra Industries Acquisition Corp.
250 West 57th Street, Suite 2223
New York, New York 10107
Email: marty@hydramgmt.com
Tel: (646) 565-3861
You may also obtain these documents by
requesting them in writing or by telephone from Hydra Industries’ proxy solicitation agent at the following address and
telephone number:
[Proxy Solicitor Contact Information]
If you are a stockholder of Hydra Industries
and would like to request documents, please do so by ,
2016, in order to receive them before the special meeting
. If you request any documents from us, we will mail them to you
by first class mail, or another equally prompt means.
All information contained or incorporated
by reference in this proxy statement as well as the accompanying Annual Report on Form 10-K for the year ended December 31, 2015
relating to Hydra Industries has been supplied by Hydra Industries, and all such information relating to Target has been supplied
by Target.
This document is a proxy statement of Hydra
Industries for the special meeting. We have not authorized anyone to give any information or make any representation about the
Business Combination, the Company or Target that is different from, or in addition to, that contained in this proxy statement.
Therefore, if anyone does give you information of this sort, you should not rely on it. The information contained in this proxy
statement speaks only as of the date of this proxy statement, unless the information specifically indicates that another date
applies.
INDEX TO FINANCIAL STATEMENTS
HYDRA INDUSTRIES ACQUISITION CORP.
DMWSL 633 LIMITED
HYDRA INDUSTRIES
ACQUISITION CORP.
Condensed Balance Sheets
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
216,796
|
|
|
$
|
256,239
|
|
Prepaid expenses
|
|
|
50,613
|
|
|
|
62,589
|
|
Total Current Assets
|
|
|
267,409
|
|
|
|
318,828
|
|
|
|
|
|
|
|
|
|
|
Cash and marketable securities held in Trust Account
|
|
|
80,031,319
|
|
|
|
80,009,479
|
|
Other assets
|
|
|
600
|
|
|
|
1,500
|
|
TOTAL ASSETS
|
|
$
|
80,299,328
|
|
|
$
|
80,329,807
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,538,140
|
|
|
$
|
2,645,838
|
|
Convertible promissory notes - related
parties
|
|
|
500,000
|
|
|
|
-
|
|
Total Current Liabilities
|
|
|
4,038,140
|
|
|
|
2,645,838
|
|
Deferred underwriting fees
|
|
|
2,800,000
|
|
|
|
2,800,000
|
|
Total Liabilities
|
|
|
6,838,140
|
|
|
|
5,445,838
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock subject to possible redemption, 6,843,439
and 6,987,568 shares at conversion value as of June 30, 2016 ad December 31, 2015, respectively
|
|
|
68,461,187
|
|
|
|
69,883,968
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 1,000,000 authorized,
none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.0001 par value; 29,000,000 shares authorized;
3,156,561 and 3,012,432 shares issued and outstanding (excluding 6,843,439 and 6,987,568 shares subject to possible redemption)
as of June 30, 2016 and December 31, 2015, respectively
|
|
|
316
|
|
|
|
301
|
|
Additional paid-in capital
|
|
|
10,090,201
|
|
|
|
8,667,435
|
|
Accumulated deficit
|
|
|
(5,090,516
|
)
|
|
|
(3,667,735
|
)
|
Total Stockholders'
Equity
|
|
|
5,000,001
|
|
|
|
5,000,001
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
$
|
80,299,328
|
|
|
$
|
80,329,807
|
|
The accompanying notes are an integral
part of the financial statements.
HYDRA INDUSTRIES
ACQUISITION CORP.
Condensed Statements of Operations
(Unaudited)
|
|
Three Months Ended June
30,
|
|
|
Six Months Ended June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
$
|
1,210,738
|
|
|
$
|
1,894,968
|
|
|
$
|
1,491,969
|
|
|
$
|
2,090,057
|
|
Loss from operations
|
|
|
(1,210,738
|
)
|
|
|
(1,894,968
|
)
|
|
|
(1,491,969
|
)
|
|
|
(2,090,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities held in Trust Account
|
|
|
(2,830
|
)
|
|
|
-
|
|
|
|
10,867
|
|
|
|
-
|
|
Interest income
|
|
|
37,147
|
|
|
|
4,346
|
|
|
|
58,321
|
|
|
|
13,148
|
|
Net Loss
|
|
$
|
(1,176,421
|
)
|
|
$
|
(1,890,622
|
)
|
|
$
|
(1,422,781
|
)
|
|
$
|
(2,076,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
(1)
|
|
|
3,040,098
|
|
|
|
2,677,612
|
|
|
|
3,026,265
|
|
|
|
2,668,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.39
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.78
|
)
|
|
(1)
|
Excludes an aggregate of up to 6,843,439 and 7,131,687 shares subject to redemption at June 30, 2016
and 2015, respectively.
|
HYDRA INDUSTRIES
ACQUISITION CORP.
Condensed Statements of Cash Flows
(Unaudited)
|
|
Six Months Ended June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,422,781
|
)
|
|
$
|
(2,076,909
|
)
|
Adjustments to reconcile net loss to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities held in Trust
Account
|
|
|
(10,867
|
)
|
|
|
-
|
|
Interest earned on cash and securities held in Trust
Account
|
|
|
(58,321
|
)
|
|
|
(13,148
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
11,976
|
|
|
|
34,365
|
|
Other assets
|
|
|
900
|
|
|
|
900
|
|
Accounts payable and accrued expenses
|
|
|
892,302
|
|
|
|
1,628,283
|
|
Net cash used
in operating activities
|
|
|
(586,791
|
)
|
|
|
(426,509
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Interest income withdrawn from Trust
Account
|
|
|
47,348
|
|
|
|
-
|
|
Net cash provided
by investing activities
|
|
|
47,348
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from convertible promissory notes – related
parties
|
|
|
500,000
|
|
|
|
-
|
|
Repayment of advances from related
party
|
|
|
-
|
|
|
|
(109
|
)
|
Net cash provided
by (used in) financing activities
|
|
|
500,000
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents
|
|
|
(39,443
|
)
|
|
|
(426,618
|
)
|
Cash and Cash Equivalents – Beginning
|
|
|
256,239
|
|
|
|
1,123,278
|
|
Cash and Cash
Equivalents – Ending
|
|
$
|
216,796
|
|
|
$
|
696,600
|
|
|
|
|
|
|
|
|
|
|
Supplement disclosure of cash flow
information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
11,126
|
|
|
$
|
7,320
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Payment of offering costs and
operational costs pursuant to related party advances
|
|
$
|
-
|
|
|
$
|
44
|
|
Change in value of common stock
subject to possible redemption
|
|
$
|
(1,422,781
|
)
|
|
$
|
2,076,910
|
|
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Hydra Industries
Acquisition Corp. (the “Company”) is a blank check company incorporated in Delaware on May 30, 2014. The Company was
formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization,
recapitalization or other similar business transaction, one or more operating businesses or assets (“Business Combination”).
At June 30, 2016,
the Company had not yet commenced operations. All activity through June 30, 2016 related to the Company’s formation, its
Initial Public Offering, which is described below, identifying a target company and engaging in due diligence for, and negotiating
the terms of, a potential Business Combination.
The registration
statement for the Company’s initial public offering (the “Initial Public Offering”) was declared effective on
October 24, 2014. The Company consummated the Initial Public Offering of 8,000,000 units (“Units”) at $10.00 per unit
on October 29, 2014, generating gross proceeds of $80,000,000, which is described in Note 4.
Simultaneously with
the closing of the Initial Public Offering, the Company consummated the private placement of 7,500,000 warrants (“Private
Placement Warrants”) at a price of $0.50 per warrant to certain of the Company’s stockholders, generating gross proceeds
of $3,750,000, which is described in Note 5.
Transaction costs
amounted to $5,223,296, inclusive of $2,000,000 of underwriting fees, $2,800,000 of deferred underwriting fees (which are held
in the Trust Account (defined below)) and $423,296 of Initial Public Offering costs. In addition, at October 29, 2014, cash of
$1,326,704 was placed in an account outside of the Trust Account to fund operations. As of June 30, 2016, cash held outside of
the Trust Account amounted to $216,796, which includes unused proceeds from convertible promissory notes in the aggregate amount
of $500,000 (see Note 6).
Following the closing
of the Initial Public Offering on October 29, 2014, an amount of $80,000,000 ($10.00 per Unit) from the net proceeds of the sale
of the Units in the Initial Public Offering and the Private Placement Warrants was placed in a trust account (“Trust Account”)
and subsequently invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company
Act of 1940, as amended (the “1940 Act”), with a maturity of 180 days or less or in any open-ended investment company
that holds itself out as a money market fund selected by the Company meeting the conditions of paragraphs (c)(2), (c)(3) and (c)(4)
of Rule 2a-7 of the 1940 Act, and will remain invested in U.S. government securities until the earlier of: (i) the consummation
of a Business Combination or (ii) the distribution of the Trust Account as described below.
The Company’s
management has broad discretion with respect to the specific application of the net proceeds of its Initial Public Offering and
Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward consummating
a Business Combination. The Company’s securities are listed on the Nasdaq Capital Market (“NASDAQ”). Pursuant
to the NASDAQ listing rules, the Company’s Business Combination must be with a target business or businesses whose collective
fair market value is equal to at least 80% of the balance in the Trust Account at the time of the execution of a definitive agreement
for such Business Combination. There is no assurance that the Company will be able to successfully effect a Business Combination.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
The Company, after
signing a definitive agreement for the acquisition of one or more target businesses or assets, may either (i) seek stockholder
approval of a Business Combination at a meeting called for such purpose at which stockholders may seek to redeem their shares,
regardless of whether they vote for or against a Business Combination or (ii) provide its stockholders with the opportunity to
sell their shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote). Stockholder approval
will be sought by the Company if required by law or applicable stock exchange rule or for business or other legal reasons. In
the event of a proposed merger of the Company with a target company, stockholder approval is required by Delaware law. Further,
under the NASDAQ listing rules, stockholder approval is required, if, for example, (a) the Company will issue common stock that
will be equal to or in excess of 20% of the number of shares of its common stock outstanding, (b) any of the Company’s directors,
officers or substantial stockholders (as defined by NASDAQ rules) has a 5% or greater interest (or such persons collectively have
a 10% or greater interest), directly, or indirectly, in the target business or assets to be acquired or otherwise and the present
or potential issuance of common stock could result in an increase in outstanding common shares or voting power of 5% or more,
or (c) the issuance or potential issuance of common stock will result in a change of control of the Company. The Business Combination
must be approved by the board of directors. In addition, the Company’s Business Combination must be approved by MIHI LLC
(the “Macquarie Sponsor”) as a condition to the Contingent Forward Purchase Contract (as described in Note 7). In
the event that the Company seeks stockholder approval in connection with a Business Combination, the Company will proceed with
a Business Combination only if a majority of the outstanding shares that are voted are voted in favor of the Business Combination.
In connection with such vote, the Company will provide its stockholders with the opportunity to redeem their shares of the Company’s
common stock upon the consummation of a Business Combination for a pro-rata portion of the amount then in the Trust Account (initially
$10.00 per share, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to pay
taxes). However, in no event will the Company redeem its public shares in an amount that would cause its net tangible assets to
be less than $5,000,001. Hydra Industries Sponsor LLC (the “Hydra sponsor”) and the Macquarie Sponsor (together with
the Hydra sponsor, the “Sponsors”) and the other initial stockholders of the Company have agreed, in the event the
Company is required to seek stockholder approval of its Business Combination, to vote their founders shares (as defined in Note
6) and any public shares purchased, in favor of approving a Business Combination. Notwithstanding the foregoing redemption rights,
if the Company seeks stockholder approval of the Business Combination and it does not conduct redemptions in connection with the
Business Combination pursuant to the tender offer rules, the Company’s amended and restated certificate of incorporation
provides that a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder
is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)), will be restricted from redeeming its shares with respect to an aggregate of 25% or more of
the shares sold in the Initial Public Offering.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
If the Company is
unable to complete a Business Combination within 24 months from the closing of the Initial Public Offering (the “Combination
Period”), the Company will (i) cease all operations except for the purposes of winding up its affairs; (ii) distribute the
aggregate amount then on deposit in the Trust Account, including a portion of the interest earned thereon (net of any taxes payable,
and less up to $50,000 of interest to pay dissolution expenses), pro rata to the Company’s public stockholders by way of
redemption of the Company’s public shares (which redemption would completely extinguish such holders’ rights as stockholders,
including the right to receive further liquidation distributions, if any); and (iii) as promptly as possible following such redemption,
dissolve and liquidate the balance of the Company’s net assets to its remaining stockholders, as part of the Company’s
plan of dissolution and liquidation.
The initial stockholders
have agreed to waive their redemption rights with respect to the founder shares (i) in connection with the consummation of a Business
Combination, (ii) if the Company fails to consummate a Business Combination within the Combination Period, and (iii) upon the
Company’s liquidation upon the expiration of the Combination Period. However, if the Company’s initial stockholders
should acquire public shares in or after the Initial Public Offering, they will be entitled to redemption rights with respect
to such public shares if the Company fails to consummate a Business Combination within the Combination Period. The underwriters
have agreed to waive their rights to their deferred underwriting commissions held in the Trust Account in the event the Company
does not consummate a Business Combination within the Combination Period and, in such event, such amounts will be included with
the funds held in the Trust Account that will be available to fund the redemption of the Company’s public shares. In the
event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution
(including Trust Account assets) will be less than the Initial Public Offering price per Unit in the Initial Public Offering ($10.00
per share). A. Lorne Weil, the Company’s Chairman and Chief Executive Officer and the managing member of the Hydra sponsor,
has agreed that he will be liable to the Company, and the Macquarie Sponsor has agreed to indemnify Mr. Weil for 50% of any such
liability, if and to the extent any claims by a vendor for services rendered or products sold to the Company, or by a prospective
target business with which the Company has discussed entering into a transaction agreement, reduce the amount of funds in the
Trust Account to below $10.00 per share or such lesser amount per share of Common Stock held in the Trust Account as of the date
of the liquidation of the Trust Account, due to reductions in value of the trust assets other than due to the failure to obtain
such waiver, in each case net of the amount of interest which may be withdrawn to pay taxes, except as to any claims by a third
party who executed a waiver of any and all rights to seek access to the Trust Account and except as to any claims under the Company’s
indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the “Securities Act”).
The Company will
seek to reduce the possibility that Mr. Weil will have to indemnify the Trust Account due to claims of creditors by endeavoring
to have all vendors, service providers (other than the Company’s independent auditors and the provider of the Company’s
directors’ and officers’ liability insurance), prospective target businesses or other entities with which the Company
does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held
in the Trust Account.
NOTE 2. LIQUIDITY AND GOING CONCERN
As of June 30, 2016,
the Company had $216,796 in its operating bank accounts, $80,031,319 in cash and securities held in the Trust Account to be used
for a Business Combination or to repurchase or convert its common stock in connection therewith and a working capital deficit
of $3,770,731. As of June 30, 2016, approximately $25,000 of the amount on deposit in the Trust Account represented interest income,
which is available to be withdrawn to pay the Company’s tax obligations. Since inception, the Company has withdrawn $47,348
in interest income from the Trust Account.
Until the consummation
of a Business Combination, the Company will be using the funds not held in the Trust Account for identifying and evaluating prospective
acquisition candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the
target business to acquire, structuring, negotiating and consummating the Business Combination and paying for public company expenses.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
For the six months
ended June 30, 2016, the Company used cash of $586,791 in operating activities. As of June 30, 2016, the Company had current liabilities
of $4,038,140, primarily representing amounts owed to lawyers, accountants and consultants who have advised the Company on matters
related to potential Business Combinations. There can be no assurances that the Company will be able to make payment in full of
the amounts due to said advisors. Funds in the Trust Account are not available for this purpose absent an initial Business Combination.
If a Business Combination is not consummated, the Company would lack the resources to pay all of the liabilities that have been
incurred by the Company to date or after and the Company may lack the resources needed to consummate another Business Combination.
The Company entered into fee arrangements with certain service providers and advisors in connection with a potential Business
Combination (“Terminated Business Combination”) pursuant to which certain fees were deferred and payable only if the
Company consummated such Terminated Business Combination (see Note 7). Effective October 26, 2015, all efforts related to such
Terminated Business Combination were terminated and, accordingly, all deferred contingent fees related to such Terminated Business
Combination that had been previously incurred are no longer due or payable. There can be no assurances that the Company will complete
a Business Combination.
The Company
may need to raise additional capital through loans or additional investments from its Sponsors, stockholders, officers, directors,
or third parties. On March 16, 2016, the Sponsors loaned the Company $250,000 each, for an aggregate of $500,000, to fund its
expenses prior to a Business Combination (see Note 6). In addition, the Company’s officers, directors and Sponsors may,
but are not obligated to, loan the Company funds, from time to time or at any time, in whatever amount they deem reasonable in
their sole discretion, to meet the Company’s working capital needs.
Other than as
described above, none of the Sponsors, stockholders, officers or directors, or third parties, is under any obligation to advance
funds to, or to invest in, the Company. Accordingly, the Company may not be able to obtain additional financing. If the Company
is unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include,
but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead
expenses. The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms,
if at all. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These financial
statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities
that might be necessary should the Company be unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
The accompanying
unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information or footnote
disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant
to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information
and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion
of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of a normal recurring
nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods
presented.
The accompanying
unaudited condensed financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2015 as filed with the SEC, which contains the audited financial statements and notes thereto, together with
Management's Discussion and Analysis. The financial information as of December 31, 2015 is derived from the audited financial
statements presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. The interim results for
the six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31,
2016 or for any future interim periods.
Use of estimates
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Making estimates
requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a
condition, situation or set of circumstances that existed at the date of the financial statements, which management considered
in formulating its estimate, could change in the near term due to one or more future events. Accordingly, the actual results could
differ significantly from those estimates.
Cash and cash equivalents
The Company considers
all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company
did not have any cash equivalents as of June 30, 2016 and December 31, 2015.
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO CONDENSED
FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
Cash and marketable securities held
in Trust Account
The amounts held
in the Trust Account represent substantially all of the proceeds of the Initial Public Offering and are classified as restricted
assets since such amounts can only be used by the Company in connection with the consummation of a Business Combination. As of
June 30, 2016, cash and marketable securities held in the Trust Account consisted of $80,031,319 in United States Treasury Bills
with a maturity date of 180 days or less.
Common stock subject to possible redemption
The Company accounts
for its common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”)
Topic 480 “Distinguishing Liabilities from Equity.” Common stock subject to mandatory redemption (if any) is classified
as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features
redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events
not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified
as stockholders’ equity. The Company’s common stock features certain redemption rights that are considered to be outside
of the Company’s control and subject to occurrence of uncertain future events. Accordingly, at June 30, 2016 and December
31, 2015, common stock subject to possible redemption is presented as temporary equity, outside of the stockholders’ equity
section of the Company’s balance sheet.
Net loss per share
The Company complies
with accounting and disclosure requirements of ASC Topic 260, “Earnings Per Share.” Net loss per share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Shares of common
stock subject to possible redemption at June 30, 2016 and 2015 have been excluded from the calculation of basic loss per share
since such shares, if redeemed, only participate in their pro rata share of the Trust Account earnings. The Company has not considered
the effect of warrants to purchase 7,875,000 shares of common stock and rights that convert into 800,000 shares of common stock
in the calculation of diluted loss per share, since the exercise of the warrants and the conversion of the rights into shares
of common stock is contingent upon the occurrence of future events. As a result, diluted loss per share is the same as basic loss
per share for the periods presented.
Income taxes
The Company complies
with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts,
based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC Topic 740 prescribes a recognition
threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected
to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. There were no unrecognized tax benefits as of June 30, 2016. The Company is currently
not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.
The Company is subject
to income tax examinations by various taxing authorities since its inception. These potential examinations may include questioning
the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state
tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change
over the next twelve months.
The Company’s
policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense.
There were no amounts accrued for penalties or interest as of June 30, 2016. Management is currently unaware of any issues under
review that could result in significant payments, accruals or material deviations from its position.
Concentration of credit risk
Financial instruments
that potentially subject the Company to concentration of credit risk consist of cash accounts in a financial institution which,
at times may exceed the Federal depository insurance coverage of $250,000. At June 30, 2016, the Company had not experienced losses
on these accounts and management believes the Company is not exposed to significant risks on such accounts.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
Fair value of financial instruments
The fair value of
the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurements
and Disclosures” (“ASC 820”), approximates the carrying amounts represented in the accompanying balance sheets,
primarily due to their short-term nature.
Recent Accounting Pronouncements
In August 2014, the
FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”
(“ASU 2014-15”). ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is
substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each
reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt
about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.
The amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016, and for annual and interim
periods thereafter. Early adoption is permitted. The Company adopted the methodologies prescribed by ASU 2014-15 as of January
1, 2016. The adoption of ASU 2014-15 did not have a material effect on its financial position or results of operations.
NOTE 4. INITIAL PUBLIC OFFERING
On October 29, 2014,
the Company sold 8,000,000 Units at a purchase price of $10.00 per Unit in its Initial Public Offering. Each Unit consists of
one share of the Company’s common stock, $0.0001 par value (“Common Stock”), one right (“Public Right”)
and one redeemable common stock purchase warrant (“Public Warrant”). Each Public Right will convert into one-tenth
(1/10) of one share of Common Stock upon the consummation of a Business Combination. The Company did not register the shares of
Common Stock issuable upon exercise of the Public Warrants. However, the Company has agreed to use its best efforts to file within
15 business days of the closing of a Business Combination and have an effective registration statement within 60 business days
of the closing of a Business Combination covering the shares of Common Stock issuable upon exercise of the Public Warrants, to
maintain a current prospectus relating to those shares of Common Stock until the earlier of the date the Public Warrants expire
or are redeemed and, the date on which all of the Public Warrants have been exercised and to qualify the resale of such shares
under state blue sky laws, to the extent an exemption is not available. Each Public Warrant entitles the holder to purchase one-half
share of Common Stock at an exercise price of $5.75 ($11.50 per whole share). The Public Warrants may be exercised only for a
whole number of shares of Common Stock. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants
will become exercisable on the later of (a) 30 days after the consummation of a Business Combination, or (b) 12 months from the
closing of the Initial Public Offering. The Public Warrants will expire five years after the consummation of a Business Combination
or earlier upon redemption or liquidation. The Public Warrants will be redeemable by the Company at a price of $0.01 per warrant
upon 30 days’ prior written notice after the Public Warrants become exercisable, only in the event that the last sale price
of the Common Stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third
trading day prior to the date on which notice of redemption is given. The Company will not redeem the Public Warrants unless an
effective registration statement under the Securities Act covering the shares of Common Stock issuable upon exercise of the Public
Warrants is effective and a current prospectus relating to those shares of Common Stock is available throughout the 30-day redemption
period except if the Public Warrants may be exercised on a cashless basis and such cashless exercise is exempt from registration
under the Securities Act. If and when the Public Warrants become redeemable by the Company, the Company may exercise its redemption
right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
If the Company calls
the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants
to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the Public
Warrants for that number of shares of Common Stock equal to the quotient obtained by dividing (x) the product of the number of
shares of Common Stock underlying the Public Warrants, multiplied by the difference between the exercise price of the Public Warrants
and the “fair market value” by (y) the fair market value. The “fair market value” shall mean the average
reported last sale price of the Common Stock for the 10 trading days ending on the third trading day prior to the date on which
the notice of redemption is sent to the holders of Public Warrants.
NOTE 5. PRIVATE PLACEMENT
Simultaneously with
the Initial Public Offering, Mr. Weil, the Macquarie Sponsor and Martin E. Schloss, the Company’s Executive Vice President,
General Counsel and Secretary, purchased an aggregate of 7,500,000 Private Placement Warrants at a price of $0.50 per warrant
($3,750,000 in the aggregate) in a private placement. Each Private Placement Warrant is exercisable to purchase one-half share
of Common Stock at $5.75 per half share. The Private Placement Warrants may be exercised only for a whole number of shares of
Common Stock. No fractional shares will be issued upon exercise of the Private Placement Warrants. The purchase price of the Private
Placement Warrants was added to the net proceeds from the Initial Public Offering held in the Trust Account. If the Company does
not complete a Business Combination within the Combination Period, the proceeds of the sale of the Private Placement Warrants
will be used, in part, to fund the redemption of the Company’s public shares (subject to the requirements of applicable
law). There will be no redemption rights or liquidating distributions with respect to the Private Placement Warrants.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
The Sponsors have
agreed that the Private Placement Warrants and the Common Stock issuable upon exercise of the Private Placement Warrants will
not be transferable, assignable or salable until 30 days following consummation of a Business Combination, subject to certain
limited exceptions. Additionally, the Private Placement Warrants will be non-redeemable so long as they are held by the initial
purchasers or such purchasers’ permitted transferees. If the Private Placement Warrants are held by someone other than the
initial purchasers or such purchasers’ permitted transferees, the Private Placement Warrants will be redeemable by the Company
and exercisable by such holders on the same basis as the Public Warrants. If the Company does not complete a Business Combination,
then the proceeds will be part of the liquidating distribution to the public stockholders and the Private Placement Warrants will
expire worthless.
NOTE 6. RELATED PARTY TRANSACTIONS
Founder Shares
On July 11, 2014,
the Company issued 2,875,000 shares of Common Stock to the Sponsors, of which an aggregate of 575,000 shares were returned to
the Company and subsequently cancelled (the “founder shares”) on October 24, 2014, for an aggregate purchase price
of $25,000. As a result of the underwriters’ determination not to exercise their over-allotment option, an additional 300,000
founder shares were forfeited. The founder shares are identical to the shares of Common Stock included in the Units sold in the
Initial Public Offering, except that (1) the founder shares are subject to certain transfer restrictions, as described in more
detail below, and (2) the Company’s initial stockholders have agreed: (i) to waive their redemption rights with respect
to their founder shares in connection with the consummation of a Business Combination and (ii) to waive their redemption rights
with respect to their founder shares if the Company fails to complete a Business Combination within the Combination Period. However,
the Company’s initial stockholders will be entitled to redemption rights with respect to any public shares they hold by
way of public market purchase if the Company fails to consummate a Business Combination within such time period. If the Company
submits a Business Combination to its public stockholders for a vote, the initial stockholders have agreed to vote their founder
shares and any public shares purchased in favor of a Business Combination.
The Company’s
initial stockholders have agreed not to transfer, assign or sell any of their founder shares until the earlier to occur of: (1)
one year after a Business Combination or (2) the date on which the Company completes a liquidation, merger, stock exchange or
other similar transaction after a Business Combination that results in all of the Company’s stockholders having the right
to exchange their shares of Common Stock for cash, securities or other property (the “Lock Up Period”). Notwithstanding
the foregoing, if the last sale price of the Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock
dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing
at least 150 days after a Business Combination, the founder shares will be released from the lock-up.
Convertible Promissory Notes
On March 16, 2016,
the Company entered into convertible promissory notes with the Sponsors, whereby the Sponsors loaned the Company an aggregate
of $500,000 (“Convertible Promissory Notes”) in order to finance transaction costs in connection with a Business Combination.
The Convertible Promissory Notes are non-interest bearing, and due on the date on which the Company consummates a Business Combination.
In the event that a Business Combination does not occur, the Sponsors would become general unsecured creditors of the Company.
Each of the Convertible Promissory Notes is convertible, in whole or in part, at the election of the Sponsor holding such note,
upon the consummation of a Business Combination. Upon such election, the Convertible Promissory Notes will convert into warrants,
at a price of $0.50 per warrant. These warrants will be identical to the Private Placement Warrants. As such, each warrant is
exercisable for one-half of one share of the Company’s common stock at an exercise price of $5.75 per half share.
The Convertible Promissory
Notes were issued pursuant to the Expense Advancement Agreement, dated as of October 24, 2014, by and among the Company and the
Sponsors, pursuant to which each Sponsor committed to fund up to $250,000 to the Company for the Company’s expenses relating
to investigating and selecting a target business and other working capital requirements. In the event that the Business Combination
does not close, the Company may use a portion of the working capital held outside the Trust Account to repay such loaned amounts
but no proceeds from the Trust Account may be used for such repayment.
As of June 30, 2016, $500,000 was outstanding
under the Convertible Promissory Notes.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
NOTE 7. COMMITMENTS & CONTINGENCIES
Terminated Transaction Fee Arrangements
The Company entered
into fee arrangements with certain service providers and advisors pursuant to which certain fees incurred by the Company in connection
with a Terminated Business Combination would be deferred and become payable only if the Company consummated such Terminated Business
Combination. If the Terminated Business Combination did not occur, the Company would not be required to pay these contingent fees.
Effective October 26, 2015, all efforts related to such Terminated Business Combination were terminated and, accordingly, all
contingent fees that had been previously incurred are no longer due or payable.
Potential Transaction Fee Arrangements
The Company has entered
into fee arrangements with certain service providers and advisors pursuant to which certain fees incurred by the Company in connection
with another potential Business Combination will be deferred and become payable only if the Company consummates such potential
Business Combination. If the potential Business Combination does not occur, the Company will not be required to pay these contingent
fees. As of June 30, 2016, the Company incurred approximately $811,000 of fees, of which approximately $60,000 has been paid,
approximately $495,000 is included in accounts payable and accrued expenses in the accompanying condensed balance sheet and $256,000
has not been accrued since it is contingent upon the closing of the proposed Business Combination. The Company anticipates incurring
a significant amount of additional costs. There can be no assurances that the Company will complete this or any other Business
Combination.
Administrative Services Agreement
The Company entered
into an Administrative Services Agreement commencing on October 24, 2014 pursuant to which the Company pays an affiliate of the
Hydra Sponsor a total of $10,000 per month for office space, utilities and secretarial support. Upon the completion of a Business
Combination or the Company’s liquidation, the Company will cease paying these monthly fees. The Company paid $30,000 in
fees during the three months ended June 30, 2016 and 2015 and paid $60,000 in fees during the six months ended June 30, 2016 and
2015.
Contingent Forward Purchase Contract
On October 24, 2014,
the Macquarie Sponsor entered into a contingent forward purchase contract with the Company (the “Contingent Forward Purchase
Contract”) to purchase, in a private placement for gross proceeds of approximately $20,000,000 to occur concurrently with
the consummation of the Business Combination, 2,000,000 Units on the same terms as the sale of the Units in the Initial Public
Offering at $10.00 per Unit (which includes 2,000,000 rights which will be exchanged for 200,000 shares of Common Stock) (“Private
Placement Units”), and 500,000 shares of the Company’s Common Stock on the same terms as the sale of the founder shares
to the Sponsors prior to the Initial Public Offering (“Private Placement Shares”). The funds from the sale of the
Private Placement Units and the Private Placement Shares will be used as part of the consideration to the sellers in the Business
Combination; any excess funds from the Private Placement Units will be used for working capital in the post-transaction company.
This commitment is independent of the percentage of stockholders electing to redeem their public shares.
As a closing condition
to the Contingent Forward Purchase Contract, the Company has agreed not to consummate a Business Combination without the Macquarie
Sponsor’s consent; provided, however, that if the Company fails to consummate a Business Combination within the Combination
Period, and the Company’s board of directors (other than the Macquarie Sponsor designee) unanimously votes in favor of a
proposed Business Combination and the Macquarie Sponsor decides to withhold its vote on the Business Combination, the Macquarie
Sponsor will be, subject to customary conditions, obligated to pay a $740,000 fee to the Hydra sponsor. In such event, the Private
Placement Warrants purchased by the Macquarie Sponsor and the Hydra sponsor will expire worthless. Notwithstanding the foregoing,
in the event the Macquarie Sponsor withholds consent to consummate a Business Combination because of regulatory reasons or the
Business Combination involves a competitor to the Macquarie Sponsor, its affiliates, or an entity in which the Macquarie Sponsor
or an affiliate has an equity interest, then the Macquarie Sponsor is not obligated to pay the $740,000 fee, the Company may proceed
with such Business Combination, the Macquarie Sponsor will be permitted to sell its Private Placement Warrants and founder shares
(provided that the transferee agrees to be bound by the transfer restrictions, lock-up provisions, registration rights, voting
obligations and other such restrictions and rights of the transferred Private Placement Warrants and founder shares), the Hydra
sponsor will use its best efforts to facilitate a sale of the Macquarie Sponsor’s Private Placement Warrants and founder
shares, and the term of the Macquarie Sponsor’s nominee for the Board of Directors will automatically terminate and such
board seat will remain vacant until filled by a successor duly appointed by the Hydra sponsor.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
Right of First Refusal
Pursuant to an agreement
dated October 24, 2014, the Company has granted Macquarie Capital (USA) Inc. (“Macquarie Capital”), an affiliate of
the Macquarie Sponsor, a right of first refusal for a period of 36 months from the closing of the Initial Public Offering to provide
certain financial advisory, underwriting, capital raising, and other services for which they may receive fees. The amount of fees
the Company pays to Macquarie Capital will be based upon the prevailing market for similar services rendered by global full-service
investment banks for such transactions, and will be subject to the review of the Company’s Audit Committee pursuant to the
Audit Committee’s policies and procedures relating to transactions that may present conflicts of interest.
Registration Rights
Pursuant to a registration
rights agreement entered into on October 24, 2014 with the Company’s initial stockholders and purchasers of the Private
Placement Warrants and the Contingent Forward Purchase Contract, the Company is required to register certain securities for sale
under the Securities Act. Each of the sponsors will be entitled to make up to three demands, excluding short form registration
demands, that the Company register such securities for sale under the Securities Act and to have the securities covered thereby
registered for resale pursuant to Rule 415 under the Securities Act. In addition, these holders will have “piggy-back”
registration rights to include their securities in other registration statements filed by the Company. However, the registration
rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become
effective until termination of the applicable Lock Up Period. The Company will bear the expenses incurred in connection with the
filing of any such registration statements.
Underwriting Agreement
The underwriters
were entitled to an underwriting discount of up to 6.0%, of which two and one-half percent (2.5%), or $2,000,000, was paid in
cash at the closing of the Initial Public Offering on October 29, 2014, and up to three and one-half percent (3.5%), or $2,800,000,
has been deferred. The deferred fee will be payable in cash upon the closing of a Business Combination. The deferred fee will
become payable to the underwriters from the amounts held in the Trust Account solely in the event that the Company completes a
Business Combination, subject to the terms of the underwriting agreement.
NOTE 8. STOCKHOLDERS’ EQUITY
Preferred Stock
— The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share in
one or more series. The Company’s board of directors will be authorized to fix the voting rights, if any, designations,
powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions
thereof, applicable to the shares of each series. At June 30, 2016, there were no shares of preferred stock issued or outstanding.
Common Stock
— The Company is authorized to issue 29,000,000 shares of Common Stock with a par value of $0.0001 per share. Holders
of the Company’s Common Stock are entitled to one vote for each common share. At June 30, 2016, there were 3,156,561 shares
of Common Stock issued and outstanding (excluding 6,843,439 shares of Common Stock subject to possible redemption).
NOTE 9. FAIR VALUE MEASUREMENTS
The Company follows
the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting
period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
The fair value of
the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have
received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction
between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities,
the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the
use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following
fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in
order to value the assets and liabilities:
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities. An active
market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency
and volume to provide pricing information on an ongoing basis.
|
|
Level 2:
|
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices
in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that
are not active.
|
|
Level 3:
|
Unobservable inputs based on our assessment of the assumptions that market participants would
use in pricing the asset or liability.
|
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
The following table
presents information about the Company’s assets that are measured at fair value on a recurring basis at June 30, 2016 and
December 31, 2015, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair
value:
Description
|
|
Level
|
|
June
30,
2016
|
|
|
December
31,
2015
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and marketable securities held in Trust
Account
|
|
1
|
|
$
|
80,031,319
|
|
|
$
|
80,009,479
|
|
NOTE 10. SUBSEQUENT EVENTS
The Company evaluates
subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued
for potential recognition or disclosure. Other than as described below, the Company did not identify any subsequent events that
would have required adjustment or disclosure in the financial statements.
On July 13, 2016,
the Company entered into a definitive agreement to acquire London based Inspired Gaming Group and its affiliates (the “Inspired
Group”) from funds managed by Vitruvian Partners LLP (a London headquartered private equity firm) and its co-investors.
The Share Sale Agreement,
dated as of July 13, 2016, by and among the Company, the Vendors named on Schedule 1 thereto, DMWSL 633 Limited (“Target
Parent”), DMWSL 632 Limited and Gaming Acquisitions Limited (the “Sale Agreement”), provides for the acquisition
by the Company from the Vendors of all of the equity and shareholder loan notes of Target Parent and the Inspired Group (the “Inspired
Business Combination”).
The Sale Agreement
reflects a transaction value for the Inspired Business Combination of £200 million/$264 million, plus an earn-out of up
to $25 million (up to 2.5 million of the Company’s shares), expected to represent approximately £96 million/$126 million
of equity value after adjusting for the maintenance of debt and certain other liabilities (the foregoing conversions from GBP
to USD are based on the current USD/GBP exchange rate of $1.32/£1.00 as of July 13, 2016. Although equivalent amounts are
also expressed in both UK pounds and US dollars, the payments will be made in UK pounds in the amounts stated.). Exclusive of
the potential earn-out, the consideration to be paid for the equity and shareholder loan notes of the Target Parent and the Inspired
Group will be the aggregate of the Base Consideration (as defined below),
less
a fixed amount of Accruing Negative Consideration
(£21,500 per day from but excluding July 2, 2016 through and including the closing of the Inspired Business Combination).
The “Base Consideration”
to be paid for the equity and shareholder loan notes pursuant to the Sale Agreement will equal (i) £100,363,394/$132,479,680,
plus
(ii) any amount by which the Company’s transaction expenses (“Purchaser Costs”) referred to in Schedule
6 to the Sale Agreement exceeds £8,237,909/$10,874,040,
minus
(iii) certain expenses of the Vendors noticed by the
Institutional Vendors’ Representative, not to exceed £3,000,000/$3,960,000,
minus
(iv) certain excess interest
payments owing on the Inspired Group’s existing financing arrangements.
The Vendors will
be paid the Base Consideration, adjusted for the Accruing Negative Consideration (the “Completion Payment”), partially
in cash (the “Cash Consideration”), to the extent available after the payment of transaction expenses and working
capital adjustments, if any, and partially in newly-issued shares of Company common stock (“Purchaser Shares”) at
a value of $10.00 per share (the “Stock Consideration”), as follows:
|
a.
|
The Cash Consideration represents the cash the Company will have available at
closing to pay the Completion Payment. The Cash Consideration will equal (i) the Company’s current cash in trust, the
$20 million proceeds of a private placement to Macquarie Capital, and any other available funds,
minus
(ii) an agreed
amount of Purchaser Costs (including expenses incurred in connection with the preparation of the proxy statement and meetings
with the Company’s stockholders),
minus
(iii) an agreed amount of the Vendors’ transaction expenses,
minus
(iv) the amount of repayment required under certain of the Inspired Group’s financing arrangements,
minus
(v) £5 million for the purposes of retaining cash on the Company’s balance sheet.
|
|
b.
|
The Stock Consideration will equal the Completion Payment minus the Cash Consideration,
divided by $10.00 per share.
|
The earn-out payment
of up to $25,000,000 (the “Earn-out Consideration”) shall be paid to the Vendors exclusively in Purchaser Shares and
will be determined based on Inspired’s performance in certain jurisdictions through September 30, 2018 pursuant to a formula
set forth in Schedule 5 to the Sale Agreement.
The consummation
of the Inspired Business Combination is conditioned upon the approval of the Company’s stockholders, certain regulatory
approvals pertaining to the gaming industry and other customary closing conditions.
HYDRA INDUSTRIES
ACQUISITION CORP.
INDEX TO FINANCIAL
STATEMENTS
Report
of Independent Registered Public Accounting Firm
To the Audit Committee of the Board of
Directors and Shareholders
of Hydra Industries Acquisition Corp.
We have audited the accompanying balance
sheet of Hydra Industries Acquisition Corp. (the “Company”) as of December 31, 2015 and 2014 and the related statements
of operations, changes in stockholders’ equity, and cash flows for the year ended December 31, 2015 and for the period from
May 30, 2014 (inception) through December 31, 2014. 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 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. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of Hydra Industries Acquisition Corp. as of
December 31, 2015 and 2014, and the results of its operations and its cash flows for the year ended December 31, 2015 and for
the period from May 30, 2014 (inception) through December 31, 2014 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements,
the Company has no present revenue, its business plan is dependent on the completion of a business combination and the Company’s
cash and working capital as of December 31, 2015 may not be sufficient to complete its planned activities through October 29,
2016 which is the date the Company is required to liquidate in the event that it is unable to complete a business combination.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Marcum LLP
Marcum LLP
New York, NY
March 15, 2016
HYDRA
INDUSTRIES ACQUISITION CORP.
Balance Sheets
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
256,239
|
|
|
$
|
1,123,278
|
|
Prepaid expenses
|
|
|
62,589
|
|
|
|
164,151
|
|
Total Current Assets
|
|
|
318,828
|
|
|
|
1,287,429
|
|
|
|
|
|
|
|
|
|
|
Cash and securities held in Trust Account
|
|
|
80,009,479
|
|
|
|
80,005,240
|
|
Other assets
|
|
|
1,500
|
|
|
|
3,300
|
|
TOTAL ASSETS
|
|
$
|
80,329,807
|
|
|
$
|
81,295,969
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,645,838
|
|
|
$
|
85,729
|
|
Advance from related party
|
|
|
-
|
|
|
|
65
|
|
Total Current Liabilities
|
|
|
2,645,838
|
|
|
|
85,794
|
|
Deferred underwriting fees
|
|
|
2,800,000
|
|
|
|
2,800,000
|
|
Total Liabilities
|
|
|
5,445,838
|
|
|
|
2,885,794
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock subject to possible redemption, 6,987,568
and 7,341,017 shares at conversion value as of December 31, 2015 ad 2014, respectively
|
|
|
69,883,968
|
|
|
|
73,410,170
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 1,000,000 authorized,
none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.0001 par value; 29,000,000 shares authorized;
3,012,432 and 2,658,983 shares issued and outstanding (excluding 6,987,568 and 7,341,017 shares subject to possible redemption)
as of December 31, 2015 and 2014, respectively
|
|
|
301
|
|
|
|
266
|
|
Additional paid-in capital
|
|
|
8,667,435
|
|
|
|
5,141,268
|
|
Accumulated deficit
|
|
|
(3,667,735
|
)
|
|
|
(141,529
|
)
|
Total Stockholders'
Equity
|
|
|
5,000,001
|
|
|
|
5,000,005
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
$
|
80,329,807
|
|
|
$
|
81,295,969
|
|
The accompanying
notes are an integral part of the financial statements.
HYDRA
INDUSTRIES ACQUISITION CORP.
Statements of
Operations
|
|
Year Ended
December
31,
2015
|
|
|
For the Period
from
May 30,
2014
(inception)
Through
December 31,
2014
|
|
Operating costs
|
|
$
|
3,530,445
|
|
|
$
|
141,529
|
|
Loss from operations
|
|
|
(3,530,445
|
)
|
|
|
(141,529
|
)
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
Unrealized loss on securities held in Trust Account
|
|
|
(10,281
|
)
|
|
|
-
|
|
Interest income
|
|
|
14,520
|
|
|
|
-
|
|
Net Loss
|
|
$
|
(3,526,206
|
)
|
|
$
|
(141,529
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
2,787,207
|
|
|
|
2,189,405
|
|
Basic and diluted
net loss per common share
|
|
$
|
(1.27
|
)
|
|
$
|
(0.06
|
)
|
HYDRA
INDUSTRIES ACQUISITION CORP.
Statement of Changes
in Stockholders’ Equity
Year Ended December
31, 2015 and for the Period from May 30, 2014 (inception) through December 31, 2014
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance – May 30, 2014 (Inception)
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance of common stock to Sponsors
|
|
|
2,875,000
|
|
|
|
288
|
|
|
|
24,712
|
|
|
|
-
|
|
|
|
25,000
|
|
Cancellation of 575,000 shares of common stock
|
|
|
(575,000
|
)
|
|
|
(58
|
)
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
Sale of 8,000,000 Units, net of underwriters discount
and offering expenses
|
|
|
8,000,000
|
|
|
|
800
|
|
|
|
74,755,904
|
|
|
|
-
|
|
|
|
74,776,704
|
|
Sale of 7.500,000 Private Placement Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
3,750,000
|
|
|
|
-
|
|
|
|
3,750,000
|
|
Forfeiture of 300,000 shares of common stock due to
underwriters not exercising their over-allotment option
|
|
|
(300,000
|
)
|
|
|
(30
|
)
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
Common stock subject to redemption
|
|
|
(7,341,017
|
)
|
|
|
(734
|
)
|
|
|
(73,409,436
|
)
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(141,529
|
)
|
|
|
(141,529
|
)
|
Balance – December 31, 2014
|
|
|
2,658,983
|
|
|
|
266
|
|
|
|
5,141,268
|
|
|
|
(141,529
|
)
|
|
|
5,000,005
|
|
Common stock subject to redemption
|
|
|
353,449
|
|
|
|
35
|
|
|
|
3,526,167
|
|
|
|
-
|
|
|
|
3,526,202
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,526,206
|
)
|
|
|
(3,526,206
|
)
|
Balance – December
31, 2015
|
|
|
3,012,432
|
|
|
$
|
301
|
|
|
$
|
8,667,435
|
|
|
$
|
(3,667,735
|
)
|
|
$
|
5,000,001
|
|
The accompanying
notes are an integral part of the financial statements.
HYDRA
INDUSTRIES ACQUISITION CORP.
Statements of
Cash Flows
|
|
Year Ended
December
31, 2015
|
|
|
For the Period
From
May 30, 2014
(inception) through
the year ended
December 31, 2014
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,526,206
|
)
|
|
$
|
(141,529
|
)
|
Adjustments to reconcile net loss to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Unrealized loss on securities held in Trust Account
|
|
|
10,281
|
|
|
|
|
|
Interest earned on cash and securities held in Trust
Account
|
|
|
(14,520
|
)
|
|
|
(5,240
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
101,562
|
|
|
|
(17,610
|
)
|
Other assets
|
|
|
1,800
|
|
|
|
(149,841
|
)
|
Accounts payable and accrued expenses
|
|
|
2,560,153
|
|
|
|
133,603
|
|
Net cash used
in operating activities
|
|
|
(866,930
|
)
|
|
|
(180,617
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Investment of cash and securities
held in trust
|
|
|
-
|
|
|
|
(80,000,000
|
)
|
Net cash used
in investing activities
|
|
|
-
|
|
|
|
(80,000,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock to Sponsors
|
|
|
-
|
|
|
|
25,000
|
|
Proceeds from sale of Units, net of underwriting discounts
paid
|
|
|
-
|
|
|
|
78,000,000
|
|
Proceeds from sale of Private Placement Warrants
|
|
|
-
|
|
|
|
3,750,000
|
|
Payment of offering costs
|
|
|
-
|
|
|
|
(423,296
|
)
|
Proceeds from promissory notes – related
parties
|
|
|
-
|
|
|
|
169,499
|
|
Repayment of promissory notes – related
parties
|
|
|
-
|
|
|
|
(169,499
|
)
|
Repayment of advances from related
party
|
|
|
(109
|
)
|
|
|
(47,809
|
)
|
Net cash provided
by financing activities
|
|
|
(109
|
)
|
|
|
81,303,895
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents
|
|
|
(867,039
|
)
|
|
|
1,123,278
|
|
Cash and Cash Equivalents – Beginning
|
|
|
1,123,278
|
|
|
|
-
|
|
Cash and Cash
Equivalents – Ending
|
|
$
|
256,239
|
|
|
$
|
1,123,278
|
|
|
|
|
|
|
|
|
|
|
Supplement disclosure of cash flow
information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
8,720
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Payment of offering costs and
operational costs pursuant to related party advances
|
|
$
|
44
|
|
|
$
|
47,874
|
|
Deferred underwriting fees
|
|
$
|
-
|
|
|
$
|
2,800,000
|
|
The accompanying
notes are an integral part of the financial statements.
HYDRA
INDUSTRIES ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
DECEMBER 31, 2015
NOTE 1. DESCRIPTION OF ORGANIZATION
AND BUSINESS OPERATIONS
Hydra Industries
Acquisition Corp. (the “Company”) is a blank check company incorporated in Delaware on May 30, 2014. The Company was
formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization,
recapitalization or other similar business transaction, one or more operating businesses or assets (“Business Combination”).
At December 31, 2015,
the Company had not yet commenced operations. All activity through December 31, 2015 related to the Company’s formation,
its Initial Public Offering, which is described below, identifying a target company and engaging in due diligence for a Business
Combination.
The registration
statement for the Company’s initial public offering (the “Initial Public Offering”) was declared effective on
October 24, 2014. The Company consummated the Initial Public Offering of 8,000,000 units (“Units”) at $10.00 per unit
on October 29, 2014, generating gross proceeds of $80,000,000, which is described in Note 4.
Simultaneously with
the closing of the Initial Public Offering, the Company consummated the private placement of 7,500,000 warrants (“Private
Placement Warrants”) at a price of $0.50 per warrant to certain of the Company’s stockholders, generating gross proceeds
of $3,750,000, which is described in Note 5.
Transaction costs
amounted to $5,223,296, inclusive of $2,000,000 of underwriting fees, $2,800,000 of deferred underwriting fees (which are held
in the Trust Account (defined below)) and $423,296 of Initial Public Offering costs. In addition, at October 29, 2014, cash of
$1,326,704 was placed in an account outside of the Trust Account to fund operations. As of December 31, 2015, cash held outside
of the Trust Account amounted to $256,239.
Following the closing
of the Initial Public Offering on October 29, 2014, an amount of $80,000,000 ($10.00 per Unit) from the net proceeds of the sale
of the Units in the Initial Public Offering and the Private Placement Warrants was placed in a trust account (“Trust Account”)
and subsequently invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company
Act of 1940, as amended (the “1940 Act”), with a maturity of 180 days or less or in any open-ended investment company
that holds itself out as a money market fund selected by the Company meeting the conditions of paragraphs (c)(2), (c)(3) and (c)(4)
of Rule 2a-7 of the 1940 Act, and will remain invested in U.S. government securities until the earlier of: (i) the consummation
of a Business Combination or (ii) the distribution of the Trust Account as described below.
The Company’s
management has broad discretion with respect to the specific application of the net proceeds of its Initial Public Offering and
Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward consummating
a Business Combination. The Company’s securities are listed on the Nasdaq Capital Market (“NASDAQ”). Pursuant
to the NASDAQ listing rules, the Company’s Business Combination must be with a target business or businesses whose collective
fair market value is equal to at least 80% of the balance in the Trust Account at the time of the execution of a definitive agreement
for such Business Combination. There is no assurance that the Company will be able to successfully effect a Business Combination.
The Company, after
signing a definitive agreement for the acquisition of one or more target businesses or assets, may either (i) seek stockholder
approval of a Business Combination at a meeting called for such purpose at which stockholders may seek to redeem their shares,
regardless of whether they vote for or against a Business Combination or (ii) provide its stockholders with the opportunity to
sell their shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote). Stockholder approval
will be sought by the Company if required by law or applicable stock exchange rule or for business or other legal reasons. In
the event of a proposed merger of the Company with a target company, stockholder approval is required by Delaware law. Further,
under the NASDAQ listing rules, stockholder approval is required, if, for example, (a) the Company will issue common stock that
will be equal to or in excess of 20% of the number of shares of its common stock outstanding, (b) any of the Company’s directors,
officers or substantial stockholders (as defined by NASDAQ rules) has a 5% or greater interest (or such persons collectively have
a 10% or greater interest), directly, or indirectly, in the target business or assets to be acquired or otherwise and the present
or potential issuance of common stock could result in an increase in outstanding common shares or voting power of 5% or more,
or (c) the issuance or potential issuance of common stock will result in a change of control of the Company. The Business Combination
must be approved by the board of directors. In addition, the Company’s Business Combination must be approved by MIHI LLC
(the “Macquarie Sponsor”) as a condition to the Contingent Forward Purchase Contract (as described in Note 7). In
the event that the Company seeks stockholder approval in connection with a Business Combination, the Company will proceed with
a Business Combination only if a majority of the outstanding shares that are voted are voted in favor of the Business Combination.
In connection with such vote, the Company will provide its stockholders with the opportunity to redeem their shares of the Company’s
common stock upon the consummation of a Business Combination for a pro-rata portion of the amount then in the Trust Account (initially
$10.00 per share, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to pay
taxes). However, in no event will the Company redeem its public shares in an amount that would cause its net tangible assets to
be less than $5,000,001. Hydra Industries Sponsor LLC (the “Hydra sponsor”) and the Macquarie Sponsor (together with
the Hydra sponsor, the “Sponsors”) and the other initial stockholders of the Company have agreed, in the event the
Company is required to seek stockholder approval of its Business Combination, to vote their founders shares (as defined in Note
6) and any public shares purchased, in favor of approving a Business Combination. Notwithstanding the foregoing redemption rights,
if the Company seeks stockholder approval of the Business Combination and it does not conduct redemptions in connection with the
Business Combination pursuant to the tender offer rules, the Company’s amended and restated certificate of incorporation
provides that a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder
is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)), will be restricted from redeeming its shares with respect to an aggregate of 25% or more of
the shares sold in the Initial Public Offering.
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
DECEMBER 31, 2015
If the Company is
unable to complete a Business Combination within 24 months from the closing of the Initial Public Offering (the “Combination
Period”), the Company will (i) cease all operations except for the purposes of winding up its affairs; (ii) distribute the
aggregate amount then on deposit in the Trust Account, including a portion of the interest earned thereon (net of any taxes payable,
and less up to $50,000 of interest to pay dissolution expenses), pro rata to the Company’s public stockholders by way of
redemption of the Company’s public shares (which redemption would completely extinguish such holders’ rights as stockholders,
including the right to receive further liquidation distributions, if any); and (iii) as promptly as possible following such redemption,
dissolve and liquidate the balance of the Company’s net assets to its remaining stockholders, as part of the Company’s
plan of dissolution and liquidation.
The initial stockholders
have agreed to waive their redemption rights with respect to the founder shares (i) in connection with the consummation of a Business
Combination, (ii) if the Company fails to consummate a Business Combination within the Combination Period, and (iii) upon the
Company’s liquidation upon the expiration of the Combination Period. However, if the Company’s initial stockholders
should acquire public shares in or after the Initial Public Offering, they will be entitled to redemption rights with respect
to such public shares if the Company fails to consummate a Business Combination within the Combination Period. The underwriters
have agreed to waive their rights to their deferred underwriting commissions held in the Trust Account in the event the Company
does not consummate a Business Combination within the Combination Period and, in such event, such amounts will be included with
the funds held in the Trust Account that will be available to fund the redemption of the Company’s public shares. In the
event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution
(including Trust Account assets) will be less than the Initial Public Offering price per Unit in the Initial Public Offering ($10.00
per share). A. Lorne Weil, the Company’s Chairman and Chief Executive Officer and the managing member of the Hydra sponsor,
has agreed that he will be liable to the Company, and the Macquarie Sponsor has agreed to indemnify Mr. Weil for 50% of any such
liability, if and to the extent any claims by a vendor for services rendered or products sold to the Company, or by a prospective
target business with which the Company has discussed entering into a transaction agreement, reduce the amount of funds in the
Trust Account to below $10.00 per share or such lesser amount per share of Common Stock held in the Trust Account as of the date
of the liquidation of the Trust Account, due to reductions in value of the trust assets other than due to the failure to obtain
such waiver, in each case net of the amount of interest which may be withdrawn to pay taxes, except as to any claims by a third
party who executed a waiver of any and all rights to seek access to the Trust Account and except as to any claims under the Company’s
indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the “Securities Act”).
The Company will
seek to reduce the possibility that Mr. Weil will have to indemnify the Trust Account due to claims of creditors by endeavoring
to have all vendors, service providers (other than the Company’s independent auditors), prospective target businesses or
other entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or
claim of any kind in or to monies held in the Trust Account.
NOTE 2. LIQUIDITY AND GOING CONCERN
As of December 31,
2015, the Company had $256,239 in its operating bank accounts, $80,009,479 in cash and securities held in the Trust Account to
be used for a Business Combination or to repurchase or convert its common stock in connection therewith and a working capital
deficit of $2,327,010. As of December 31, 2015, $14,520 of the amount on deposit in the Trust Account represented interest income,
which is available to be withdrawn to pay the Company’s tax obligations. Since inception, the Company has not withdrawn
any interest income from the Trust Account.
Until the consummation
of a Business Combination, the Company will be using the funds not held in the Trust Account for identifying and evaluating prospective
acquisition candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the
target business to acquire, structuring, negotiating and consummating the Business Combination and paying for public company expenses.
For the year ended
December 31, 2015, the Company used cash of $866,930 in operating activities. As of December 31, 2015, the Company had current
liabilities of $2,645,838, primarily representing amounts owed to lawyers, accountants and consultants who have advised the Company
on matters related to a potential Business Combination. There can be no assurances that the Company will be able to make payment
in full of the amounts due to said advisors. Funds in the Trust Account are not available for this purpose absent an initial Business
Combination. If a Business Combination is not consummated, the Company would lack the resources to pay all of the liabilities
that have been incurred by the Company to date or after and the Company may lack the resources needed to consummate another Business
Combination. The Company entered into fee arrangements with certain service providers and advisors in connection with a potential
Business Combination pursuant to which certain fees were deferred and payable only if the Company consummated such potential Business
Combination (see Note 8). Effective October 26, 2015, all efforts related to such potential Business Combination were terminated
and, accordingly, all deferred contingent fees that had been previously incurred are no longer due or payable. There can be no
assurances that the Company will complete a Business Combination.
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
DECEMBER 31, 2015
The Company may need
to raise additional capital through loans or additional investments from its Sponsors, stockholders, officers, directors, or third
parties. The Company’s Sponsors have each committed $250,000, for an aggregate of $500,000, to be provided to the Company
in the event that funds held outside of the Trust Account are insufficient to fund its expenses after the Initial Public Offering
and prior to a Business Combination (see Note 8). In addition, the Company’s officers, directors and Sponsors may, but are
not obligated to, loan the Company funds, from time to time or at any time, in whatever amount they deem reasonable in their sole
discretion, to meet the Company’s working capital needs.
Other than as
described above, none of the Sponsors, stockholders, officers or directors, or third parties, is under any obligation to advance
funds to, or to invest in, the Company. Accordingly, the Company may not be able to obtain additional financing. If the Company
is unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include,
but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead
expenses. The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms,
if at all. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These financial
statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities
that might be necessary should the Company be unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
The accompanying
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) and pursuant to the rules of the Securities and Exchange Commission (“SEC”).
Use of estimates
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Making estimates
requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a
condition, situation or set of circumstances that existed at the date of the financial statements, which management considered
in formulating its estimate, could change in the near term due to one or more future events. Accordingly, the actual results could
differ significantly from those estimates.
Cash and cash equivalents
The Company considers
all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company
did not have any cash equivalents as of December 31, 2015.
Cash and securities held in Trust Account
At December 31, 2015,
the assets held in the Trust Account were held in cash and U.S. Treasury Bills.
Common stock subject to possible redemption
The Company accounts
for its common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”)
Topic 480 “Distinguishing Liabilities from Equity.” Common stock subject to mandatory redemption (if any) is classified
as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features
redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events
not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified
as stockholders’ equity. The Company’s common stock features certain redemption rights that are considered to be outside
of the Company’s control and subject to occurrence of uncertain future events. Accordingly, at December 31, 2015 and December
31, 2014, common stock subject to possible redemption in the amount of $69,883,968 (or 6,987,568 shares) and $73,410,170 (or 7,341,017
shares), respectively, is presented as temporary equity, outside of the stockholders’ equity section of the Company’s
balance sheet.
Offering costs
Offering costs consist
principally of legal, accounting and underwriting costs incurred through the balance sheet date that are directly related to the
Initial Public Offering. Offering costs amounting to $5,223,296 (including $4,800,000 in underwriters’ fees, of which $2,800,000
is deferred) were charged to stockholder’s equity upon completion of the Initial Public Offering.
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
DECEMBER 31, 2015
Net loss per share
The Company complies
with accounting and disclosure requirements of ASC Topic 260, “Earnings Per Share.” Net loss per share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Shares of common
stock subject to possible redemption at December 31, 2015 and 2014 have been excluded from the calculation of basic loss per share
since such shares, if redeemed, only participate in their pro rata share of the Trust Account earnings. At December 31, 2015 and
2014, the Company did not have any dilutive securities and other contracts that could, potentially, be exercised or converted
into common stock and then share in the earnings of the Company. The Company has not considered the effect of warrants to purchase
shares of common stock and rights that convert into shares of common stock in the calculation of diluted loss per share, since
the exercise of the warrants and the conversion of the rights into shares of common stock is contingent upon the occurrence of
future events. As a result, diluted loss per share is the same as basic loss per share for the periods presented.
Income taxes
The Company complies
with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts,
based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC Topic 740 prescribes
a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken
or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be
sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December 31, 2015. The Company
is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from
its position.
The Company is subject
to income tax examinations by various taxing authorities since its inception. These potential examinations may include questioning
the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state
tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change
over the next twelve months.
The Company’s
policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense.
There were no amounts accrued for penalties or interest as of December 31, 2015 and 2014. Management is currently unaware of any
issues under review that could result in significant payments, accruals or material deviations from its position.
Concentration of credit risk
Financial instruments
that potentially subject the Company to concentration of credit risk consist of cash accounts in a financial institution which,
at times may exceed the Federal depository insurance coverage of $250,000. At December 31, 2015, the Company had not experienced
losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
Fair value of financial instruments
The fair value of
the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurements
and Disclosures” (“ASC 820”), approximates the carrying amounts represented in the accompanying balance sheets,
primarily due to their short-term nature.
Recent Accounting Pronouncements
In August 2014, the
FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”
(“ASU 2014-15”). ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is
substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each
reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt
about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.
The amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016, and for annual and interim
periods thereafter. Early adoption is permitted. The Company will adopt the methodologies prescribed by ASU 2014-15 by the date
required, and does not anticipate that the adoption of ASU 2014-15 will have a material effect on its financial position or results
of operations.
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
DECEMBER 31, 2015
NOTE 4. INITIAL PUBLIC OFFERING
On October 29, 2014,
the Company sold 8,000,000 Units at a purchase price of $10.00 per Unit in its Initial Public Offering. Each Unit consists of
one share of the Company’s common stock, $0.0001 par value (“Common Stock”), one right (“Public Right”)
and one redeemable common stock purchase warrant (“Public Warrant”). Each Public Right will convert into one-tenth
(1/10) of one share of Common Stock upon the consummation of a Business Combination. The Company did not register the shares of
Common Stock issuable upon exercise of the Public Warrants. However, the Company has agreed to use its best efforts to file within
15 business days of the closing of a Business Combination and have an effective registration statement within 60 business days
of the closing of a Business Combination covering the shares of Common Stock issuable upon exercise of the Public Warrants, to
maintain a current prospectus relating to those shares of Common Stock until the earlier of the date the Public Warrants expire
or are redeemed and, the date on which all of the Public Warrants have been exercised and to qualify the resale of such shares
under state blue sky laws, to the extent an exemption is not available. Each Public Warrant entitles the holder to purchase one-half
share of Common Stock at an exercise price of $5.75 ($11.50 per whole share). The Public Warrants may be exercised only for a
whole number of shares of Common Stock. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants
will become exercisable on the later of (a) 30 days after the consummation of a Business Combination, or (b) 12 months from the
closing of the Initial Public Offering. The Public Warrants will expire five years after the consummation of a Business Combination
or earlier upon redemption or liquidation. The Public Warrants will be redeemable by the Company at a price of $0.01 per warrant
upon 30 days’ prior written notice after the Public Warrants become exercisable, only in the event that the last sale price
of the Common Stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third
trading day prior to the date on which notice of redemption is given. The Company will not redeem the Public Warrants unless an
effective registration statement under the Securities Act covering the shares of Common Stock issuable upon exercise of the Public
Warrants is effective and a current prospectus relating to those shares of Common Stock is available throughout the 30-day redemption
period except if the Public Warrants may be exercised on a cashless basis and such cashless exercise is exempt from registration
under the Securities Act. If and when the Public Warrants become redeemable by the Company, the Company may exercise its redemption
right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
If the Company calls
the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants
to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the Public
Warrants for that number of shares of Common Stock equal to the quotient obtained by dividing (x) the product of the number of
shares of Common Stock underlying the Public Warrants, multiplied by the difference between the exercise price of the Public Warrants
and the “fair market value” by (y) the fair market value. The “fair market value” shall mean the average
reported last sale price of the Common Stock for the 10 trading days ending on the third trading day prior to the date on which
the notice of redemption is sent to the holders of Public Warrants.
NOTE 5. PRIVATE PLACEMENT
Simultaneously with
the Initial Public Offering, Mr. Weil, the Macquarie Sponsor and Martin E. Schloss, the Company’s Executive Vice President,
General Counsel and Secretary, purchased an aggregate of 7,500,000 Private Placement Warrants at a price of $0.50 per warrant
($3,750,000 in the aggregate) in a private placement. Each Private Placement Warrant is exercisable to purchase one-half share
of Common Stock at $5.75 per half share. The Private Placement Warrants may be exercised only for a whole number of shares of
Common Stock. No fractional shares will be issued upon exercise of the Private Placement Warrants. The purchase price of the Private
Placement Warrants was added to the net proceeds from the Initial Public Offering held in the Trust Account. If the Company does
not complete a Business Combination within the Combination Period, the proceeds of the sale of the Private Placement Warrants
will be used, in part, to fund the redemption of the Company’s public shares (subject to the requirements of applicable
law). There will be no redemption rights or liquidating distributions with respect to the Private Placement Warrants.
The Sponsors have
agreed that the Private Placement Warrants and the Common Stock issuable upon exercise of the Private Placement Warrants will
not be transferable, assignable or salable until 30 days following consummation of a Business Combination, subject to certain
limited exceptions. Additionally, the Private Placement Warrants will be non-redeemable so long as they are held by the initial
purchasers or such purchasers’ permitted transferees. If the Private Placement Warrants are held by someone other than the
initial purchasers or such purchasers’ permitted transferees, the Private Placement Warrants will be redeemable by the Company
and exercisable by such holders on the same basis as the Public Warrants. If the Company does not complete a Business Combination,
then the proceeds will be part of the liquidating distribution to the public stockholders and the Private Placement Warrants will
expire worthless.
NOTE 6. RELATED PARTY TRANSACTIONS
Founder Shares
On July 11, 2014,
the Company issued 2,875,000 shares of Common Stock to the Sponsors, of which an aggregate of 575,000 shares were returned to
the Company and subsequently cancelled (the “founder shares”) on October 24, 2014, for an aggregate purchase price
of $25,000 (see Note 8). As a result of the underwriters’ determination not to exercise their over-allotment option, an
additional 300,000 founder shares were forfeited (see Note 8). The founder shares are identical to the shares of Common Stock
included in the Units sold in the Initial Public Offering, except that (1) the founder shares are subject to certain transfer
restrictions, as described in more detail below, and (2) the Company’s initial stockholders have agreed: (i) to waive their
redemption rights with respect to their founder shares in connection with the consummation of a Business Combination and (ii)
to waive their redemption rights with respect to their founder shares if the Company fails to complete a Business Combination
within the Combination Period. However, the Company’s initial stockholders will be entitled to redemption rights with respect
to any public shares they hold by way of public market purchase if the Company fails to consummate a Business Combination within
such time period. If the Company submits a Business Combination to its public stockholders for a vote, the initial stockholders
have agreed to vote their founder shares and any public shares purchased in favor of a Business Combination.
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
DECEMBER 31, 2015
The Company’s
initial stockholders have agreed not to transfer, assign or sell any of their founder shares until the earlier to occur of: (1)
one year after a Business Combination or (2) the date on which the Company completes a liquidation, merger, stock exchange or
other similar transaction after a Business Combination that results in all of the Company’s stockholders having the right
to exchange their shares of Common Stock for cash, securities or other property (the “Lock Up Period”). Notwithstanding
the foregoing, if the last sale price of the Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock
dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing
at least 150 days after a Business Combination, the founder shares will be released from the lock-up.
Related Party Advances
During the period
from May 30, 2014 (inception) through October 29, 2014, Lorne Weil, Inc., a company owned by Mr. Weil and an affiliate of the
Hydra sponsor, advanced an aggregate of $47,874 directly to the Company’s vendors for Initial Public Offering costs and
other operational costs, of which the Company repaid $47,809 of such advances as of December 31, 2014. At December 31, 2015 and
2014, $0 and $65, respectively, were owed under the related party advances. The advances were non-interest bearing, unsecured
and due on demand.
Promissory Notes
On July 25, 2014,
the Company entered into a promissory note with each of the Sponsors, whereby the Sponsors agreed to loan the Company up to an
aggregate of $125,000 each (“Promissory Notes”) to be used in part for expenses incurred in connection with the Initial
Public Offering. The Promissory Notes were non-interest bearing, unsecured and due at the earlier of March 31, 2015 or the closing
of the Initial Public Offering. An aggregate of $169,499 of Promissory Notes were repaid to the Sponsors upon the consummation
of the Initial Public Offering on October 29, 2014. As of December 31, 2015 and 2014, no amounts were outstanding under the Promissory
Notes.
NOTE 7. COMMITMENTS& CONTINGENCIES
Potential Transaction Fee Arrangements
The Company entered
into fee arrangements with certain service providers and advisors pursuant to which certain fees incurred by the Company in connection
with a potential Business Combination would be deferred and become payable only if the Company consummated such potential Business
Combination. If the potential Business Combination did not occur, the Company would not be required to pay these contingent fees.
Effective October 26, 2015, all efforts related to such potential Business Combination were terminated and, accordingly, all contingent
fees that had been previously incurred are no longer due or payable.
Administrative Services Agreement
The Company entered
into an Administrative Services Agreement commencing on October 24, 2014 pursuant to which the Company pays an affiliate of the
Hydra Sponsor a total of $10,000 per month for office space, utilities and secretarial support. Upon the completion of a Business
Combination or the Company’s liquidation, the Company will cease paying these monthly fees. The Company paid $120,000 and
$22,258 in fees during the year ended December 31, 2015 and for the period from May 30, 2014 (inception) through December 31,
2014, respectively.
Related Party Loans
In order to finance
transaction costs in connection with a Business Combination, the Company’s Sponsors have each committed $250,000, for an
aggregate of $500,000, in accordance with unsecured promissory notes the Company will issue to the Sponsors pursuant to an expense
advance agreement between the Company and the Sponsors, to be provided to the Company in the event that funds held outside of
the Trust Account are insufficient to fund its expenses after the Initial Public Offering and prior to a Business Combination
(including investigating and selecting a target business and other working capital requirements) and the Sponsors may, but are
not obligated to, loan the Company additional funds as may be required. If the Company consummates a Business Combination, the
Company expects to repay such non-interest bearing loaned amounts. In the event that the Business Combination does not close,
the Company may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds
from the Trust Account would be used for such repayment. Up to $1,000,000 of all loans made to the Company are convertible at
the option of the lender into warrants of the post Business Combination entity at a price of $0.50 per warrant. The warrants would
be identical to the Private Placement Warrants.
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
DECEMBER 31, 2015
Contingent Forward Purchase Contract
On October 24, 2014,
the Macquarie Sponsor entered into a contingent forward purchase contract with the Company (the “Contingent Forward Purchase
Contract”) to purchase, in a private placement for gross proceeds of approximately $20,000,000 to occur concurrently with
the consummation of the Business Combination, 2,000,000 Units on the same terms as the sale of the Units in the Initial Public
Offering at $10.00 per Unit (which includes 2,000,000 rights which will be exchanged for 200,000 shares of Common Stock) (“Private
Placement Units”), and 500,000 shares of the Company’s Common Stock on the same terms as the sale of the founder shares
to the Sponsors prior to the Initial Public Offering (“Private Placement Shares”). The funds from the sale of the
Private Placement Units and the Private Placement Shares will be used as part of the consideration to the sellers in the Business
Combination; any excess funds from the Private Placement Units will be used for working capital in the post-transaction company.
This commitment is independent of the percentage of stockholders electing to redeem their public shares.
As a closing condition
to the Contingent Forward Purchase Contract, the Company has agreed not to consummate a Business Combination without the Macquarie
Sponsor’s consent; provided, however, that if the Company fails to consummate a Business Combination within the Combination
Period, and the Company’s board of directors (other than the Macquarie Sponsor designee) unanimously votes in favor of a
proposed Business Combination and the Macquarie Sponsor decides to withhold its vote on the Business Combination, the Macquarie
Sponsor will be, subject to customary conditions, obligated to pay a $740,000 fee to the Hydra sponsor. In such event, the Private
Placement Warrants purchased by the Macquarie Sponsor and the Hydra sponsor will expire worthless. Notwithstanding the foregoing,
in the event the Macquarie Sponsor withholds consent to consummate a Business Combination because of regulatory reasons or the
Business Combination involves a competitor to the Macquarie Sponsor, its affiliates, or an entity in which the Macquarie Sponsor
or an affiliate has an equity interest, then the Macquarie Sponsor is not obligated to pay the $740,000 fee, the Company may proceed
with such Business Combination, the Macquarie Sponsor will be permitted to sell its Private Placement Warrants and founder shares
(provided that the transferee agrees to be bound by the transfer restrictions, lock-up provisions, registration rights, voting
obligations and other such restrictions and rights of the transferred Private Placement Warrants and founder shares), the Hydra
sponsor will use its best efforts to facilitate a sale of the Macquarie Sponsor’s Private Placement Warrants and founder
shares, and the term of the Macquarie Sponsor’s nominee for the Board of Directors will automatically terminate and such
board seat will remain vacant until filled by a successor duly appointed by the Hydra sponsor.
Right of First Refusal
Pursuant to an agreement
dated October 24, 2014, the Company has granted Macquarie Capital (USA) Inc. (“Macquarie Capital”), an affiliate of
the Macquarie Sponsor, a right of first refusal for a period of 36 months from the closing of the Initial Public Offering to provide
certain financial advisory, underwriting, capital raising, and other services for which they may receive fees. The amount of fees
the Company pays to Macquarie Capital will be based upon the prevailing market for similar services rendered by global full-service
investment banks for such transactions, and will be subject to the review of the Company’s Audit Committee pursuant to the
Audit Committee’s policies and procedures relating to transactions that may present conflicts of interest.
Registration Rights
Pursuant to a registration
rights agreement entered into on October 24, 2014 with the Company’s initial stockholders and purchasers of the Private
Placement Warrants and the Contingent Forward Purchase Contract, the Company is required to register certain securities for sale
under the Securities Act. Each of the sponsors will be entitled to make up to three demands, excluding short form registration
demands, that the Company register such securities for sale under the Securities Act and to have the securities covered thereby
registered for resale pursuant to Rule 415 under the Securities Act. In addition, these holders will have “piggy-back”
registration rights to include their securities in other registration statements filed by the Company. However, the registration
rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become
effective until termination of the applicable Lock Up Period. The Company will bear the expenses incurred in connection with the
filing of any such registration statements.
Underwriting Agreement
The underwriters
were entitled to an underwriting discount of up to 6.0%, of which two and one-half percent (2.5%), or $2,000,000, was paid in
cash at the closing of the Initial Public Offering on October 29, 2014, and up to three and one-half percent (3.5%), or $2,800,000,
has been deferred. The deferred fee will be payable in cash upon the closing of a Business Combination. The deferred fee will
become payable to the underwriters from the amounts held in the Trust Account solely in the event that the Company completes a
Business Combination, subject to the terms of the underwriting agreement.
NOTE 8. STOCKHOLDERS’ EQUITY
Preferred Stock
— The
Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share in one or more series.
The Company’s board of directors will be authorized to fix the voting rights, if any, designations, powers, preferences,
the relative, participating, optional or other special rights and any qualifications, limitations and restrictions thereof, applicable
to the shares of each series. At December 31, 2015, there were no shares of preferred stock issued or outstanding.
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
DECEMBER 31, 2015
Common Stock
— The
Company is authorized to issue 29,000,000 shares of Common Stock with a par value of $0.0001 per share. Holders of the Company’s
Common Stock are entitled to one vote for each common share. At December 31, 2015, there were 3,012,432 shares of Common Stock
issued and outstanding (excluding 6,987,568 shares of Common Stock subject to possible redemption).
NOTE 9. INCOME TAX
The Company’s
net deferred tax assets are as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,663,937
|
|
|
$
|
64,448
|
|
Unrealized loss on securities
|
|
|
4,678
|
|
|
|
—
|
|
Total deferred tax assets
|
|
|
1,668,615
|
|
|
|
64,448
|
|
Valuation allowance
|
|
|
(1,668,615
|
)
|
|
|
(64,448
|
)
|
Deferred tax asset, net of allowance
|
|
$
|
—
|
|
|
$
|
—
|
|
The income
tax provision (benefit) consists of the following:
|
|
Year Ended
December
31,
2015
|
|
|
For
the Period
from
May 30,
2014
(inception)
through
December
31,
2014
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
(1,198,757
|
)
|
|
|
(48,120
|
)
|
|
|
|
|
|
|
|
|
|
State and Local
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
(405,460
|
)
|
|
|
(16,328
|
)
|
Change in valuation allowance
|
|
|
1,604,217
|
|
|
|
64,448
|
|
Income tax provision (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
As of December 31,
2015, the Company had U.S. federal and state net operating loss carryovers (“NOLs”) of $3,657,005 available to offset
future taxable income. These NOLs expire beginning in 2034. In accordance with Section 382 of the Internal Revenue Code, deductibility
of the Company’s NOLs may be subject to an annual limitation in the event of a change in control as defined under the regulations.
In assessing the
realization of the deferred tax assets, management considers whether it is more likely than not that some portion of all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. After consideration of all of the information available, management believes that significant uncertainty
exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance.
For the year ended December 31, 2015, the change in the valuation allowance was $1,604,217.
A reconciliation
of the federal income tax rate to the Company’s effective tax rate is as follows:
|
|
Year Ended
December
31,
2015
|
|
|
For
the Period
from
May 30,
2014
(inception)
through
December
31,
2014
|
|
Statutory federal income tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State taxes, net of federal tax benefit
|
|
|
(11.5
|
)%
|
|
|
(11.5
|
)%
|
Change in valuation allowance
|
|
|
45.5
|
%
|
|
|
45.5
|
%
|
Income tax provision (benefit)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
DECEMBER 31, 2015
NOTE 10. FAIR VALUE MEASUREMENTS
The Company follows
the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting
period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
The fair value of
the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have
received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction
between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities,
the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the
use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following
fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in
order to value the assets and liabilities:
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities. An active market for
an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume
to provide pricing information on an ongoing basis.
|
|
Level 2:
|
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices
in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that
are not active.
|
|
Level 3:
|
Unobservable inputs based on our assessment of the assumptions that market participants would
use in pricing the asset or liability.
|
The following table
presents information about the Company’s assets that are measured at fair value on a recurring basis at December 31, 2015
and 2014, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
Description
|
|
Level
|
|
|
December
31,
2015
|
|
|
December
31,
2014
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and securities held in Trust Account
|
|
|
1
|
|
|
$
|
80,009,479
|
|
|
$
|
80,005,240
|
|
NOTE 11. SELECTED QUARTERLY INFORMATION (UNAUDITED)
The following table
presents summarized unaudited quarterly financial data for each of the four quarters in the year ended December 31, 2015 and for
the period from May 30, 2014 (inception) through December 31, 2014. The data has been derived from our unaudited financial statements
that, in management's opinion, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation
of such information when read in conjunction with the Financial Statements and Notes thereto. The results of operations for any
quarter are not necessarily indicative of the results of operations for any future period.
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
$
|
195,089
|
|
|
$
|
1,894,968
|
|
|
$
|
715,863
|
|
|
$
|
724,525
|
|
Unrealized loss on securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(6,280
|
)
|
|
$
|
(4,001
|
)
|
Interest income
|
|
$
|
8,802
|
|
|
$
|
4,346
|
|
|
$
|
1,372
|
|
|
$
|
-
|
|
Net loss
|
|
$
|
(186,287
|
)
|
|
$
|
(1,890,622
|
)
|
|
$
|
(720,771
|
)
|
|
$
|
(728,526
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.25
|
)
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Period from May 30, 2014 (inception) through December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
-
|
|
|
$
|
403
|
|
|
$
|
3,144
|
|
|
$
|
137,982
|
|
Net loss
|
|
$
|
-
|
|
|
$
|
(403
|
)
|
|
$
|
(3,144
|
)
|
|
$
|
(137,982
|
)
|
Basic and diluted loss per share
|
|
$
|
-
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.06
|
)
|
HYDRA INDUSTRIES
ACQUISITION CORP.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER 31, 2015
NOTE 12. SUBSEQUENT EVENTS
The Company evaluates
subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued
for potential recognition or disclosure. Based upon this review, the Company did not identify any subsequent events that would
have required adjustment or disclosure in the financial statements.
DMWSL
633 LIMITED
Unaudited Condensed Consolidated Interim
Financial Statements
April 9, 2016 and April 11, 2015
DMWSL 633 LIMITED
Index to Unaudited
Condensed Consolidated Interim Financial Statements
April 9, 2016
and April 11, 2015
DMWSL 633 LIMITED
UNAUDITED CONDENSED CONSOLIDATED INTERIM
BALANCE SHEETS
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,985
|
|
|
|
4,060
|
|
Accounts receivable, net
|
|
|
41,509
|
|
|
|
42,828
|
|
Inventory
|
|
|
8,128
|
|
|
|
8,298
|
|
Prepaid expenses and other current assets
|
|
|
9,400
|
|
|
|
11,398
|
|
Total current assets
|
|
|
61,022
|
|
|
|
66,584
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
61,679
|
|
|
|
75,786
|
|
Software development costs, net
|
|
|
31,878
|
|
|
|
30,463
|
|
Other acquired intangible assets subject to amortization, net
|
|
|
17,713
|
|
|
|
21,343
|
|
Goodwill
|
|
|
91,973
|
|
|
|
99,150
|
|
Total assets
|
|
|
264,265
|
|
|
|
293,326
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' deficit
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
21,278
|
|
|
|
26,823
|
|
Accrued expenses
|
|
|
14,489
|
|
|
|
21,468
|
|
Corporate tax and other current taxes payable
|
|
|
4,313
|
|
|
|
6,353
|
|
Deferred revenue, current
|
|
|
9,313
|
|
|
|
10,424
|
|
Other current liabilities
|
|
|
7,554
|
|
|
|
6,611
|
|
Current portion of long-term debt
|
|
|
11,416
|
|
|
|
131
|
|
Total current liabilities
|
|
|
68,363
|
|
|
|
71,810
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
415,494
|
|
|
|
422,385
|
|
Deferred revenue, net of current portion
|
|
|
17,805
|
|
|
|
20,847
|
|
Other long-term liabilities
|
|
|
3,129
|
|
|
|
6,193
|
|
Total liabilities
|
|
|
504,791
|
|
|
|
521,235
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
165
|
|
|
|
165
|
|
Additional paid in capital
|
|
|
450
|
|
|
|
450
|
|
Accumulated other comprehensive income (loss)
|
|
|
7,604
|
|
|
|
(10,957
|
)
|
Accumulated deficit
|
|
|
(248,745
|
)
|
|
|
(217,567
|
)
|
Total stockholders' deficit
|
|
|
(240,526
|
)
|
|
|
(227,909
|
)
|
Total liabilities and stockholders'
deficit
|
|
|
264,265
|
|
|
|
293,326
|
|
The accompanying
notes are an integral part of these interim consolidated financial statements.
DMWSL
633 LIMITED
UNAUDITED INTERIM
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
April 9, 2016
|
|
|
April 11, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Service *
|
|
|
61,601
|
|
|
|
63,522
|
|
Hardware *
|
|
|
2,023
|
|
|
|
2,749
|
|
Total revenue
|
|
|
63,624
|
|
|
|
66,271
|
|
Cost of sales, excluding depreciation and amortization:
|
|
|
|
|
|
|
|
|
Cost of service *
|
|
|
(8,822
|
)
|
|
|
(8,448
|
)
|
Cost of hardware *
|
|
|
(834
|
)
|
|
|
(1,690
|
)
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
(33,197
|
)
|
|
|
(34,923
|
)
|
Depreciation and amortization
|
|
|
(19,761
|
)
|
|
|
(23,333
|
)
|
Net operating income/(loss)
|
|
|
1,010
|
|
|
|
(2,123
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
397
|
|
Interest expense
|
|
|
(31,901
|
)
|
|
|
(30,862
|
)
|
Income/(loss) from equity method investee
|
|
|
-
|
|
|
|
(350
|
)
|
Total other income (expense), net
|
|
|
(31,901
|
)
|
|
|
(30,815
|
)
|
Net loss from continuing operations before income taxes
|
|
|
(30,891
|
)
|
|
|
(32,938
|
)
|
Income tax expense
|
|
|
(287
|
)
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(31,178
|
)
|
|
|
(33,187
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation gain, net
|
|
|
18,250
|
|
|
|
18,271
|
|
Actuarial losses on pension plan, net
|
|
|
247
|
|
|
|
235
|
|
Other comprehensive income
|
|
|
18,497
|
|
|
|
18,506
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(12,681
|
)
|
|
|
(14,681
|
)
|
* Revenue and cost of sales, excluding depreciation and
amortization, have been revised to present service and hardware components of revenue separately as described in Note 1,
Amendment
of Financial Statements
.
The accompanying
notes are an integral part of these interim consolidated financial statements.
DMWSL 633 LIMITED
UNAUDITED INTERIM CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ DEFICIT
|
|
Common
stock
|
|
|
Additional
paid in capital
|
|
|
Accumulated other
comprehensive
income (loss)
|
|
|
Accumulated
deficit
|
|
|
Total
stockholders'
deficit
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as at September 27, 2014
|
|
|
165
|
|
|
|
450
|
|
|
|
(18,554
|
)
|
|
|
(157,029
|
)
|
|
|
(174,968
|
)
|
Translation adjustments, net
|
|
|
-
|
|
|
|
-
|
|
|
|
18,321
|
|
|
|
-
|
|
|
|
18,321
|
|
Actuarial losses on pension plan, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
235
|
|
|
|
-
|
|
|
|
235
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(33,187
|
)
|
|
|
(33,187
|
)
|
Ending Balance as at April 11, 2015
|
|
|
165
|
|
|
|
450
|
|
|
|
2
|
|
|
|
(190,216
|
)
|
|
|
(189,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as at September 26, 2015
|
|
|
165
|
|
|
|
450
|
|
|
|
(10,957
|
)
|
|
|
(217,567
|
)
|
|
|
(227,909
|
)
|
Translation adjustments, net
|
|
|
-
|
|
|
|
-
|
|
|
|
18,314
|
|
|
|
-
|
|
|
|
18,250
|
|
Actuarial losses on pension plan, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
247
|
|
|
|
|
|
|
|
247
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(31,178
|
)
|
|
|
(31,178
|
)
|
Ending Balance as at April 9, 2016
|
|
|
165
|
|
|
|
450
|
|
|
|
7,604
|
|
|
|
(248,745
|
)
|
|
|
(239,692
|
)
|
The accompanying notes are an integral
part of these interim consolidated financial statements.
DMWSL 633 LIMITED
UNAUDITED INTERIM CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
|
April 9, 2016
|
|
|
April 11, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(31,178
|
)
|
|
|
(33,187
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
19,761
|
|
|
|
23,333
|
|
Non-cash interest expense relating to PIK loan notes
|
|
|
22,313
|
|
|
|
20,876
|
|
Deferred income tax expense
|
|
|
(665
|
)
|
|
|
(1,332
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,712
|
)
|
|
|
(4,774
|
)
|
Inventory
|
|
|
(447
|
)
|
|
|
739
|
|
Prepaid expenses and other assets
|
|
|
1,259
|
|
|
|
5,947
|
|
Income taxes payable
|
|
|
(754
|
)
|
|
|
(1,445
|
)
|
Accounts payable
|
|
|
3,317
|
|
|
|
(2,555
|
)
|
Other current Liabilities
|
|
|
(220
|
)
|
|
|
160
|
|
Deferred revenues and customer prepayment
|
|
|
(364
|
)
|
|
|
(4,400
|
)
|
Accrued expenses
|
|
|
(3,103
|
)
|
|
|
9,807
|
|
Other long-term liabilities
|
|
|
(2,963
|
)
|
|
|
(1,046
|
)
|
Net cash provided by operating activities
|
|
|
5,244
|
|
|
|
12,123
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(18,933
|
)
|
|
|
(26,359
|
)
|
Disposals of property and equipment
|
|
|
71
|
|
|
|
152
|
|
Investment in joint venture
|
|
|
-
|
|
|
|
972
|
|
Net cash used in investing activities
|
|
|
(18,862
|
)
|
|
|
(25,235
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
11,826
|
|
|
|
-
|
|
Repayments of long term debt
|
|
|
(74
|
)
|
|
|
(70
|
)
|
Net cash provided by financing activities
|
|
|
11,752
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(209
|
)
|
|
|
(1,147
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(2,075
|
)
|
|
|
(14,329
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
4,060
|
|
|
|
19,252
|
|
Cash and cash equivalents, end of period
|
|
|
1,985
|
|
|
|
4,923
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
|
6,321
|
|
|
|
5,713
|
|
Cash paid during the period for income taxes
|
|
|
72
|
|
|
|
112
|
|
The accompanying notes are an integral
part of these interim consolidated financial statements.
DMWSL
633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
1.
|
Nature of Operations and Summary of Significant
Accounting Policies
|
Nature of Operations
DMWSL 633 Limited (the "Company",
the “Group”, "we", "our", and "us") is a global gaming technology company, supplying
Virtual Sports, Mobile and Server Based Gaming (“SBG”) systems to regulated lottery, betting and gaming operators
worldwide. Our strategic focus is the development and sale of SBG software systems and SBG digital terminals.
Basis of Consolidation
The accompanying interim consolidated
financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles
("US GAAP"). All monetary values set forth in these financial statements are in US Dollars ("USD" or "$")
unless otherwise stated herein. The accompanying interim consolidated financial statements include the results of the Company
and its wholly owned subsidiaries, as well as those subsidiaries in which we have a controlling financial interest. Investments
in other entities in which we do not have a controlling financial interest but exert significant influence are accounted for in
our interim consolidated financial statements using the equity method of accounting. All intercompany balances and transactions
have been eliminated in consolidation.
The financial statement periods presented
represent a 52 week period, which approximates a calendar year end period. The balance sheet date of each fiscal period represents
the Saturday closest to the 30
th
of September. Each 52 week fiscal period presented within these financial statements
and footnotes are herein referred to as a "period".
We have historically operated thirteen
lots of four week periods during a period. As such, the first half of the period, seven periods or twenty eight weeks have been
shown in the interim financial statements representing the periods ending April 11, 2015 and April 9, 2016.
Amendment of Financial Statements
In connection with the inclusion of
these financial statements in the Preliminary Proxy Statement on Schedule 14A to be filed by Hydra Industries Acquisition Corp
with the Securities Exchange Commission, the following amendments to disclosures in the consolidated financial statements have
been made for the purposes of complying with the disclosure requirements of Regulation S-X : i) On the Consolidated Statement
of Operations and Comprehensive Loss we have now presented hardware and service revenues and related costs of sales separately
and we have removed the Gross profit subtotal and relabeled Cost of sales to “Cost of sales, excluding depreciation and
amortization”; ii) We have provided details of research and development costs incurred in Note 1; and iii) We have provided
segmental information in Note 2. We have also provided other additional footnote disclosures and made other amendments which are
considered to be minor in nature. We have also evaluated subsequent events through the date these revised financial statements
were available to be issued as described in Note 22.
These changes had
no impact on the Company's operating results or financial condition for the periods affected.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Amendment of Financial Statements
(continued)
The following tables present the effects
of such revisions on the Company’s previously reported financial statements as of and for the period ended April 9, 2016:
Consolidated Statements of Operations and Comprehensive
Loss
Revenue:
|
|
|
As
reported
|
|
|
|
As
amended
|
|
Service
|
|
|
Not
disclosed
|
|
|
|
61,601
|
|
Hardware
|
|
|
Not
disclosed
|
|
|
|
2,023
|
|
Total revenue
|
|
|
63,624
|
|
|
|
63,624
|
|
Cost of sales, excluding depreciation and amortization:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
|
Not
disclosed
|
|
|
|
(8,822
|
)
|
Cost of hardware
|
|
|
Not
disclosed
|
|
|
|
(834
|
)
|
Total cost of sales
|
|
|
(9,656
|
)
|
|
|
Not
applicable
|
|
The following tables present the effects
of such revisions on the Company’s previously reported financial statements as of and for the period ended April 11, 2015:
Consolidated Statements of Operations and
Comprehensive Loss
Revenue:
|
|
|
As
reported
|
|
|
|
As
amended
|
|
Service
|
|
|
Not
disclosed
|
|
|
|
63.522
|
|
Hardware
|
|
|
Not
disclosed
|
|
|
|
2,749
|
|
Total revenue
|
|
|
66.271
|
|
|
|
66.271
|
|
Cost of sales, excluding depreciation and amortization:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
|
Not
disclosed
|
|
|
|
(8,448
|
)
|
Cost of hardware
|
|
|
Not
disclosed
|
|
|
|
(1,690
|
)
|
Total cost of sales
|
|
|
(10,138
|
)
|
|
|
Not
applicable
|
|
Going Concern
At April 9, 2016, the group had net liabilities
of $240,526,000, primarily as a result of shareholder loans and interest thereon. . On completion of the acquisition described
in Note 21 by Hydra Industries Acquisition Corp, a pre-agreed rollover of the senior bank debt and the revolving credit facility
becomes effective. This agreement extends the existing facilities by 2 years to September 30, 2019, on similar terms with
a reset of covenant headroom. In the event of non-completion management would seek to negotiate a similar extension of terms.
In either scenario, the directors’ believe that the company has adequate financial resources to meet its liabilities as
they fall due and hence all financial statements have been prepared on a going concern basis.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Use of Estimates
The preparation of financial statements in conformity with
US GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management evaluates these estimates, including those related to the
revenue recognition for contracts involving software and non-software elements, allowance for doubtful accounts, goodwill and
intangible assets, useful lives of long-lived assets, stock-based compensation, valuation allowances, commitments and contingencies
and litigation, among others. Management bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. We regularly evaluate these significant factors and make adjustments when facts
and circumstances dictate. Actual results may differ from these estimates.
Revenue Recognition
We derive revenue principally from the
sale and rental of our Server Based Gaming (“SBG”) terminals and related services, including content provision and
servicing, to regulated retail betting outlets, casinos and other gaming operators, and licensing of our Virtual Sports gaming
software and related services to regulated virtual sports retail, mobile and online operators. We evaluate the recognition of
revenue based on the criteria set forth in ASC 605, Revenue Recognition ("ASC 605") and ASC 985-605, Software-Revenue
Recognition ("ASC 985"). Revenue is recognized when all of the following criteria are met:
|
1.
|
Persuasive evidence
of an arrangement exists
|
|
2.
|
The price to the
customer is fixed or determinable
|
|
3.
|
Delivery has occurred,
title has been transferred, and any acceptance terms have been fulfilled; and
|
|
4.
|
Collectability
is probable
|
For our multiple-deliverable arrangements
which include hardware containing software that functions together with the hardware to deliver its essential functionality and
undelivered non-software services, deliverables are separated into more than one unit of accounting when: (i) the delivered element(s)
have value to the customer on a stand-alone basis and (ii) delivery of the undelivered element(s) is probable and substantially
in the control of the company. When the final undelivered element(s) are non-software services and non-hardware, those deliverables
are recognized on a ratable basis over the remaining term of the arrangement.
We determine the relative selling price
for deliverables in the scope of ASC 605 based on the following selling price hierarchy:
|
4.
|
Vendor specific objective evidence ("VSOE"), (i.e.,
the price we charge when the product or service is sold separately) if available,
|
|
5.
|
Third-party evidence (“TPE”) of fair value (i.e.,
the price charged by others for similar products and services) if VSOE is not available,
|
|
6.
|
or our best estimate of selling price (“BESP”) if
neither VSOE nor TPE is available.
|
Our multiple-deliverable arrangements
may also contain one or more software deliverables in the scope of ASC 985-605. The revenue for these multiple-deliverable arrangements
is allocated to the software deliverables and the non-software deliverables based on the relative selling prices of all of the
deliverables in the arrangement using the fair value hierarchy outlined above. In circumstances where the Company cannot determine
VSOE or TPE of the selling price for any of the deliverables in the arrangement, BESP is used for the purpose of allocating the
arrangement consideration between software and non-software deliverable.
DMWSL 633 LIMITED
NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Periods Ended
April 9, 2016, and April 11, 2015
(in thousands)
Revenue is allocated to the software deliverables
based on the relative fair value of each element, and fair value is determined using VSOE. Where VSOE does not exist for the undelivered
software element, revenue is deferred until either the undelivered element is delivered or VSOE is established, whichever occurs
first. When the final undelivered software element is services, the related revenue is recognized on a ratable basis over the
remaining service period. When VSOE of a delivered element has not been established, but VSOE exists for the undelivered elements,
the Company uses the residual method to recognize revenue when the fair value of all undelivered elements is determinable. Under
the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement consideration
is allocated to the delivered elements and is recognized as revenue.
In addition to the general policies discussed
above, the following are the specific revenue recognition policies for our revenue streams.
Server Based Gaming
Revenue from SBG terminals, access
to our content and SBG platform, including electronic table gaming products is recognized in accordance with the criteria set
forth in ASC 605 and is usually based upon a contracted percentage of the operator’s net winnings from the terminals’
daily use. Where this is not the case, revenue is based upon a fixed daily or weekly rental fee. We recognize revenue from these
arrangements on a daily basis over the term of the arrangement, or when not specified over the expected customer relationship
period. Performance obligations under these arrangements may include the delivery and installation of our SBG terminals for use
over a term, as well as service obligations related to hardware repairs and server based content and maintenance.
We sometimes bill for SBG arrangements
up front in order to help fund our working capital and development requirements, or at the request of a customer. Upfront fees
on SBG arrangements are deferred and recognized on a straight-line basis over the term of the arrangement, or when not specified
over the expected customer relationship period. Hardware sales take the form of a transfer of ownership of our developed gaming
terminals, and are recognized upon delivery as they have value to our customers on a stand-alone basis.
Virtual Sports
Revenue from licensing of our gaming
software is recognized in accordance with the criteria set forth in ASC 985-605. Virtual sports retail revenue, which includes
the provision of virtual sports content and services to retail betting outlets, and virtual sports online and mobile revenue,
which includes the provision of virtual sports content and services to mobile and online operators, is based upon a contracted
percentage of the operator’s net winnings or a fixed rental fee. We recognize revenue for these fees on a daily or weekly
basis over the term of the arrangement. These arrangements typically include a perpetual license billed up front, granted to the
customer for access to our gaming platform and content. As we do not have VSOE for the undelivered elements in virtual sports
arrangements, revenue from the licensing of perpetual licenses is recognized on a straight-line basis over the term of the arrangement,
or when not specified, over the expected customer relationship period.
Revenue from the development of bespoke
games licensed on a perpetual basis to mobile and online operators is recognized on delivery and acceptance by the customer. We
have no ongoing service obligations subsequent to customer acceptance of our bespoke games.
DMWSL 633 LIMITED
NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Periods Ended
April 9, 2016, and April 11, 2015
(in thousands)
Deferred Revenue and Deferred
Cost of Sales, excluding depreciation and amortization
Deferred revenue arises from the timing
differences between invoicing on shipment or installation of gaming terminals and systems products and the satisfaction of all
revenue recognition criteria consistent with our revenue recognition policy, as well as prepayment of contracts which are recognized
ratably over a service period, such as maintenance or licensing fees. Deferred cost of sales, excluding depreciation and amortization
consists of the direct costs associated with the manufacture of gaming equipment and systems products for which revenue has been
deferred. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as
deferred revenue in current liabilities. Amounts not expected to be recognized as revenue within the 12 months following the balance
sheet date are classified as deferred revenue, less current portion.
Software Development Costs
We classify software development costs
as either internal use software or external use software. We account for costs incurred to develop internal use software in accordance
with ASC 350-40, Internal Use Software. Consequently, any costs incurred during preliminary project stages are expensed; direct
costs incurred during the application development stages are capitalized; and costs incurred during the post-implementation/operation
stages are expensed. Once the software is placed in operation, we amortize the capitalized internal use software cost over its
estimated economic useful life, which range from two to five years.
We purchase, license and incur costs to
develop external use software to be used in the products we sell or provide to customers. Such costs are capitalized under ASC
985-20, Costs of Software to Be Sold Leased or Marketed. Costs incurred in creating software are expensed when incurred as Selling,
General and Administrative Expenses until technological feasibility has been established, after which costs are capitalized up
to the date the software is available for general release to customers. We capitalize the payments made for software that we purchase
or license for use in our products that has previously met the technological feasibility criteria prior to our purchase or license.
Annual amortization of capitalized external use software development costs is recorded over the estimated economic life, which
range from two to five years.
Research and development costs are
expensed as incurred. Research and development related primarily to software product development costs is expensed until technological
feasibility has been established. Research and development costs amounting to $1,689,000 and $1,920,000 were expensed during the
periods to April 11, 2015, and April 9 2016, respectively. Employee related costs associated with related product development
are included in Selling, General and Administrative Expenses in the Consolidated Statement of Operations and Comprehensive Loss.
Cash and Cash Equivalents
Cash and cash equivalents include cash
and short-term highly liquid investments with remaining maturities of three months or less when purchased. Cash and cash equivalents
are stated at cost which approximates fair value. We deposit cash and cash equivalents with financial institutions that management
believes are of high credit quality.
Accounts Receivable
Accounts receivable are recorded at the
invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit
losses in our existing accounts receivable. Changes in circumstances relating to the collectability of accounts receivable may
result in the need to increase or decrease our allowance for doubtful accounts in the future. We determine the allowance based
on historical experience, current market trends, and our customers' financial condition. We continually review our allowance for
doubtful accounts. Past due balances and other higher risk amounts are reviewed individually for collectability. Account balances
are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered
remote.
DMWSL 633 LIMITED
NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Periods Ended
April 9, 2016, and April 11, 2015
(in thousands)
Under certain of our contracts, the timing
of our invoices does not coincide with revenue recognized under the contract. We have unbilled accounts receivable which represent
revenue recorded in excess of amounts invoiced under the contract and generally become billable at contractually specified dates.
These amounts consist primarily of labor hours and materials provided under the terms of executed contracts but not yet billed.
We had $14,307,000 and $14,543,000 of unbilled accounts receivable as of September 26, 2015, and April 9 2016, respectively.
Our standard credit terms are net 30 to
60 days. From time to time, we allow for certain digital customers to pay on an enhanced revenue share basis for the software
license whereby the customer pays an incremental revenue share percentage over a specific period of time. We consider these types
of arrangements to be extended payment terms as the full consideration for the arrangement may not be received until several years
after the date of the sale depending on the net winnings from the game or application. We evaluate the payment terms of the arrangement
at the outset in order to determine if collectability is reasonably assured and defer revenue on enhanced revenue shares in cases
where this is not met. For additional information on notes receivables, see Note 2 (Accounts Receivable, Notes Receivable, Allowance
for Doubtful Accounts and Bad Debt).
Inventories
Inventories consist primarily of component
parts and related parts used in gaming terminals. Inventories are stated at the lower of cost or net realizable value, using the
weighted average cost method. We determine the lower of cost or market value of our inventory based on estimates of potentially
excess and obsolete inventories after considering historical and forecasted demand and average selling prices. However, forecasts
are subject to revisions, cancellations and rescheduling. Cost includes all direct costs and an appropriate proportion of fixed
and variable overheads.
We have established a reserve for excess
and obsolete inventory. Demand for gaming terminals and parts inventory is also subject to technological obsolescence.
Equity Method Investments
Investee companies that are not consolidated,
but over which we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise
significant influence with respect to an investee depends on an evaluation of several factors including, representation on the
investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities
of the investee company. Under the equity method of accounting, an investee company’s accounts are not reflected within
our Consolidated Balance Sheets and Statements of Operations and Comprehensive Loss; however, our share of the earnings or losses
of the investee company is reflected in other income (loss) in the Consolidated Statements of Operations and Comprehensive Loss.
Our carrying value in an equity method investee company is reflected in Other Current Liabilities in our Consolidated Balance
Sheets.
When our carrying value in an equity method
investee company is reduced to zero, no further losses are recorded in our consolidated financial statements unless we have guaranteed
obligations of the investee company or we have committed additional funding. In this instance, when the investee company subsequently
reports income, we will not record its share of such income until it equals the amount of its share of losses not previously recognized.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Property and Equipment
Property and equipment are recorded at
cost, and when placed into service, depreciated to their residual values using the straight-line method over the estimated useful
lives of the related assets as follows:
Short-term
leasehold property
|
life of the lease
|
Server based gaming
terminals ("SBG's")
|
4 – 6 years
|
Motor Vehicles
|
3 – 5 years
|
Plant and machinery
and fixtures and fittings
|
4 – 8 years
|
Computer equipment
|
3 – 5 years
|
Our policy is to periodically review the
estimated useful lives of our fixed assets. We also assess the recoverability of long-lived assets (or asset groups) whenever
events or changes in circumstances indicate that the carrying amount of such an asset (or asset groups) may not be recoverable.
Repairs and maintenance costs are expensed
as incurred. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are written off and
any resulting gain or loss is credited or charged to income.
Goodwill and Other Acquired Intangible
Assets
Our primary acquired intangible assets
relate to goodwill, trademarks and customer relationships. Goodwill represents the excess purchase price over the fair value of
the identifiable net assets acquired in a business combination. Trademarks and customer relationships were originally recorded
at their fair values in connection with business combinations.
Goodwill and other intangible assets with
indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible assets with finite
lives are amortized on a straight line basis over three to ten years to their estimated residual values, and reviewed for impairment.
Factors considered when assigning useful lives include legal, regulatory and contractual provisions, product obsolescence, demand,
competition and other economic factors.
Impairment of Goodwill and Property
and Equipment
We test for goodwill impairment at the
reporting unit level at least annually on the last day of our fiscal period and whenever other facts and circumstances indicate
that the carrying value may not be recoverable. For goodwill impairment evaluations, we first make a qualitative assessment to
determine if goodwill is likely to be impaired. If it is more-likely-than-not that a reporting unit's fair value is less than
its carrying value, we then compare the fair value of the reporting unit to its respective carrying amount. A reporting unit is
an operating segment or one level below an operating segment (referred to as a "component"). Our operating segment is
deemed to be a reporting unit because the operating segment is comprised of only a single component. If the fair value of the
reporting unit is less than its carrying amount, the amount of the impairment loss, if any, will be measured by comparing the
implied fair value of goodwill to its carrying amount and would be charged to operations as an impairment loss. For additional
information, see Note 5 (Intangibles, net and goodwill).
DMWSL 633 LIMITED
NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Periods Ended
April 9, 2016, and April 11, 2015
(in thousands)
We assess the recoverability of long-lived
assets and intangible assets with finite useful lives whenever events arise or circumstances change that indicate the carrying
amount of an asset may not be recoverable. Recoverability of long-lived assets (or asset groups) to be held and used is measured
by a comparison of the carrying amount of the asset (or asset group) to the expected net future undiscounted cash flows to be
generated by that asset (or asset group) or, for identifiable intangibles with finite useful lives, by determining whether the
amortization of the intangible asset balance over its remaining life can be recovered through expected net future undiscounted
cash flows. The amount of impairment of other long-lived assets and intangible assets with finite lives is measured by the amount
by which the carrying amount of the asset exceeds the fair market value of the asset.
Derivative Financial Instruments
From time to time we enter into foreign
currency forward contracts to mitigate the risk associated with cash payments required to be made in non-functional currencies
or to mitigate the risk associated with cash to be received in non-functional currencies from our equity method investees. We
record the derivative financial instruments on the balance sheets at their respective fair market values. Changes in fair value
in the associated derivative are recorded in the consolidated statement of operations and comprehensive loss. See Note 12 (Fair
Value Measurements) for additional information.
Shipping and Handling Costs
Shipping and handling costs for products
sales and hardware related to subscription services are included in cost of sales, excluding depreciation and amortization for
all periods presented.
Income Taxes
Income taxes are accounted for under the
asset and liability method. Our provision for income taxes is primarily based on current period income (loss), changes in deferred
tax assets and liabilities and changes in estimates with regard to uncertain tax positions. We estimate current tax expense and
assess temporary differences resulting from differing treatments of items for tax and accounting purposes using enacted tax rates
in effect for each taxing jurisdiction in which we operate for the period in which those temporary differences are expected to
be recovered or settled. These differences result in deferred tax assets and liabilities. Our total deferred tax assets are principally
comprised of net operating loss carryforwards and expense accruals.
Significant management judgment is required
to assess the likelihood that its deferred tax assets will be recovered from future taxable income. In assessing the realizability
of these deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred
tax assets will be realized. Management makes this assessment on a jurisdiction by jurisdiction basis considering the historical
trend of taxable losses, projected future taxable income and the reversal of deferred tax liabilities. As of April 9 2016, we
had a valuation allowance of $40,443,000 against net deferred tax assets due to uncertainty of realization of these deferred tax
assets.
We evaluate income tax uncertainties,
assess the probability of the ultimate settlement with the applicable taxing authority and records an amount based on that assessment.
Interest and penalties, if any, associated with uncertain tax positions are included in income tax expense.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Foreign Currency Translation
For most of our operations GBP is our
functional currency. We also have significant operations where the local currency is the functional currency, including our operations
in Europe and South America. Assets and liabilities of foreign operations are translated at period-end rates of exchange and results
of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating the foreign
currency financial statements are accumulated as a separate component of accumulated other comprehensive loss in stockholders'
(deficit) equity. Gains or losses resulting from foreign currency transactions are included in other (expense) income, net in
the consolidated statements of operations and comprehensive loss.
Leases
We lease our office facilities under operating
leases. We account for certain operating leases that contain rent escalation provisions, rent abatements and /or lease incentives
by recognizing rent expense on a straight-line basis over the lease term. The difference between the rent paid and the straight-line
rent is recorded as a deferred liability.
Assets acquired under capital leases are
amortized over a lease term which coincides with the estimated useful life of the leased assets. For the purpose of recognizing
the above mentioned lease incentives on a straight-line basis over the term of the lease, we use the date of initial possession
to begin amortization. Lease renewal periods are considered in the determination of the lease term.
Comprehensive Loss
We include and separately classify in
comprehensive loss unrealized gains and losses from our foreign currency translation adjustments, gains or losses associated with
pension or other post-retirement benefits, prior service costs or credits associated with pension or other post-retirement benefits
and transition assets or obligations associated with pension or other post- retirement benefits. See Note 19 (Accumulated Other
Comprehensive (Loss) Income).
Business Combinations
We apply the provisions of ASC 805, Business
Combinations ("ASC 805"), in the accounting for acquisitions, which requires us to recognize separately from goodwill
the fair value of assets acquired and liabilities assumed on the acquisition date. Goodwill as of the acquisition date is measured
as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities
assumed. Significant estimates and assumptions are required to value assets acquired and liabilities assumed at the acquisition
date as well as contingent consideration, where applicable. These estimates are inherently uncertain and subject to refinement
and typically include the calculation of an appropriate discount rate and projection of the cash flows associated with each acquired
asset. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments
to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement
period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to the consolidated statements of operations and comprehensive loss.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09
“Revenue from Contracts with Customers” which introduces a new revenue recognition model in which an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five step process to
achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process
than are required under existing U.S. GAAP. This ASU also requires disclosures sufficient to enable users to understand the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative
disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs
to obtain or fulfill a contract. The FASB has voted to approve a one-year deferral of the effective date from January 1, 2017
to January 1, 2018, while allowing for early adoption as of January 1, 2017. The new accounting standard is expected to have an
impact on our consolidated financial statements. We are currently evaluating the impact of its adoption on the consolidated financial
statements and related disclosures.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
In June 2014, the FASB issued ASU 2014-12,
Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That
a Performance Target Could Be Achieved after the Requisite Service Period
("ASU 2014-12"), requiring a performance
target which affects vesting and could be achieved after the requisite service period be treated as a performance condition in
accordance with ASC 718, Compensation - Stock Compensation. ASU 2014-12 was effective prospectively for annual periods beginning
after December 15, 2015 with early adoption permitted. We are currently evaluating the impact of its adoption on the consolidated
financial statements and related disclosures.
On April 7, 2015, the FASB issued ASU
2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance
sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt
discount. For public business entities, the standard is effective for financial statements issued for fiscal years beginning after
December 15, 2015, and interim periods within those fiscal years. For all other entities, the standard is effective for financial
statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after
December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The company has
adopted this guidance and has presented debt issuance costs net against the associated debt liabilities in the consolidated balance
sheets presented.
In April
2015, the FASB issued ASU 2015-05,
Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Fees Paid in a Cloud Computing Arrangement
("ASU 2015-05"),
which
provides guidance to customers about how to account for cloud computing arrangements when such arrangements include software licenses.
ASU 2015-11 is effective for reporting periods beginning after December 15, 2015, with early adoption permitted.
The standard may be applied retrospectively or prospectively.
We are currently evaluating the impact of its adoption on
the consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11,
Inventory
(Topic 330) - Simplifying the Measurement of Inventory
("ASU 2015-11"),
which
will require us to measure inventory at the lower of cost or net realizable value, rather than the lower of cost or market.
ASU 2015-11 is effective prospectively for reporting periods beginning after December 15, 2016. As this is the first time we have
prepared consolidated financial statements under US GAAP, we have early adopted the guidance from the inception of the Company
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Recently Issued Accounting Standards
(continued)
In November 2015, the FASB issued ASU
2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. The guidance eliminates the current
requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance
sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. As this is the
first time we have prepared consolidated financial statements under US GAAP, we have early adopted the guidance from the inception
of the Company.
In February 2016, the FASB issued ASU
2016-02,
Leases (Topic 842),
to increase transparency and comparability among organizations by reporting lease assets and
lease liabilities, both finance (capital) and operating leases, on the balance sheet and disclosing key information about leasing
arrangements. For public companies, the updated guidance is effective for the financial statements issued for fiscal years beginning
after December 15, 2018 (including interim periods within those fiscal years). Early adoption is permitted. We are currently evaluating
the impact of its adoption on the consolidated financial statements and related disclosures.
In March
2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 201609,
Compensation –
Stock Compensation (Topic 718),
to simplify several aspects of the accounting for share-based payment award transactions including:
(a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement
of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim
periods within those annual periods.
We are currently evaluating the impact of its adoption on the consolidated financial
statements and related disclosures.
Operating segments are identified as
components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating
decision-maker in making decisions regarding resource allocation and assessing performance. After considering how the Company
manages its business activities, we have concluded that we operate in one operating segment.
Geographic Information
Geographic information for revenue
is set forth below:
|
|
April 9, 2016
|
|
|
April 11, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
Total revenue
|
|
|
|
|
|
|
|
|
UK
|
|
|
46,592
|
|
|
|
49,005
|
|
Italy
|
|
|
10,965
|
|
|
|
12,353
|
|
Rest of world
|
|
|
6,067
|
|
|
|
4,913
|
|
Total
|
|
|
63,624
|
|
|
|
66,271
|
|
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
|
2.
|
Segmental
Reporting
(continued)
|
Geographic information of our non-current
assets excluding goodwill is set forth below:
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
Total non-current assets excluding goodwill
|
|
|
|
|
|
|
|
|
UK
|
|
|
82,520
|
|
|
|
93,885
|
|
Italy
|
|
|
12,017
|
|
|
|
15,915
|
|
|
|
|
|
|
|
|
|
|
Rest of world
|
|
|
16,733
|
|
|
|
17,792
|
|
Total
|
|
|
111,270
|
|
|
|
127,592
|
|
Software development costs are included
as attributable to the market in which they are utilized.
Customer Information
Revenues from one customer represent
approximately 29.85%, and 31.32% of our total revenues in the periods ended April 9, 2016 and April 11, 2015 respectively. Revenues
from a second customer represent approximately 11.60%, and 11.08% of our total revenues in the periods ended April 9, 2016 and
April 11, 2015 respectively. There were no revenues greater than 10% derived from any other customer in any of the periods presented
in these financial statements.
Revenue by Major Category
Our revenue by major category is set
forth below:
Period ended April 9, 2016
|
|
Server Based
Gaming
|
|
|
Virtual Sports
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
43,531
|
|
|
|
18,070
|
|
|
|
61,601
|
|
Hardware
|
|
|
2,023
|
|
|
|
-
|
|
|
|
2,023
|
|
Total revenue
|
|
|
45,554
|
|
|
|
18,070
|
|
|
|
63,624
|
|
Period ended April 11, 2015
|
|
Server Based
Gaming
|
|
|
Virtual Sports
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
49,395
|
|
|
|
14,127
|
|
|
|
63,522
|
|
Hardware
|
|
|
2,749
|
|
|
|
-
|
|
|
|
2,749
|
|
Total revenue
|
|
|
52,144
|
|
|
|
14,127
|
|
|
|
66,271
|
|
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Accounts receivable consist of the following:
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
41,868
|
|
|
|
43,629
|
|
Other receivables
|
|
|
95
|
|
|
|
157
|
|
Allowance for doubtful accounts
|
|
|
(454
|
)
|
|
|
(958
|
)
|
Total accounts receivable, net
|
|
|
41,509
|
|
|
|
42,828
|
|
Changes in the allowance for doubtful
accounts are as follows:
|
|
£ '000
|
|
|
|
|
|
Beginning balance at September 27, 2015
|
|
|
(958
|
)
|
Charge-offs
|
|
|
287
|
|
Recoveries
|
|
|
1
|
|
Provisions
|
|
|
216
|
|
Ending balance at April 9,2016
|
|
|
(454
|
)
|
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Component parts
|
|
|
6,710
|
|
|
|
6,584
|
|
Finished goods
|
|
|
1,418
|
|
|
|
1,714
|
|
Total inventories
|
|
|
8,128
|
|
|
|
8,298
|
|
Component parts include parts for gaming
terminals. Work in progress includes parts for gaming terminals which have been partially constructed. Our finished goods inventory
primarily consists of gaming terminals for ready for sale.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
|
5.
|
Property
and Equipment
|
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Short-term leasehold property
|
|
|
573
|
|
|
|
618
|
|
Video lottery terminals
|
|
|
132,654
|
|
|
|
142,462
|
|
Computer equipment
|
|
|
8,134
|
|
|
|
8,302
|
|
Plant & machinery
|
|
|
1,932
|
|
|
|
1,866
|
|
|
|
|
143,293
|
|
|
|
153,248
|
|
Less: accumulated depreciation
|
|
|
(81,614
|
)
|
|
|
(77,462
|
)
|
|
|
|
61,679
|
|
|
|
75,786
|
|
Depreciation expense for the periods ended
April 9, 2016, and April 11, 2015 was $12.6 million and $16.3 million respectively. Cost of equipment associated with specific
contracts and internal use software projects are recorded as assets in the course of construction (a subsection of video lottery
terminals) and not depreciated until placed in service. When the equipment is placed into service, the related costs are transferred
from assets in the course of construction to video lottery terminals, and we commence depreciation. Depreciation expense is separately
included within depreciation and amortization expense on the Consolidated Statements of Operations and Comprehensive Loss.
|
6.
|
Intangible
Assets, net and goodwill
|
The following tables present certain information
regarding our intangible assets as of April 9, 2016 and September 26, 2015. Amortizable intangible assets are being amortized
on a straight-line basis over their estimated useful lives with no estimated residual values, which materially approximates the
expected pattern of use.
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
22,475
|
|
|
|
24,228
|
|
Customer relationships
|
|
|
19,994
|
|
|
|
20,706
|
|
|
|
|
42,469
|
|
|
|
44,934
|
|
Less: accumulated depreciation
|
|
|
(24,756
|
)
|
|
|
(23,591
|
)
|
|
|
|
17,713
|
|
|
|
21,343
|
|
The aggregate intangible asset amortization
expense for the periods ended April 9, 2016, and April 11, 2015 was $2,185,000, and $2,297,000, respectively.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Goodwill
The table below reconciles the change
in the carrying amount of goodwill, for the period from September 27, 2014 to April 9, 2016.
|
|
$ '000
|
|
|
|
|
|
Beginning balance at September 27, 2014
|
|
|
106,196
|
|
Additions
|
|
|
1,043
|
|
Impairment
|
|
|
(1,043
|
)
|
Foreign currency translation adjustments
|
|
|
(10,333
|
)
|
Ending balance at April 11, 2015
|
|
|
95,863
|
|
|
|
|
|
|
Beginning balance at September 26, 2015
|
|
|
99,150
|
|
Additions
|
|
|
-
|
|
Impairment
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
(7,177
|
)
|
Ending balance at April 9, 2016
|
|
|
91,973
|
|
|
7.
|
Software
Development Costs, net
|
Software development costs,
net consisted of the following:
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Software development costs
|
|
|
72,867
|
|
|
|
70,669
|
|
Less: accumulated depreciation
|
|
|
(40,989
|
)
|
|
|
(40,206
|
)
|
|
|
|
31,878
|
|
|
|
30,463
|
|
In the periods April 9, 2016 and April
11, 2015 we capitalized $9,536,000 and $7,356,000, respectively, of software development costs. Net amounts above include $1.3
million and $1.4 million of internal use software at April 9, 2016 and September 26, 2015, respectively.
The total amount of software costs
amortized was $5,017,000 and $3,815,000 for the periods ended April 9, 2016, and April 11, 2015, respectively. The total amount
of software written down to net realizable value was $800,000 and $Nil for the periods ended April 9, 2016, and April 11, 2015,
respectively. The weighted average amortization period was 3.3 years and 3.4 years for the periods ended April 9, 2016, and April
11, 2015, respectively. The estimated software amortization expense for the period April 10, 2016 to September 24, 2016 and the
subsequent four fiscal periods is $4.9 million, $10.5 million, $7.2 million, $5.9 million and $3.4 million per annum, respectively.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
|
8.
|
Prepaid
Expenses and Other Assets
|
Prepaid expenses and other assets consist
of the following:
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
9,400
|
|
|
|
11,398
|
|
Foreign exchange contract assets
|
|
|
-
|
|
|
|
-
|
|
Total prepaid expenses and other assets
|
|
|
9,400
|
|
|
|
11,398
|
|
Accrued expenses consist of the following:
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Interest payable - cash
|
|
|
3,195
|
|
|
|
2,945
|
|
Interest payable – payment in kind
|
|
|
550
|
|
|
|
377
|
|
Asset retirement obligations
|
|
|
-
|
|
|
|
616
|
|
Direct costs of sales
|
|
|
6,582
|
|
|
|
11,579
|
|
Accrued corporate cost expenses
|
|
|
1,618
|
|
|
|
1,434
|
|
Other creditors
|
|
|
2,544
|
|
|
|
4,517
|
|
Total accrued expenses
|
|
|
14,489
|
|
|
|
21,468
|
|
Other liabilities consist of the following:
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Customer prepayments & deposits
|
|
|
7,554
|
|
|
|
6,611
|
|
Total other liabilities, current
|
|
|
7,554
|
|
|
|
6,611
|
|
Foreign exchange contract liabilities
|
|
|
87
|
|
|
|
321
|
|
Provisions for other liabilities & charges
|
|
|
404
|
|
|
|
995
|
|
Pension liability
|
|
|
2,638
|
|
|
|
4,877
|
|
Total other liabilities, long-term
|
|
|
3,129
|
|
|
|
6,193
|
|
|
|
|
10,683
|
|
|
|
12,804
|
|
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Foreign exchange contract liabilities
related to foreign currency forward agreements where the net balance was in a credit position. Refer to Note 13 for additional
information.
At April 9, 2016, we were obligated under
operating leases covering office and warehouse space and transportation equipment expiring at various dates. Future minimum lease
payments required under our operating leases at April 9, 2016 were approximately as follows:
|
|
$ '000
|
|
|
|
|
|
2016
|
|
|
1,554
|
|
2017
|
|
|
1,230
|
|
2018
|
|
|
1,206
|
|
2019
|
|
|
989
|
|
2020
|
|
|
598
|
|
Thereafter
|
|
|
974
|
|
Rent expense under all operating leases
was $1,119,000 and $727,000 for the periods ended April 9, 2016, and April 11, 2015, respectively.
Some of our operating leases contain provisions
for future rent increases, rent-free periods or periods in which rent payments are reduced. The total amount of rental payments
due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference
between rent expense recorded and the amount paid is credited or charged to deferred rent obligation, which is included in accrued
liabilities and other long-term liabilities in the accompanying Consolidated Balance Sheets.
|
12.
|
Long
Term and Other Debt
|
Outstanding Debt and Capital Leases
The following reflects outstanding debt
as of the dates indicated below:
|
|
Principal
|
|
|
Unamortized
deferred
financing
charge
|
|
|
Book
value,
April
9, 2016
|
|
|
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Senior bank debt
|
|
|
122,812
|
|
|
|
(1,920
|
)
|
|
|
120,892
|
|
PIK loan notes
|
|
|
305,791
|
|
|
|
-
|
|
|
|
305,791
|
|
Capital leases and hire purchase contract
|
|
|
227
|
|
|
|
-
|
|
|
|
227
|
|
Total long-term debt outstanding
|
|
|
428,830
|
|
|
|
(1,920
|
)
|
|
|
426,910
|
|
Less: current portion of long-term debt
|
|
|
(11,416
|
)
|
|
|
-
|
|
|
|
(11,416
|
)
|
Long-term debt, excluding current portion
|
|
|
417,414
|
|
|
|
(1,920
|
)
|
|
|
415,494
|
|
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
The company is in compliance with all
relevant covenants and the long term debt portion is correctly classified as such in line with the underlying agreements.
|
|
Principal
|
|
|
Unamortized
deferred
financing
charge
|
|
|
Book value,
September 26,
2015
|
|
|
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Senior bank debt
|
|
|
117,573
|
|
|
|
(2,822
|
)
|
|
|
114,751
|
|
PIK loan notes
|
|
|
307,444
|
|
|
|
-
|
|
|
|
307,444
|
|
Capital leases and hire purchase contract
|
|
|
321
|
|
|
|
-
|
|
|
|
321
|
|
Total long-term debt outstanding
|
|
|
425,338
|
|
|
|
(2,822
|
)
|
|
|
422,516
|
|
Less: current portion of long-term debt
|
|
|
(131
|
)
|
|
|
-
|
|
|
|
(131
|
)
|
Long-term debt, excluding current portion
|
|
|
425,207
|
|
|
|
(2,822
|
)
|
|
|
422,385
|
|
Debt consists of senior bank debt and
loan notes payable to the owners of Ordinary A shares (referred to as Payment in Kind (“PIK”) Loan Notes).
During 2014, the Company re-financed its
existing senior bank facility of $86.7 million with a new senior bank facility of $121.2 million. During 2014, unamortized senior
bank debt issuances fees of $2.0 million, were written off. The new senior bank facility has a cash interest rate on outstanding
borrowings for this line of credit being the Bank of England’s bank’s base rate plus the base rate margin or LIBOR
rate plus the bank’s LIBOR rate margin. The loan agreement includes a PIK interest rate on the outstanding borrowings that
can be paid for or added to the outstanding debt. Capitalized debt issuance fees of $5.4 million were realized in 2014 with the
issuance of new debt. Note, due to foreign currency translation, these figures are then revised at each Balance Sheet date. The
new senior bank debt is scheduled to mature on September 30, 2017.
The senior bank debt also included a revolving
facility commitment for $28.5 million. The revolver facility has an interest rate on unutilized borrowings of 2%. The line of
credit is scheduled to mature on September 30, 2017, although agreement has been reached to extend this by two years on successful
acquisition as discussed in Note 1 under the caption Going Concern. On April 9, 2016 a revolver totaling $11.3 million had been
drawn (September 26, 2015 $Nil). In addition, $0.4 million of the facility had been utilized for the Duty Deferment guarantee
and the company credit card scheme at both April 9, 2016 and September 26, 2015. The line of credit is scheduled to mature on
September 30, 2017.
The company also has PIK loan notes
payable to a syndicate of investors including parent entities to the group. PIK loan notes have a final repayment date of July
6, 2018 and receive interest at a rate of 13.5%. This interest is accrued and compounded annually onto the loan notes on
September 30 each year. Loan notes may be transferred between parties but cannot be converted into other options or redeemed
before the final repayment date. At the repayment date, all PIK loan note liabilities are settled by sterling cheque payment.
PIK loan notes are repayable in full upon either a sale or a listing of the group
.
PIK loan notes are held in proportion to Ordinary A shares. PIK loan balance to parent company at April 9, 2016 and September
26, 2015 amounted to $260.1 million and $261.5 million respectively.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
|
12.
|
Long
Term and Other Debt
(continued)
|
Long term debt at April 9, 2016 matures
as follows:
Fiscal period
|
|
Senior bank
debt
|
|
|
PIK loan
notes
|
|
|
Capital leases
and hire
purchase
contract
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 10, 2016 to September 24, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2017
|
|
|
111,524
|
|
|
|
-
|
|
|
|
49
|
|
|
|
111,573
|
|
2018
|
|
|
-
|
|
|
|
305,791
|
|
|
|
40
|
|
|
|
305,831
|
|
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
2020
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
2021
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
111,524
|
|
|
|
305,791
|
|
|
|
99
|
|
|
|
417,414
|
|
|
13.
|
Fair
Value Measurements
|
Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset and liability in an orderly transaction between market participants at the measurement date. We estimate
the fair value of its assets and liabilities utilizing an established three-level hierarchy. The hierarchy is based upon the transparency
of inputs to the valuation of an asset or liability as of the measurement date as follows:
|
Level 1:
|
Quoted prices
in active markets for identical assets or liabilities.
|
|
Level 2:
|
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities,
quoted prices in markets with insufficient volume or infrequent transactions (less active
markets), or model-derived valuations in which all significant inputs are observable
or can be derived principally from or corroborated with observable market data for substantially
the full term of the assets or liabilities. Level 2 inputs also include non-binding market
consensus prices that can be corroborated with observable market data, as well as quoted
prices that were adjusted for security-specific restrictions.
|
|
Level 3:
|
Unobservable
inputs that are supported by little or no market activity that are significant to the
fair value of the asset or liability. Level 3 inputs also include non-binding market
consensus prices or non-binding broker quotes that are unable to be corroborated with
observable market data.
|
The fair value of our financial assets
and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value
of our financial instruments, which are principally cash and cash equivalents, accounts receivable, other current assets, accounts
payable and accrued liabilities, approximates their recorded values.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
|
13.
|
Fair
Value Measurements
(continued)
|
For each period, derivative financial
instrument assets and liabilities measured at fair value on a recurring basis are included in the financial statements as per
the table below. All amounts are categorized as Level 2
|
|
April 9, 2016
|
|
|
April 11, 2015
|
|
Consolidated Statement of Operations and Comprehensive Loss
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
220
|
|
|
|
106
|
|
|
|
April 9, 2016
|
|
|
April 11, 2015
|
|
Consolidated Balance Sheets
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
(87
|
)
|
|
|
(321
|
)
|
Foreign currency forward contracts
Throughout the period we enter into contracts
to buy and sell foreign currency. These contracts are recorded on the balance sheets at each period end at fair value. These contracts
are typically short term in nature with maturities of six months to a year. We entered into forward contracts to sell Euros and
to purchase USD and the change in fair value of the derivative is recorded within interest income or expense in the Consolidated
Statements of Operations and Comprehensive Loss. For the periods ended April 9, 2016 and April 11, 2015, we realized interest
income of $220,000 and $106,000 respectively from changes in the fair value of the derivative instrument.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
|
14.
|
Stockholder's
Deficit
|
Common stock
Common stock consists of six classes of
common shares. There are no shares reserved for future issuance. Common stock balances of shares authorized, issued and outstanding
as of April 9, 2016 were as follows:
|
|
Shares
|
|
|
Common Stock
|
|
|
|
each
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Class A Voting Shares, par value of £0.01
|
|
|
8,750,000
|
|
|
|
132
|
|
Class B Non-voting Shares, par value of £0.01
|
|
|
264,639
|
|
|
|
4
|
|
Class B1Non-voting Shares, par value of £0.001
|
|
|
314,361
|
|
|
|
-
|
|
Class B2 Non-voting Shares, par value of £0.75
|
|
|
11,150
|
|
|
|
13
|
|
Class B3 Voting Shares, par value of £0.01
|
|
|
154,500
|
|
|
|
2
|
|
Deferred Non-voting Shares, par value of £0.01
|
|
|
985,361
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,480,011
|
|
|
|
165
|
|
Common stock balances of shares authorized,
issued and outstanding as of September 26, 2015 were as follows:
|
|
Shares
|
|
|
Common Stock
|
|
|
|
each
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Class A Voting Shares, par value of £0.01
|
|
|
8,750,000
|
|
|
|
132
|
|
Class B Non-voting Shares, par value of £0.01
|
|
|
1,250,000
|
|
|
|
18
|
|
Class B2 Non-voting Shares, par value of £0.75
|
|
|
11,150
|
|
|
|
13
|
|
Class B3 Voting Shares, par value of £0.01
|
|
|
154,500
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,165,650
|
|
|
|
165
|
|
Class A Voting Shares
The holders of Class A common stock are
entitled to receive dividends, when and as declared by the Board of Directors, and to vote on all matters entitled to be voted
on by the stockholders of the Company.
Class B Non-voting Shares
The holders of Class B common stock have
the same rights on a winding up as the Class A shareholders. The holders of Class B shares have the right to receive 10% of dividends
paid to Class A shareholders.
Class B1 Non-voting Shares
The holders of Class B1 common stock have
the same rights on a winding up as the Class A shareholders. The holders of Class B1 shares also have the same rights to receive
dividends as Class A shareholders.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Class B2 Non-voting Shares
The holders of Class B2 shares will only
participate up to the paid up amount plus a 10% per annum return of such paid up amount upon a winding up.
Class B3 Voting Shares
The holders of Class B3 shares will only
participate up to the paid up amount plus a 10% per annum return of such paid up amount upon a winding up. B3 shares carry 10
votes each on a poll.
Deferred Non-voting Shares
The holders of deferred shares shall only
be entitled to the repayment of the amounts paid up on their shares (including premium) after repayment of the capital of the
ordinary shares plus the payment of $7million on each of the ordinary shares on a winding up. Deferred shares carry no right to
income.
Additional paid in capital
Additional paid in capital represents
the excess of amounts paid for common shares over their stated par value. There have been no changes in additional paid in capital
during the periods ended September 26, 2015, September 27, 2014 and September 28, 2013.
In December 2015, a restructuring of the
management shareholding structure was undertaken. This resulted in management being issued new shares in the Company and certain
growth shares in Inspired Gaming Group Limited. The reorganization consisted of the steps set out below.
Company
985,361 B Non-voting Shares, B2 Non-voting
Shares, and B3 Voting Shares in the Company held by various members of management were gifted back to the Company and re-designated
as deferred shares. The fair value of each class of shares of the gift was not material.
The Company created a new class of B1
Non-voting shares with broadly the same income and capital rights as the A Voting Shares (but which additionally have the benefit
of a ratchet dependent on the returns to the investors) and issued 314,361 B1 Non-voting Shares to members of management. In addition
options for 393,222 B1 Non-voting Shares were granted to members of management. These options are only exercisable conditional
on any exit of the shareholders from the Company and lapse if they are not exercised by the completion of any such exit. Both
B1 Non-voting Shares and the options for the B1 Non-voting Shares vested upon grant to management, and the fair value and resulting
share based payment expense were not material.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Inspired Gaming Group Limited
Two new classes of shares were created
in Inspired Gaming Group Limited, a subsidiary of the Company, comprising B ordinary shares and C ordinary shares with par values
of £0.00001 each. These shares have voting rights and identical economic rights to each other, except B ordinary shares
also gave each holder the right to put all of the B ordinary shares onto Gaming Acquisitions Limited, another subsidiary of the
Company, for a price of £2,250. The put options were required to be exercised by the relevant holder within 60 days of the
issue of B ordinary shares and all expired unexercised. The fair value of the put options were not material at the date of the
grant of the B ordinary shares to management.
The B ordinary shares were issued to the
relevant management shareholders under the employee shareholder scheme provisions such that each relevant manager gave up certain
employment rights and did not pay any consideration for the issue of these shares. There were 2,800,000 B ordinary shares issued
and 500 of C ordinary shares issued to members of management. All shares vested upon grant.
The C ordinary shares have a right to
any dividends or distributions declared in respect of the C ordinary shares at the discretion of the directors. Their economic
entitlement on an exit is calculated by a formula referenced to the returns on the PIK loan notes in Note 12 once a specified
exit hurdle amount has been exceeded. Once this hurdle is exceeded the C ordinary shares have a minimum value of £0.40 per
C ordinary share which can increase as the returns on the PIK loan notes increase to a maximum amount (assuming for this purpose
a transaction date of 12 March 2016) of approximately £0.75 per C ordinary share.
A similar valuation mechanism applies
for the C ordinary shares if an exit happens at certain other subsidiaries of DMWSL 633 Limited.
The fair value and resulting share based
payment expense of the B and C ordinary shares were not material upon issuance to management.
We operate a combined scheme which comprises
of a defined benefit section and a defined contribution section. The defined benefit section has been closed to future accruals
for services rendered to the company for the entire financial statement periods presented in these consolidated financial statements.
Retirement benefits are generally based on a portion of an employee's pensionable earnings during years prior to 2010. Our policy
is to make contributions according to schedules agreed with the trustee every 3 years after completion of the triennial valuation
undertaken by the scheme’s actuaries. We estimate that $4.1 million will be contributed to the pension plan in the period
ending September 24, 2016.
The plan investment policy is to maximize
long-term financial return commensurate with security and minimizing risk. This is achieved by holding a portfolio of marketable
investments that avoids over-concentration of investment and spreads assets both over industries and geographies. In setting investment
strategy, the trustees considered the lowest risk strategy that they could adopt in relation to the plan's liabilities and designed
an asset allocation to achieve a higher return while maintaining a cautious approach to meeting the plan's liabilities. The trustees
undertook a review of investment strategy and took advice from their investment advisors. They considered a full range of asset
classes, the risks and rewards of a range of alternative asset allocation strategies, the suitability of each asset class and
the need for appropriate diversification. The current strategy is to hold approximately 30% in a global return fund, approximately
25% in U.K. equities, approximately 20% in real estate, approximately 16% in non-U.K. equities and approximately 9% in corporate
bonds.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
Our pension benefit costs are calculated
using various actuarial assumptions and methodologies. These assumptions include discount rates, inflation, expected returns on
plan assets, mortality rates and other factors. The assumptions utilized in recording the obligations under our plans represent
our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance
as well as other factors that might cause future expectations to differ from past trends. Differences in actual experience or
changes in assumptions may affect our pension obligations and future expense. The primary factors contributing to actuarial gains
and losses each year are (1) changes in the discount rate used to value pension benefit obligations as of the measurement date
and (2) differences between the expected and the actual return on plan assets.
Full disclosure of our Defined Benefit
scheme is contained within our full consolidated financial statements. The total amount of employers contributions paid in the
period to April 9, 2016 amounted to $1.885 million. We expect to pay $1.885 million during the remaining part of the fiscal period.
On December 23, 2014, the group purchased
the remaining 50% shares in Merkur Inspired Limited for a total consideration of £1. As part of the transaction, the selling
party agreed to waive payables amounting to $2,430,589. The purchase has been accounted for under the acquisition method, On January
2, 2015, Merkur Inspired Limited changed its name to Inspired Gaming (Italy) Limited.
Assets and liabilities acquired in the
acquisition were as follows:
|
|
Fair value
|
|
|
|
$ '000
|
|
Assets and liabilities acquired
|
|
|
|
|
Property and equipment
|
|
|
39
|
|
Inventory
|
|
|
2
|
|
Accounts receivable
|
|
|
615
|
|
Prepaid expenses and other current assets
|
|
|
(258
|
)
|
Cash and cash equivalents
|
|
|
506
|
|
Accounts payable
|
|
|
(712
|
)
|
Accrued expenses
|
|
|
(954
|
)
|
Corporate tax and other current taxes payable
|
|
|
(53
|
)
|
Other current liabilities
|
|
|
(228
|
)
|
Net assets acquired
|
|
|
(1,043
|
)
|
|
|
|
|
|
Goodwill
|
|
|
1,043
|
|
Total
|
|
|
-
|
|
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
|
18.
|
Accumulated
Other Comprehensive (Loss) Income
|
The accumulated balances for each classification
of comprehensive (loss) income are presented below:
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrecognized
pension benefit
costs, net of
taxes
|
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 27, 2014
|
|
|
2,360
|
|
|
|
16,194
|
|
|
|
18,554
|
|
Change during the period
|
|
|
(18,321
|
)
|
|
|
(235
|
)
|
|
|
(18,506
|
)
|
Reclassified into operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 11, 2015
|
|
|
(15,961
|
)
|
|
|
15,959
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 26, 2015
|
|
|
(9,187
|
)
|
|
|
20,144
|
|
|
|
10,957
|
|
Change during the period
|
|
|
(18,314
|
)
|
|
|
(247
|
)
|
|
|
(18,497
|
)
|
Reclassified into operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 9, 2016
|
|
|
(27,501
|
)
|
|
|
19,897
|
|
|
|
(7,604
|
)
|
The following is income (loss) before
income taxes:
|
|
April 9, 2016
|
|
|
April 11, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
UK
|
|
|
(30,451
|
)
|
|
|
(32,492
|
)
|
Mainland Europe
|
|
|
(154
|
)
|
|
|
318
|
|
South America
|
|
|
(286
|
)
|
|
|
(764
|
)
|
Total loss before income taxes
|
|
|
(30,891
|
)
|
|
|
(32,938
|
)
|
The income tax expense (benefit) consisted
of the following for the periods ended April 9, 2016 and April 11, 2015:
|
|
April 9, 2016
|
|
|
April 11, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
UK
|
|
|
-
|
|
|
|
|
|
Mainland Europe
|
|
|
236
|
|
|
|
197
|
|
South America
|
|
|
51
|
|
|
|
52
|
|
Total current taxes
|
|
|
287
|
|
|
|
249
|
|
The net deferred tax assets and liabilities
arising from temporary differences at April 9, 2016 and September 26, 2015 are as follows:
|
|
April 9, 2016
|
|
|
September 26, 2015
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
25,518
|
|
|
|
30,103
|
|
Other temporary differences
|
|
|
441
|
|
|
|
503
|
|
Net operating losses
|
|
|
14,484
|
|
|
|
16,560
|
|
Total deferred tax assets, net
|
|
|
40,443
|
|
|
|
47,166
|
|
Valuation allowance balance
|
|
|
(36,732
|
)
|
|
|
(42,898
|
)
|
Net deferred tax assets
|
|
|
3,711
|
|
|
|
4,268
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(3,711
|
)
|
|
|
(4,268
|
)
|
Net deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
|
19
|
Income
Taxes (continued)
|
The valuation allowance on deferred tax
assets has been determined by considering all available evidence, both positive and negative, in order to ascertain whether it
is more likely than not that carried forward deferred tax assets will be realised. Inspired Gaming (UK) Limited has a total potential
deferred tax asset carried forward of $30,492,000 at April 9, 2016 (forming the majority of the total potential group deferred
tax asset carried forward of $40,443,000). In addition, Gaming Acquisition Limited (a group subsidiary) has a deferred tax asset
of $5,501,000 which relates to non-trade losses carried forward. Information provided by management indicates that current level
of profitability across the group will not be sufficient to obtain relief for these losses in the current period (as has been
done in previous periods). Losses can be carried forward indefinitely.
On consideration of the cumulative net
losses in Inspired Gaming (UK) Limited and Gaming Acquisitions Limited (a group subsidiary) over the three periods ending April
9, 2016, the group has recorded a full valuation allowance of $36,732,000.
As at April 9, 2016 there are no liabilities
relating to tax penalties and interest and the periods ending 27 September 2014 and 26 September 2015 remain open
The group is not subject to taxation in
the US. However, foreign tax is applicable in foreign jurisdictions (primarily in Europe), where the total of non-UK taxes payable
for the period ended April 9, 2016 is $287,000 and for the period ended April 11, 2015 is $249,000. All deferred tax items are
attributable to UK operations.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
A provision of $46,000 has been included
within current taxes as at September 26, 2015 to reflect an uncertain tax position relating to interest deductions. There are
no similar tax provisions included as at September 27, 2014 or September 28, 2013.
Reductions in the UK corporation tax rate
from 20% to 19% (effective April 1, 2017), and to 18% (effective April 1, 2020) were substantively enacted on October 26, 2015.
This will reduce the group’s future tax charge accordingly.
The group has not recognized deferred
tax liabilities in respect of unremitted earnings that are considered indefinitely reinvested in foreign subsidiaries.
We entered into several transactions with
companies under common control. We entered into several agreements with various service companies in which certain of our current
Board members have direct or indirect ownership interests, and, in some cases, are also directors of these companies.
|
|
|
|
April 9, 2016
|
|
|
April 11, 2015
|
|
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
Transactions
|
|
|
|
|
|
|
|
|
|
|
Inspired Gaming (Italy) Limited
|
|
Total revenue
|
|
|
-
|
|
|
|
395
|
|
Openbet Retail Limited
|
|
Total revenue
|
|
|
1,016
|
|
|
|
1,187
|
|
Loxley Strategic Consulting Limited
|
|
Selling, general and administrative expenses
|
|
|
(152
|
)
|
|
|
-
|
|
Balances
|
|
|
|
|
|
|
|
|
|
|
Openbet Retail Limited
|
|
Accounts receivable
|
|
|
163
|
|
|
|
213
|
|
Transactions and balances with Inspired
Gaming (Italy) Limited are disclosed for the period when the company was not a member of the group.
|
21.
|
Litigation,
Claims and Assessments
|
A claim from the Performing Rights
Society is ongoing and relates to the alleged infringement of copyrighted material of the Performing Rights Society's members
in certain games on Fixed Odds Betting Terminals in UK Licensed Betting Offices. The Company and the other defendants (who have
formed a litigation club) filed a defense to the claim raised by the Performing Rights Society on December 22, 2015. The parties
have mutually agreed to begin a process of mediation in September 2016. The Company has made a provision in the period ending
April 9, 2016 of $0.4 million, which management believes to be adequate to cover the total net exposure to the Company, including
professional fees.
DMWSL 633 LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Periods Ended April 9, 2016, and
April 11, 2015
(in thousands)
The Company evaluates subsequent events
occurring between the most recent balance sheet date and the date that the financial statements are available to be issued in
order to determine whether the subsequent events are to be recorded and/or disclosed in the Company’s financial statements
and footnotes. We have evaluated subsequent events through September 16, 2016, the date these financial statements were available
to be issued.
On July 14, 2016 it was announced that
Hydra Industries Acquisition Corp. (“Hydra”), a special purpose acquisition company listed on the NASDAQ stock exchange,
had entered into a definitive agreement to acquire DMWSL 633 Limited and associated subsidiaries. The proposed transaction has
been unanimously approved by the Boards of Directors of both Hydra and Inspired, and is expected to close in October 2016, subject
to approval by Hydra's shareholders, required regulatory approvals and other customary closing conditions. Immediately after the
closing, Hydra intends to change its name to Inspired Entertainment, Inc.
On completion of the transaction, the
company will receive a cash injection of approximately $6.6million in addition to funds to settle transaction costs for the combined
group of approximately $20.4million, $5.4million of management bonuses, the settlement of $11.4million of PIK interest on senior
debt and the settlement of $2.8million of cash accrued interest. The management bonuses, settlement of PIK interest
and certain other transaction costs are contingent on the completion of the transaction
There were no other subsequent events
or transactions that required recognition or disclosure in the consolidated financial statements.
DMWSL 633 LIMITED
Consolidated Financial Statements
September 26, 2015, September 27, 2014
and September 28, 2013
DMWSL 633 LIMITED
Index
September 26, 2015, September 27, 2014,
and September 28, 2013
Report of Independent
Auditors
The Board of Directors
DMWSL 633 Limited:
We have
audited the accompanying consolidated financial statements of DMWSL 633 Limited and its subsidiaries, which comprise the consolidated
balance sheets as of September 26, 2015, September 27, 2014, and September 28, 2013, and the related consolidated statements of
operations and comprehensive loss, stockholders’ deficit, and cash flows for the fiscal periods then ended, and the related
notes to the consolidated financial statements
.
Management’s Responsibility
for the Financial Statements
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’
judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of DMWSL 633 Limited and its subsidiaries
as of September 26, 2015, September 27, 2014, and September 28, 2013, and the results of their operations and their cash flows
for the fiscal periods then ended in accordance with U.S. generally accepted accounting principles.
KPMG LLP
Nottingham, United Kingdom
August 4, 2016
except
as
to Notes 1, 3, and 22 which
are as of September 16, 2016
DMWSL 633 LIMITED
CONSOLIDATED BALANCE SHEETS
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
4,060
|
|
|
|
19,252
|
|
|
|
17,200
|
|
Accounts receivable, net
|
|
|
42,828
|
|
|
|
39,957
|
|
|
|
40,833
|
|
Inventory, net
|
|
|
8,298
|
|
|
|
6,868
|
|
|
|
14,849
|
|
Prepaid expenses and other current assets
|
|
|
11,398
|
|
|
|
17,326
|
|
|
|
15,878
|
|
Total current assets
|
|
|
66,584
|
|
|
|
83,403
|
|
|
|
88,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
75,786
|
|
|
|
73,006
|
|
|
|
73,725
|
|
Software development costs, net
|
|
|
30,463
|
|
|
|
21,771
|
|
|
|
20,473
|
|
Other acquired intangible assets subject to amortization, net
|
|
|
21,343
|
|
|
|
27,672
|
|
|
|
32,090
|
|
Goodwill
|
|
|
99,150
|
|
|
|
106,196
|
|
|
|
104,905
|
|
Total assets
|
|
|
293,326
|
|
|
|
312,048
|
|
|
|
319,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
26,823
|
|
|
|
9,526
|
|
|
|
23,063
|
|
Accrued expenses
|
|
|
21,468
|
|
|
|
12,541
|
|
|
|
10,099
|
|
Corporate tax and other current taxes payable
|
|
|
6,353
|
|
|
|
7,491
|
|
|
|
6,980
|
|
Deferred revenue, current
|
|
|
10,424
|
|
|
|
12,180
|
|
|
|
16,414
|
|
Other current liabilities
|
|
|
6,611
|
|
|
|
12,958
|
|
|
|
8,660
|
|
Current portion of long-term debt
|
|
|
131
|
|
|
|
127
|
|
|
|
188
|
|
Total current liabilities
|
|
|
71,810
|
|
|
|
54,823
|
|
|
|
65,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
422,385
|
|
|
|
405,853
|
|
|
|
329,851
|
|
Deferred revenue, net of current portion
|
|
|
20,847
|
|
|
|
20,044
|
|
|
|
20,229
|
|
Other long-term liabilities
|
|
|
6,193
|
|
|
|
6,296
|
|
|
|
1,765
|
|
Total liabilities
|
|
|
521,235
|
|
|
|
487,016
|
|
|
|
417,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
165
|
|
|
|
165
|
|
|
|
165
|
|
Additional paid in capital
|
|
|
450
|
|
|
|
450
|
|
|
|
450
|
|
Accumulated other comprehensive loss
|
|
|
(10,957
|
)
|
|
|
(18,554
|
)
|
|
|
(9,432
|
)
|
Accumulated deficit
|
|
|
(217,567
|
)
|
|
|
(157,029
|
)
|
|
|
(88,479
|
)
|
Total stockholders' deficit
|
|
|
(227,909
|
)
|
|
|
(174,968
|
)
|
|
|
(97,296
|
)
|
Total liabilities and stockholders'
deficit
|
|
|
293,326
|
|
|
|
312,048
|
|
|
|
319,953
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
DMWSL 633 LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
|
|
For the period ended
|
|
|
|
September 26,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service *
|
|
|
115,325
|
|
|
|
120,868
|
|
|
|
104,159
|
|
Hardware *
|
|
|
12,248
|
|
|
|
25,930
|
|
|
|
10,322
|
|
Total revenue
|
|
|
127,573
|
|
|
|
146,798
|
|
|
|
114,481
|
|
Cost of sales, excluding depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service *
|
|
|
(16,481
|
)
|
|
|
(16,642
|
)
|
|
|
(15,669
|
)
|
Cost of hardware *
|
|
|
(7,746
|
)
|
|
|
(33,496
|
)
|
|
|
(6,281
|
)
|
Selling, general and administrative expenses
|
|
|
(65,229
|
)
|
|
|
(66,940
|
)
|
|
|
(59,303
|
)
|
Depreciation and amortization
|
|
|
(40,077
|
)
|
|
|
(43,207
|
)
|
|
|
(35,483
|
)
|
Net operating loss
|
|
|
(1,960
|
)
|
|
|
(13,487
|
)
|
|
|
(2,255
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
646
|
|
|
|
474
|
|
|
|
21
|
|
Interest expense
|
|
|
(58,100
|
)
|
|
|
(56,106
|
)
|
|
|
(45,785
|
)
|
Other finance income/(costs)
|
|
|
(153
|
)
|
|
|
271
|
|
|
|
13
|
|
Income/(loss) from equity method investee
|
|
|
(340
|
)
|
|
|
606
|
|
|
|
(1,054
|
)
|
Total other expense, net
|
|
|
(57,947
|
)
|
|
|
(54,755
|
)
|
|
|
(46,805
|
)
|
Net loss from continuing operations before income taxes
|
|
|
(59,907
|
)
|
|
|
(68,242
|
)
|
|
|
(49,060
|
)
|
Income tax expense
|
|
|
(631
|
)
|
|
|
(308
|
)
|
|
|
(367
|
)
|
Net loss from continuing operations
|
|
|
(60,538
|
)
|
|
|
(68,550
|
)
|
|
|
(49,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,307
|
)
|
Gain on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
10,081
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(60,538
|
)
|
|
|
(68,550
|
)
|
|
|
(41,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain/(loss), net
|
|
|
11,547
|
|
|
|
(383
|
)
|
|
|
(2,028
|
)
|
Actuarial losses on pension plan, net of tax
|
|
|
(3,950
|
)
|
|
|
(8,739
|
)
|
|
|
(2,637
|
)
|
Other comprehensive loss
|
|
|
7,597
|
|
|
|
(9,122
|
)
|
|
|
(4,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(52,941
|
)
|
|
|
(77,672
|
)
|
|
|
(46,318
|
)
|
* Revenue and cost of sales, excluding depreciation and
amortization, have been revised to present service and hardware components of revenue separately as described in Note 1,
Amendment
of Financial Statements
.
The accompanying notes are an integral
part of these consolidated financial statements.
DMWSL 633 LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
DEFICIT
|
|
Common
stock
|
|
|
Additional
paid
in
capital
|
|
|
Accumulated
Other
Comprehensive
loss
|
|
|
Accumulated
deficit
|
|
|
Total
stockholders'
deficit
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as at September 29, 2012
|
|
|
165
|
|
|
|
450
|
|
|
|
(4,767
|
)
|
|
|
(46,826
|
)
|
|
|
(50,978
|
)
|
Foreign currency translation adjustments, net
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,028
|
)
|
|
|
-
|
|
|
|
(2,028
|
)
|
Actuarial losses on pension plan, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,637
|
)
|
|
|
-
|
|
|
|
(2,637
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(41,653
|
)
|
|
|
(41,653
|
)
|
Ending Balance as at September 28, 2013
|
|
|
165
|
|
|
|
450
|
|
|
|
(9,432
|
)
|
|
|
(88,479
|
)
|
|
|
(97,296
|
)
|
Foreign currency translation adjustments, net
|
|
|
-
|
|
|
|
-
|
|
|
|
(383
|
)
|
|
|
-
|
|
|
|
(383
|
)
|
Actuarial losses on pension plan, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,739
|
)
|
|
|
-
|
|
|
|
(8,739
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(68,550
|
)
|
|
|
(68,550
|
)
|
Ending Balance as at September 27, 2014
|
|
|
165
|
|
|
|
450
|
|
|
|
(18,554
|
)
|
|
|
(157,029
|
)
|
|
|
(174,968
|
)
|
Foreign currency translation adjustments, net
|
|
|
-
|
|
|
|
-
|
|
|
|
11,547
|
|
|
|
-
|
|
|
|
11,547
|
|
Actuarial losses on pension plan, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,950
|
)
|
|
|
-
|
|
|
|
(3,950
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(60,538
|
)
|
|
|
(60,538
|
)
|
Ending Balance as at September 26, 2015
|
|
|
165
|
|
|
|
450
|
|
|
|
(10,957
|
)
|
|
|
(217,567
|
)
|
|
|
(227,909
|
)
|
The accompanying notes are an integral
part of these consolidated financial statements.
DMWSL 633 LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the period ended
|
|
|
|
September 26,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(60,538
|
)
|
|
|
(68,550
|
)
|
|
|
(41,653
|
)
|
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit on disposal of Leisure Division
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,081
|
)
|
Depreciation and amortization
|
|
|
40,077
|
|
|
|
43,207
|
|
|
|
38,311
|
|
Non-cash interest expense relating to PIK loan notes
|
|
|
41,911
|
|
|
|
34,977
|
|
|
|
31,829
|
|
Deferred income tax expense
|
|
|
(101
|
)
|
|
|
(172
|
)
|
|
|
(2,849
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(9,039
|
)
|
|
|
1,286
|
|
|
|
(14,282
|
)
|
Inventory
|
|
|
(1,937
|
)
|
|
|
8,292
|
|
|
|
(5,709
|
)
|
Prepaid expenses and other assets
|
|
|
5,338
|
|
|
|
(1,116
|
)
|
|
|
887
|
|
Income taxes payable
|
|
|
(1,566
|
)
|
|
|
592
|
|
|
|
(6,077
|
)
|
Accounts payable
|
|
|
1,921
|
|
|
|
1,294
|
|
|
|
(4,914
|
)
|
Other current liabilities
|
|
|
487
|
|
|
|
(364
|
)
|
|
|
213
|
|
Deferred revenues and customer prepayment
|
|
|
(2,103
|
)
|
|
|
(86
|
)
|
|
|
24,343
|
|
Accrued expenses
|
|
|
14,758
|
|
|
|
5,853
|
|
|
|
(15,242
|
)
|
Other long-term liabilities
|
|
|
(3,957
|
)
|
|
|
(3,961
|
)
|
|
|
220
|
|
Net cash provided by/(used in) operating activities
|
|
|
25,251
|
|
|
|
21,252
|
|
|
|
(5,004
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(40,502
|
)
|
|
|
(56,862
|
)
|
|
|
(35,567
|
)
|
Disposals of property and equipment
|
|
|
327
|
|
|
|
3,556
|
|
|
|
2,124
|
|
Proceeds received upon disposition of discontinued operations, net of cash transferred with disposition
and disposal costs
|
|
|
-
|
|
|
|
-
|
|
|
|
25,829
|
|
Cash acquired from joint venture
|
|
|
972
|
|
|
|
-
|
|
|
|
(82)
|
|
Net cash used in investing activities
|
|
|
(39,203
|
)
|
|
|
(53,306
|
)
|
|
|
(7,696
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
-
|
|
|
|
121,177
|
|
|
|
-
|
|
Repayments of long-term debt
|
|
|
(123
|
)
|
|
|
(86,924
|
)
|
|
|
(5,373
|
)
|
Net cash provided by/(used in) financing activities
|
|
|
(123
|
)
|
|
|
34,253
|
|
|
|
(5,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,117
|
)
|
|
|
(147
|
)
|
|
|
(965
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(15,192
|
)
|
|
|
2,052
|
|
|
|
(19,038
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
19,252
|
|
|
|
17,200
|
|
|
|
36,238
|
|
Cash and cash equivalents, end of period
|
|
|
4,060
|
|
|
|
19,252
|
|
|
|
17,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
|
11,515
|
|
|
|
11,500
|
|
|
|
11,334
|
|
Cash paid during the period for income taxes
|
|
|
135
|
|
|
|
222
|
|
|
|
376
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
DMWSL 633
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
1.
|
Nature
of Operations and Summary of Significant Accounting Policies
|
Nature of Operations
DMWSL 633 Limited (the "Company",
the “Group”, "we", "our", and "us") is a global gaming technology company, supplying
Virtual Sports, Mobile and Server Based Gaming (“SBG”) systems to regulated lottery, betting and gaming operators
worldwide. Our strategic focus is the development and sale of SBG software systems and SBG digital terminals.
Basis of Consolidation
The accompanying consolidated financial
statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles ("US
GAAP"). All monetary values set forth in these financial statements are in US Dollars ("USD" or "$")
unless otherwise stated herein. The accompanying consolidated financial statements include the results of the Company and its
wholly owned subsidiaries, as well as those subsidiaries in which we have a controlling financial interest. Investments in other
entities in which we do not have a controlling financial interest but exert significant influence are accounted for in our consolidated
financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in
consolidation.
The financial statement periods presented
represent a 52 week period, which approximates a calendar year end period. The balance sheet date of each fiscal period represents
the Saturday closest to the 30
th
of September. Each 52 week fiscal period presented within these financial statements
and footnotes are herein referred to as a "period".
On February 8, 2013 we completed the sale
of our former leisure division as discussed in Note 2 (Discontinued Operations). The results of the discontinued leisure division
for the period ended September 28, 2013 are presented herein in accordance with ASC 205-20 Presentation of Financial Statements
– Discontinued Operations. There were no results of operations for the leisure division for the periods ended September
26, 2015 and September 27, 2014.
Amendment of Financial Statements
In connection with the inclusion of
these financial statements in the Preliminary Proxy Statement on Schedule 14A to be filed by Hydra Industries Acquisition Corp
with the Securities Exchange Commission, the following amendments to disclosures in the consolidated financial statements have
been made for the purposes of complying with the disclosure requirements of Regulation S-X : i) On the Consolidated Statement
of Operations and Comprehensive Loss we have now presented hardware and service revenues and related costs of sales separately
and we have removed the Gross profit subtotal and relabeled Cost of sales to “Cost of sales, excluding depreciation and
amortization”; ii) We have provided details of research and development costs incurred in Note 1; and iii) We have provided
segmental information in Note 3. We have also provided other additional footnote disclosures and made other amendments which are
considered to be minor in nature. We have also evaluated subsequent events through the date these revised financial statements
were available to be issued as described in Note 22.
These changes had
no impact on the Company's operating results or financial condition for the periods affected.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Amendment of Financial Statements
(continued)
The following tables present the effects
of such revisions on the Company’s previously reported financial statements as of and for the period ended September 26,
2015:
Consolidated Statements of Operations and Comprehensive
Loss
Revenue:
|
|
As reported
|
|
As amended
|
|
Service
|
|
Not disclosed
|
|
|
115,325
|
|
Hardware
|
|
Not disclosed
|
|
|
12,248
|
|
Total revenue
|
|
127,573
|
|
|
127,573
|
|
Cost of sales, excluding depreciation and amortization:
|
|
|
|
|
|
|
Cost of service
|
|
Not disclosed
|
|
|
(16,481
|
)
|
Cost of hardware
|
|
Not disclosed
|
|
|
(7,746
|
)
|
Total cost of sales
|
|
(24,227
|
)
|
|
Not
applicable
|
|
The following tables present the effects
of such revisions on the Company’s previously reported financial statements as of and for the period ended September 27,
2014:
Consolidated Statements of Operations and Comprehensive
Loss
Revenue:
|
|
As reported
|
|
As amended
|
|
Service
|
|
Not disclosed
|
|
|
120,868
|
|
Hardware
|
|
Not disclosed
|
|
|
25,930
|
|
Total revenue
|
|
146,798
|
|
|
146,798
|
|
Cost of sales, excluding depreciation and amortization:
|
|
|
|
|
|
|
Cost of service
|
|
Not disclosed
|
|
|
(16,642
|
)
|
Cost of hardware
|
|
Not disclosed
|
|
|
(33,496
|
)
|
Total cost of sales
|
|
(50,138
|
)
|
|
Not
applicable
|
|
The following tables present the effects
of such revisions on the Company’s previously reported financial statements as of and for the period ended September 28,
2013:
Consolidated Statements of Operations and Comprehensive
Loss
Revenue:
|
|
As reported
|
|
As amended
|
|
Service
|
|
Not disclosed
|
|
|
104,159
|
|
Hardware
|
|
Not disclosed
|
|
|
10,322
|
|
Total revenue
|
|
114,481
|
|
|
114,481
|
|
Cost of sales, excluding depreciation and amortization:
|
|
|
|
|
|
|
Cost of service
|
|
Not disclosed
|
|
|
(15,669
|
)
|
Cost of hardware
|
|
Not disclosed
|
|
|
(6,281
|
)
|
Total cost of sales
|
|
(21,950
|
)
|
|
Not
applicable
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Going Concern
At September 26, 2015, the group had net
liabilities of $227,909,000, primarily as a result of shareholder loans and interest thereon. On completion of the acquisition
described in Note 21 by Hydra Industries Acquisition Corp, a pre-agreed rollover of the senior bank debt principal and the revolving
credit facility becomes effective. This agreement extends the existing facilities by 2 years to September 30, 2019, on similar
terms with a reset of covenant headroom. In the event of non-completion management would seek to negotiate a similar extension
of terms. In either scenario, the directors’ believe that the company has adequate financial resources to meet its
liabilities as they fall due and hence all financial statements have been prepared on a going concern basis.
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates, including those
related to the revenue recognition for contracts involving software and non-software elements, allowance for doubtful accounts,
goodwill and intangible assets, useful lives of long-lived assets, stock-based compensation, valuation allowances, commitments
and contingencies and litigation, among others. Management bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. We regularly evaluate these significant factors and make adjustments
when facts and circumstances dictate. Actual results may differ from these estimates.
Revenue Recognition
We derive revenue principally from the
sale and rental of our Server Based Gaming (“SBG”) terminals and related services, including content provision and
servicing, to regulated retail betting outlets, casinos and other gaming operators, and licensing of our Virtual Sports gaming
software and related services to regulated virtual sports retail, mobile and online operators. We evaluate the recognition of
revenue based on the criteria set forth in ASC 605, Revenue Recognition ("ASC 605") and ASC 985-605, Software-Revenue
Recognition ("ASC 985"). Revenue is recognized when all of the following criteria are met:
1. Persuasive evidence of an arrangement
exists
2. The price to the customer is fixed
or determinable
3. Delivery has occurred, title has
been transferred, and any acceptance terms have been fulfilled; and
4. Collectability is probable
For our multiple-deliverable arrangements
which include hardware containing software that functions together with the hardware to deliver its essential functionality and
undelivered non-software services, deliverables are separated into more than one unit of accounting when: (i) the delivered element(s)
have value to the customer on a stand-alone basis and (ii) delivery of the undelivered element(s) is probable and substantially
in the control of the company. When the final undelivered element(s) are non-software services and non-hardware, those deliverables
are recognized on a ratable basis over the remaining term of the arrangement.
We determine the relative selling price for deliverables in
the scope of ASC 605 based on the following selling price hierarchy:
1. Vendor
specific objective evidence ("VSOE"), (i.e., the price we charge when the product or service is sold separately) if
available,
2. Third-party
evidence (“TPE”) of fair value (i.e., the price charged by others for similar products and services) if VSOE is not
available,
3. or
our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.
Our multiple-deliverable arrangements
may also contain one or more software deliverables in the scope of ASC 985-605. The revenue for these multiple-deliverable arrangements
is allocated to the software deliverables and the non-software deliverables based on the relative selling prices of all of the
deliverables in the arrangement using the fair value hierarchy outlined above. In circumstances where the Company cannot determine
VSOE or TPE of the selling price for any of the deliverables in the arrangement, BESP is used for the purpose of allocating the
arrangement consideration between software and non-software deliverable.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Revenue Recognition (continued)
Revenue is allocated to the software deliverables
based on the relative fair value of each element, and fair value is determined using VSOE. Where VSOE does not exist for the undelivered
software element, revenue is deferred until either the undelivered element is delivered or VSOE is established, whichever occurs
first. When the final undelivered software element is services, the related revenue is recognized on a ratable basis over the
remaining service period. When VSOE of a delivered element has not been established, but VSOE exists for the undelivered elements,
the Company uses the residual method to recognize revenue when the fair value of all undelivered elements is determinable. Under
the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement consideration
is allocated to the delivered elements and is recognized as revenue.
In addition to the general policies, the
following are the specific revenue recognition policies for our revenue streams.
Server Based Gaming
Revenue from SBG terminals, access
to our content and SBG platform, including electronic table gaming products is recognized in accordance with the criteria set
forth in ASC 605 and is usually based upon a contracted percentage of the operator’s net winnings from the terminals’
daily use. Where this is not the case, revenue is based upon a fixed daily or weekly rental fee. We recognize revenue from these
arrangements on a daily basis over the term of the arrangement, or when not specified over the expected customer relationship
period. Performance obligations under these arrangements may include the delivery and installation of our SBG terminals for use
over a term, as well as service obligations related to hardware repairs and server based content and maintenance.
We sometimes bill for SBG arrangements
up front in order to help fund our working capital and development requirements, or at the request of a customer. Upfront fees
on SBG arrangements are deferred and recognized on a straight-line basis over the term of the arrangement or when not specified
over the expected customer relationship period. Hardware sales take the form of a transfer of ownership of our developed gaming
terminals, and are recognized upon delivery as they have value to our customers on a stand-alone basis.
Virtual Sports
Revenue from licensing of our gaming
software is recognized in accordance with the criteria set forth in ASC 985-605. Virtual sports retail revenue, which includes
the provision of virtual sports content and services to retail betting outlets, and virtual sports online and mobile revenue,
which includes the provision of virtual sports content and services to mobile and online operators, is based upon a contracted
percentage of the operator’s net winnings or a fixed rental fee. We recognize revenue for these fees on a daily or weekly
basis over the term of the arrangement. These arrangements typically include a perpetual license billed up front, granted to the
customer for access to our gaming platform and content. As we do not have VSOE for the undelivered elements in virtual sports
arrangements, revenue from the licensing of perpetual licenses is recognized on a straight-line basis over the term of the arrangement,
or when not specified, over the expected customer relationship period.
Revenue from the development of bespoke
games licensed on a perpetual basis to mobile and online operators is recognized on delivery and acceptance by the customer. We
have no ongoing service obligations subsequent to customer acceptance of our bespoke games.
Deferred Revenue and Deferred
Cost of Sales, excluding depreciation and amortization
Deferred revenue arises from the timing
differences between the shipment or installation of gaming terminals and systems products and the satisfaction of all revenue
recognition criteria consistent with our revenue recognition policy, as well as prepayment of contracts which are recognized ratably
over a service period, such as maintenance or licensing fees. Deferred cost of sales, excluding depreciation and amortization
consists of the direct costs associated with the manufacture of gaming equipment and systems products for which revenue has been
deferred. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as
deferred revenue in current liabilities. Amounts not expected to be recognized as revenue within the 12 months following the balance
sheet date are classified as deferred revenue, less current portion.
DMWSL 633 LIMITED
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Software Development Costs
We classify software development costs
as either internal use software or external use software. We account for costs incurred to develop internal use software in accordance
with ASC 350-40, Internal Use Software. Consequently, any costs incurred during preliminary project stages are expensed; direct
costs incurred during the application development stages are capitalized; and costs incurred during the post-implementation/operation
stages are expensed. Once the software is placed in operation, we amortize the capitalized internal use software cost over its
estimated economic useful life, which range from two to five years.
We purchase, license and incur costs to
develop external use software to be used in the products we sell or provide to customers. Such costs are capitalized under ASC
985-20, Costs of Software to Be Sold Leased or Marketed. Costs incurred in creating software are expensed when incurred as Selling,
General and Administrative Expenses until technological feasibility has been established, after which costs are capitalized up
to the date the software is available for general release to customers. We capitalize the payments made for software that we purchase
or license for use in our products that has previously met the technological feasibility criteria prior to our purchase or license.
Annual amortization of capitalized external use software development costs is recorded over the estimated economic life, which
is two to five years.
Research and development costs are
expensed as incurred. Research and development related primarily to software product development costs is expensed until technological
feasibility has been established. Research and development costs amounting to $1,203,000, $2,377,000 and $3,849,000 were expensed
during the periods to September 28, 2013, September 27, 2014 and September 26, 2015, respectively. Employee related costs associated
with related product development are included in Selling, General and Administrative Expenses in the Consolidated Statement of
Operations and Comprehensive Loss.
Cash and Cash Equivalents
Cash and cash equivalents include cash
and short-term highly liquid investments with remaining maturities of three months or less when purchased. Cash and cash equivalents
are stated at cost which approximates fair value. We deposit cash and cash equivalents with financial institutions that management
believes are of high credit quality.
Accounts Receivable
Accounts receivable are recorded at the
invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit
losses in our existing accounts receivable. Changes in circumstances relating to the collectability of accounts receivable may
result in the need to increase or decrease our allowance for doubtful accounts in the future. We determine the allowance based
on historical experience, current market trends, and our customers' financial condition. We continually review our allowance for
doubtful accounts. Past due balances and other higher risk amounts are reviewed individually for collectability. Account balances
are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered
remote.
Under certain contracts, the timing of
our invoices does not coincide with revenue recognized under the contract. We have unbilled accounts receivable which represent
revenue recorded in excess of amounts invoiced under the contract and generally become billable at contractually specified dates.
These amounts consist primarily of revenue from our share of net winnings earned on a daily basis where the billing period does
not fall on the last day of the period. We had $14,307,000, $7,499,000 and $6,523,000 of unbilled accounts receivable as of September
26, 2015, September 27, 2014, and September 28, 2013, respectively.
Our standard credit terms are net 30 to
60 days. From time to time, we allow for certain digital customers to pay on an enhanced revenue share basis for the software
license whereby the customer pays an incremental revenue share percentage over a specific period of time. We consider these types
of arrangements to be extended payment terms as the full consideration for the arrangement may not be received until several years
after the date of the sale depending on the net winnings from the game or application. We evaluate the payment terms of the arrangement
at the outset in order to determine if collectability is reasonably assured and defer revenue on enhanced revenue shares in cases
where this is not met. For additional information on notes receivables, see Note 3 (Accounts Receivable, Notes Receivable, Allowance
for Doubtful Accounts and Bad Debt).
Inventories
Inventories consist primarily of component
parts and related parts used in gaming terminals. Inventories are stated at the lower of cost or net realizable value, using the
weighted average cost method. We determine the lower of cost or market value of our inventory based on estimates of potentially
excess and obsolete inventories after considering historical and forecasted demand and average selling prices. However, forecasts
are subject to revisions, cancellations and rescheduling. Cost includes all direct costs and an appropriate proportion of fixed
and variable overheads.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
We have established a reserve for excess
and obsolete inventory. Demand for gaming terminals and parts inventory is also subject to technological obsolescence.
Equity Method Investments
Investee companies that are not consolidated,
but over which we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise
significant influence with respect to an investee depends on an evaluation of several factors including, representation on the
investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities
of the investee company. Under the equity method of accounting, an investee company’s accounts are not reflected within
our Consolidated Balance Sheets and Statements of Operations and Comprehensive Loss; however, our share of the earnings or losses
of the investee company is reflected in other income (loss) in the Consolidated Statements of Operations and Comprehensive Loss.
Our carrying value in an equity method investee company is reflected in Other Current Liabilities in our Consolidated Balance
Sheets.
When our carrying value in an equity method
investee company is reduced to zero, no further losses are recorded in our consolidated financial statements unless we have guaranteed
obligations of the investee company or we have committed additional funding. In this instance, when the investee company subsequently
reports income, we will not record its share of such income until it equals the amount of its share of losses not previously recognized.
Property and Equipment
Property and equipment are recorded at
cost, and when placed into service, depreciated to their residual values using the straight-line method over the estimated useful
lives of the related assets as follows:
Short-term
leasehold property
|
life
of the lease
|
Server based gaming
terminals ("SBG's")
|
4 – 6 years
|
Motor Vehicles
|
3 – 5 years
|
Plant and machinery
and fixtures and fittings
|
4
– 8 years
|
Computer equipment
|
3
– 5 years
|
Our policy is to periodically review the
estimated useful lives of our fixed assets. We also assess the recoverability of long-lived assets (or asset groups) whenever
events or changes in circumstances indicate that the carrying amount of such an asset (or asset groups) may not be recoverable.
Repairs and maintenance costs are expensed as incurred. Upon
retirement or sale, the cost of assets disposed and the related accumulated depreciation are written off and any resulting gain
or loss is credited or charged to income.
Goodwill and Other Acquired Intangible
Assets
Our primary acquired intangible assets
relate to goodwill, trademarks and customer relationships. Goodwill represents the excess purchase price over the fair value of
the identifiable net assets acquired in a business combination. Trademarks and customer relationships were originally recorded
at their fair values in connection with business combinations.
Goodwill and other intangible assets with
indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible assets with finite
lives are amortized on a straight line basis over three to ten years to their estimated residual values, and reviewed for impairment.
Factors considered when assigning useful lives include legal, regulatory and contractual provisions, product obsolescence, demand,
competition and other economic factors.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Impairment of Goodwill and Property
and Equipment
We test for goodwill impairment at the
reporting unit level at least annually on the last day of our fiscal period as of September 26, 2015, September 27, 2014, and
September 28, 2013 and whenever other facts and circumstances indicate that the carrying value may not be recoverable. For goodwill
impairment evaluations, we first make a qualitative assessment to determine if goodwill is likely to be impaired. If it is more-likely-than-not
that a reporting unit's fair value is less than its carrying value, we then compare the fair value of the reporting unit to its
respective carrying amount. A reporting unit is an operating segment or one level below an operating segment (referred to as a
"component"). Our operating segment is deemed to be a reporting unit because the operating segment is comprised of only
a single component. If the fair value of the reporting unit is less than its carrying amount, the amount of the impairment loss,
if any, will be measured by comparing the implied fair value of goodwill to its carrying amount and would be charged to operations
as an impairment loss. For additional information, see Note 6 (Intangibles, net and goodwill).
We assess the recoverability of long-lived
assets and intangible assets with finite useful lives whenever events arise or circumstances change that indicate the carrying
amount of an asset may not be recoverable. Recoverability of long-lived assets (or asset groups) to be held and used is measured
by a comparison of the carrying amount of the asset (or asset group) to the expected net future undiscounted cash flows to be
generated by that asset (or asset group) or, for identifiable intangibles with finite useful lives, by determining whether the
amortization of the intangible asset balance over its remaining life can be recovered through expected net future undiscounted
cash flows. The amount of impairment of other long-lived assets and intangible assets with finite lives is measured by the amount
by which the carrying amount of the asset exceeds the fair market value of the asset.
Derivative Financial Instruments
From time to time we enter into foreign
currency forward contracts which we designate as hedging instruments in order to mitigate the risk associated with cash payments
required to be made in non-functional currencies or to mitigate the risk associated with cash to be received in non-functional
currencies. We record the derivative financial instruments on the balance sheets at their respective fair market values. We do
not apply hedge accounting and make related effectiveness assessments. As a result, changes in fair value in the associated derivative
are recorded in the consolidated statement of operations and comprehensive loss. See Note 13 (Fair Value Measurements) for additional
information.
Shipping and Handling Costs
Shipping and handling costs for products
sales and hardware related to subscription services are included in cost of sales, excluding depreciation and amortization for
all periods presented.
Income Taxes
Income taxes are accounted for under the
asset and liability method. Our provision for income taxes is primarily based on current period income (loss), changes in deferred
tax assets and liabilities and changes in estimates with regard to uncertain tax positions. We estimate current tax expense and
assess temporary differences resulting from differing treatments of items for tax and accounting purposes using enacted tax rates
in effect for each taxing jurisdiction in which we operate for the period in which those temporary differences are expected to
be recovered or settled. These differences result in deferred tax assets and liabilities. Our total deferred tax assets are principally
comprised of net operating loss carry forwards and expense accruals.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Significant management judgment is required
to assess the likelihood that its deferred tax assets will be recovered from future taxable income. In assessing the realizability
of these deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred
tax assets will be realized. Management makes this assessment on a jurisdiction by jurisdiction basis considering the historical
trend of taxable losses, projected future taxable income and the reversal of deferred tax liabilities. As of September 26, 2015,
we had a valuation allowance of $47,166,000 against net deferred tax assets due to uncertainty of realization of these deferred
tax assets.
We evaluate income tax uncertainties,
assess the probability of the ultimate settlement with the applicable taxing authority and records an amount based on that assessment.
Interest and penalties, if any, associated with uncertain tax positions are included in income tax expense.
Foreign Currency Translation
For most of our operations GBP is our
functional currency. We also have significant operations where the local currency is the functional currency, including our operations
in mainland Europe and South America. Assets and liabilities of foreign operations are translated at period-end rates of exchange
and results of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating
the foreign currency financial statements are accumulated as a separate component of accumulated other comprehensive loss in stockholders'
(deficit) equity. Gains or losses resulting from foreign currency transactions are included in other (expense) income, net in
the consolidated statements of operations and comprehensive loss.
Leases
We lease our office facilities under operating
leases. We account for certain operating leases that contain rent escalation provisions, rent abatements and /or lease incentives
by recognizing rent expense on a straight-line basis over the lease term. The difference between the rent paid and the straight-line
rent is recorded as a deferred liability.
Assets acquired under capital leases are
amortized over a lease term which coincides with the estimated useful life of the leased assets. For the purpose of recognizing
the above mentioned lease incentives on a straight-line basis over the term of the lease, we use the date of initial possession
to begin amortization. Lease renewal periods are considered in the determination of the lease term.
Comprehensive Loss
We include and separately classify in
comprehensive loss unrealized gains and losses from our foreign currency translation adjustments, gains or losses associated with
pension or other post-retirement benefits, prior service costs or credits associated with pension or other post-retirement benefits
and transition assets or obligations associated with pension or other post- retirement benefits. See Note 17 (Accumulated Other
Comprehensive (Loss) Income).
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09
“Revenue from Contracts with Customers” which introduces a new revenue recognition model in which an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five step process to
achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process
than are required under existing U.S. GAAP. This ASU also requires disclosures sufficient to enable users to understand the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative
disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs
to obtain or fulfill a contract. The FASB has voted to approve a one-year deferral of the effective date from January 1, 2017
to January 1, 2018, while allowing for early adoption as of January 1, 2017. The new accounting standard is expected to have an
impact on our consolidated financial statements. We are currently evaluating the impact of its adoption on the consolidated financial
statements and related disclosures.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
In June 2014, the FASB issued ASU 2014-12,
Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That
a Performance Target Could Be Achieved after the Requisite Service Period
("ASU 2014-12"), requiring a performance
target which affects vesting and could be achieved after the requisite service period be treated as a performance condition in
accordance with ASC 718, Compensation - Stock Compensation. ASU 2014-12 was effective prospectively for annual periods beginning
after December 15, 2015 with early adoption permitted. We are currently evaluating the impact of its adoption on the consolidated
financial statements and related disclosures.
On April 7, 2015, the FASB issued ASU
2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance
sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt
discount. For public business entities, the standard is effective for financial statements issued for fiscal years beginning after
December 15, 2015, and interim periods within those fiscal years. For all other entities, the standard is effective for financial
statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after
December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The company has
adopted this guidance and has presented debt issuance costs net against the associated debt liabilities in the consolidated balance
sheets presented.
In April
2015, the FASB issued ASU 2015-05,
Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Fees Paid in a Cloud Computing Arrangement
("ASU 2015-05"),
which
provides guidance to customers about how to account for cloud computing arrangements when such arrangements include software licenses.
ASU 2015-11 is effective for reporting periods beginning after December 15, 2015, with early adoption permitted.
The standard may be applied retrospectively or prospectively.
We are currently evaluating the impact of its adoption on
the consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11,
Inventory
(Topic 330) - Simplifying the Measurement of Inventory
("ASU 2015-11"),
which
will require us to measure inventory at the lower of cost or net realizable value, rather than the lower of cost or market.
ASU 2015-11 is effective prospectively for reporting periods beginning after December 15, 2016. As this is the first time we have
prepared consolidated financial statements under US GAAP, we have early adopted the guidance from the inception of the Company.
In November 2015, the FASB issued ASU
2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. The guidance eliminates the current
requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance
sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. As this is the
first time we have prepared consolidated financial statements under US GAAP, we have early adopted the guidance from the inception
of the Company.
In February 2016, the FASB issued ASU
2016-02,
Leases (Topic 842),
to increase transparency and comparability among organizations by reporting lease assets and
lease liabilities, both finance (capital) and operating leases, on the balance sheet and disclosing key information about leasing
arrangements. For public companies, the updated guidance is effective for the financial statements issued for fiscal years beginning
after December 15, 2018 (including interim periods within those fiscal years). Early adoption is permitted. We are currently evaluating
the impact of its adoption on the consolidated financial statements and related disclosures.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Recently Issued Accounting Standards
(continued)
In March
2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09,
Compensation –
Stock Compensation (Topic 718),
to simplify several aspects of the accounting for share-based payment award transactions including:
(a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement
of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim
periods within those annual periods.
We are currently evaluating the impact of its adoption on the consolidated financial
statements and related disclosures.
|
2.
|
Discontinued
Operations
|
On February 8, 2013 we completed the sale
of the trade and assets of our leisure division to Playnation Limited for cash proceeds of $30.8 million resulting in a gain of
approximately $10.1 million, which is reflected as a gain on discontinued operations in our Consolidated Statements of Operations
and Comprehensive Loss for the period ended September 28, 2013. The company had no continuing involvement after the sale of our
leisure business.
Expenses included as discontinued include
only those directly attributable to the specific operations. No apportionment of shared costs has been made.
The revenue and expenses of the discontinued
operations were as follows:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
10,074
|
|
Cost of sales, excluding depreciation and amortization
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,466
|
)
|
Depreciation and amortization
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,537
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,307
|
)
|
For the 2014 and 2015 financial periods
there were no revenues or expenses classified as discontinued operations.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Operating segments are identified as
components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating
decision-maker in making decisions regarding resource allocation and assessing performance. After considering how the Company
manages its business activities, we have concluded that we operate in one operating segment.
Geographic Information
Geographic information for revenue
is set forth below:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
Total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
UK
|
|
|
95,760
|
|
|
|
118,757
|
|
|
|
92,227
|
|
Italy
|
|
|
20,674
|
|
|
|
20,270
|
|
|
|
15,675
|
|
Rest of world
|
|
|
11,139
|
|
|
|
7,771
|
|
|
|
6,579
|
|
Total
|
|
|
127,573
|
|
|
|
146,798
|
|
|
|
114,481
|
|
Geographic information of our non-current
assets excluding goodwill is set forth below:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
Total non-current assets excluding goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
UK
|
|
|
93,885
|
|
|
|
97,999
|
|
|
|
92,052
|
|
Italy
|
|
|
15,915
|
|
|
|
16,144
|
|
|
|
23,996
|
|
Rest of world
|
|
|
17,792
|
|
|
|
8,306
|
|
|
|
10,240
|
|
Total
|
|
|
127,592
|
|
|
|
122,449
|
|
|
|
126,288
|
|
Software development costs are included
as attributable to the market in which they are utilized.
Customer Information
Revenues from one customer represent
approximately 28.15%, 30.97%, and 34.31% of our total revenues in the periods ended September 26, 2015, September 27, 2014 and
September 28, 2013, respectively. Revenues from a second customer represent approximately 10.11%, 21.60%, and 10.97% of our total
revenues in the periods ended September 26, 2015, September 27, 2014 and September 28, 2013, respectively. There were no revenues
greater than 10% derived from any other customer in any of the periods presented in these financial statements.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
3.
|
Segmental Reporting
(continued)
|
Revenue by Major Category
Our revenue by major category is set
forth below:
Period ended September 26, 2015
|
|
Server Based
Gaming
|
|
|
Virtual Sports
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
88,138
|
|
|
|
27,187
|
|
|
|
115,325
|
|
Hardware
|
|
|
12,248
|
|
|
|
-
|
|
|
|
12,248
|
|
Total revenue
|
|
|
100,386
|
|
|
|
27,187
|
|
|
|
127,573
|
|
Period ended September 27, 2014
|
|
Server Based
Gaming
|
|
|
Virtual Sports
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
95,325
|
|
|
|
25,543
|
|
|
|
120,868
|
|
Hardware
|
|
|
25,930
|
|
|
|
-
|
|
|
|
25,930
|
|
Total revenue
|
|
|
121,255
|
|
|
|
25,543
|
|
|
|
146,798
|
|
Period ended September 28, 2013
|
|
Server Based
Gaming
|
|
|
Virtual Sports
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
91,706
|
|
|
|
12,453
|
|
|
|
104,159
|
|
Hardware
|
|
|
10,322
|
|
|
|
-
|
|
|
|
10,322
|
|
Total revenue
|
|
|
102,028
|
|
|
|
12,453
|
|
|
|
114,481
|
|
Accounts receivable consist of the following:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
43,629
|
|
|
|
40,205
|
|
|
|
41,105
|
|
Other receivables
|
|
|
157
|
|
|
|
596
|
|
|
|
328
|
|
Allowance for doubtful accounts
|
|
|
(958
|
)
|
|
|
(844
|
)
|
|
|
(600
|
)
|
Total accounts receivable, net
|
|
|
42,828
|
|
|
|
39,957
|
|
|
|
40,833
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Changes in the allowance for doubtful
accounts are as follows:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(844
|
)
|
|
|
(600
|
)
|
|
|
(799
|
)
|
Recognition of bad debt expense
|
|
|
(590
|
)
|
|
|
(1,188
|
)
|
|
|
(214
|
)
|
Recoveries
|
|
|
47
|
|
|
|
547
|
|
|
|
136
|
|
Write offs
|
|
|
373
|
|
|
|
404
|
|
|
|
277
|
|
Foreign currency translation adjustments
|
|
|
56
|
|
|
|
(7
|
)
|
|
|
-
|
|
Ending balance
|
|
|
(958
|
)
|
|
|
(844
|
)
|
|
|
(600
|
)
|
Inventory consists of the following:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Component parts
|
|
|
6,584
|
|
|
|
6,264
|
|
|
|
14,143
|
|
Finished goods
|
|
|
1,714
|
|
|
|
604
|
|
|
|
706
|
|
Total inventories
|
|
|
8,298
|
|
|
|
6,868
|
|
|
|
14,849
|
|
Component parts include parts for gaming
terminals, net of allowance for excess and obsolete parts. Our finished goods inventory primarily consists of gaming terminals
which are ready for sale.
|
6.
|
Property
and Equipment
|
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Short-term leasehold property
|
|
|
618
|
|
|
|
661
|
|
|
|
653
|
|
Video lottery terminals
|
|
|
142,462
|
|
|
|
139,851
|
|
|
|
154,026
|
|
Computer equipment
|
|
|
8,302
|
|
|
|
8,964
|
|
|
|
30,580
|
|
Motor vehicles
|
|
|
-
|
|
|
|
14
|
|
|
|
15
|
|
Plant and machinery
|
|
|
1,866
|
|
|
|
2,384
|
|
|
|
2,274
|
|
|
|
|
153,248
|
|
|
|
151,874
|
|
|
|
187,548
|
|
Less: accumulated depreciation
|
|
|
(77,462
|
)
|
|
|
(78,868
|
)
|
|
|
(113,823
|
)
|
|
|
|
75,786
|
|
|
|
73,006
|
|
|
|
73,725
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Depreciation expense for the periods ended
September 26, 2015, September 27, 2014 and September 28, 2013 was $27.3 million, $30.3 million and $25.0 million, respectively.
Cost of equipment associated with specific contracts and internal use software projects are recorded as assets in the course of
construction (a subsection of video lottery terminals) and not depreciated until placed in service. When the equipment is placed
into service, the related costs are transferred from assets in the course of construction to video lottery terminals, and we commence
depreciation. Depreciation expense is separately included within depreciation and amortization expense on the Consolidated Statements
of Operations and Comprehensive Loss.
The following tables present certain information
regarding our intangible assets. Amortizable intangible assets are being amortized on a straight-line basis over their estimated
useful lives with no estimated residual values, which materially approximates the expected pattern of use.
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
24,228
|
|
|
|
25,950
|
|
|
|
25,635
|
|
Customer relationships
|
|
|
20,706
|
|
|
|
22,177
|
|
|
|
21,907
|
|
|
|
|
44,934
|
|
|
|
48,127
|
|
|
|
47,542
|
|
Less: accumulated amortization
|
|
|
(23,591
|
)
|
|
|
(20,455
|
)
|
|
|
(15,452
|
)
|
|
|
|
21,343
|
|
|
|
27,672
|
|
|
|
32,090
|
|
The aggregate intangible asset amortization
expense for the periods ended September 26, 2015, September 27, 2014 and September 28, 2013 was $4,581,000, $4,890,000 and $4,631,000,
respectively. The estimated intangible asset amortization expense for the period ending September 24, 2016 and each of the subsequent
four periods is $4,493,000 per annum.
Goodwill
The table below reconciles the change
in the carrying amount of goodwill, for the period from September 29, 2012 to September 26, 2015.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
|
$ '000
|
|
|
|
|
|
Beginning balance at September 29, 2012
|
|
|
105,929
|
|
Additions
|
|
|
-
|
|
Impairment
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
(1,024
|
)
|
Ending balance at September 28, 2013
|
|
|
104,905
|
|
Additions
|
|
|
-
|
|
Impairment
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
1,291
|
|
Ending balance at September 27, 2014
|
|
|
106,196
|
|
Additions
|
|
|
1,043
|
|
Impairment
|
|
|
(1,043
|
)
|
Foreign currency translation adjustments
|
|
|
(7,046
|
)
|
Ending balance at September 26, 2015
|
|
|
99,150
|
|
|
8.
|
Software
Development Costs, net
|
Software development costs, net consisted
of the following:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Software development costs
|
|
|
70,669
|
|
|
|
57,206
|
|
|
|
47,173
|
|
Less: accumulated depreciation
|
|
|
(40,206
|
)
|
|
|
(35,435
|
)
|
|
|
(26,700
|
)
|
|
|
|
30,463
|
|
|
|
21,771
|
|
|
|
20,473
|
|
In the periods ended September 26,
2015, September 27, 2014 and September 28, 2013 we capitalized $17.8 million, $11.6 million and $9.8 million, respectively, of
software development costs. Amounts above include $1.4 million, $1.0 million and $0.6 million of internal use software at September
26, 2015, September 27, 2014 and September 28, 2013, respectively.
The total amount of software costs
amortized was $6.7 million, $6.9 million and $5.7 million for the periods ended September 26, 2015, September 27, 2014 and September
28, 2013, respectively. The total amount of software costs written down to net realizable value was $0.6 million, $1.1 million
and $0.1 million for the periods ended September 26, 2015, September 27, 2014 and September 28, 2013, respectively. The weighted
average amortization period was 3.4 years, 3.4 years and 3.5 years for the periods ended September 26, 2015, September 27, 2014
and September 28, 2013 respectively. The estimated software amortization expense for the period ending September 24, 2016 and
the subsequent four periods is $8.6 million, $8.7 million, $5.4 million, $4.0 million and $1.5 million per annum, respectively.
|
9.
|
Prepaid
Expenses and Other Assets
|
Prepaid expenses and other assets consist
of the following:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
11,398
|
|
|
|
16,598
|
|
|
|
15,324
|
|
Joint venture loan
|
|
|
-
|
|
|
|
560
|
|
|
|
554
|
|
Foreign exchange contract assets
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
Total prepaid expenses and other assets
|
|
|
11,398
|
|
|
|
17,326
|
|
|
|
15,878
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
The Joint Venture loan is a receivable
that was provided to Merkur Inspired Limited. In December 2014, the company purchased the remaining 50% of shares in the joint
venture and the outstanding balance became an intercompany receivable which is eliminated on consolidation.
Foreign exchange contracts relate to foreign
currency forward agreements where the net balance at period end was in a debit position. Refer to Note 13 for additional information.
Accrued expenses consist of the following:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable - cash
|
|
|
2,945
|
|
|
|
3,027
|
|
|
|
1,822
|
|
Interest payable – payment in kind
|
|
|
377
|
|
|
|
401
|
|
|
|
538
|
|
Asset retirement obligations
|
|
|
616
|
|
|
|
169
|
|
|
|
66
|
|
Accrued corporate cost expenses
|
|
|
1,434
|
|
|
|
2,021
|
|
|
|
1,764
|
|
Direct costs of sales
|
|
|
11,579
|
|
|
|
5,692
|
|
|
|
3,219
|
|
Other creditors
|
|
|
4,517
|
|
|
|
1,231
|
|
|
|
2,690
|
|
|
|
|
21,468
|
|
|
|
12,541
|
|
|
|
10,099
|
|
Other liabilities consist of the following:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Customer prepayments & deposits
|
|
|
6,611
|
|
|
|
10,560
|
|
|
|
5,702
|
|
Share of net liabilities in joint venture
|
|
|
-
|
|
|
|
2,398
|
|
|
|
2,958
|
|
Total other liabilities, current
|
|
|
6,611
|
|
|
|
12,958
|
|
|
|
8,660
|
|
Foreign exchange contract liabilities
|
|
|
321
|
|
|
|
-
|
|
|
|
189
|
|
Provisions for other liabilities & charges
|
|
|
995
|
|
|
|
1,441
|
|
|
|
1,576
|
|
Pension liability
|
|
|
4,877
|
|
|
|
4,855
|
|
|
|
-
|
|
Total other liabilities, long-term
|
|
|
6,193
|
|
|
|
6,296
|
|
|
|
1,765
|
|
|
|
|
12,804
|
|
|
|
19,254
|
|
|
|
10,425
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
Foreign exchange contract liabilities
related to foreign currency forward agreements where the net balance at period end was in a credit position. Refer to Note 13
for additional information.
The company had a 50% share of the equity
of Merkur Inspired Limited. At September 27, 2014 and September 28, 2013, Merkur Inspired Limited was in a net liabilities position.
The joint venture arrangement required us to guarantee the obligations of this company and therefore we recorded our share of
the losses and liabilities. In December 2014, the company purchased the remaining 50% of shares in the joint venture, see note
17 for further information. Goodwill arising is disclosed in note 17.
In the period to September 26, 2015 this
generated additional revenue for the group of $1.7 million, with extra selling and general administrative expenses costs of $1.7
million for the 9 months. This acquisition gave us the ability to take control of the existing customer contracts, control all
future customer negotiations and implement cost reductions.
At September 26, 2015, we were obligated
under operating leases covering office and warehouse space and transportation equipment expiring at various dates. Future minimum
lease payments required under our operating leases at September 26, 2015 were approximately as follows:
|
|
$ '000
|
|
|
|
|
|
2016
|
|
|
1,707
|
|
2017
|
|
|
1,353
|
|
2018
|
|
|
1,326
|
|
2019
|
|
|
1,088
|
|
2020
|
|
|
658
|
|
Thereafter
|
|
|
230
|
|
Rent expense under all operating leases
was $1.4 million, $1.3 million and $1.4 million for the periods ended September 26, 2015, September 27, 2014 and September 28,
2013, respectively.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
12.
|
Operating
Leases
(continued)
|
Some of our operating leases contain provisions
for future rent increases, rent-free periods or periods in which rent payments are reduced. The total amount of rental payments
due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference
between rent expense recorded and the amount paid is credited or charged to deferred rent obligation, which is included in accrued
expenses and other long-term liabilities in the Consolidated Balance Sheets.
|
13.
|
Long
Term and Other Debt
|
Outstanding Debt and Capital Leases
The following reflects outstanding debt
as of the dates indicated below:
|
|
Principal
|
|
|
Unamortized
deferred
financing
charge
|
|
|
Book value,
September 26,
2015
|
|
|
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Senior bank debt
|
|
|
117,573
|
|
|
|
(2,822
|
)
|
|
|
114,751
|
|
PIK loan notes
|
|
|
307,444
|
|
|
|
-
|
|
|
|
307,444
|
|
Capital leases and hire purchase contract
|
|
|
321
|
|
|
|
-
|
|
|
|
321
|
|
Total long-term debt outstanding
|
|
|
425,338
|
|
|
|
(2,822
|
)
|
|
|
422,516
|
|
Less: current portion of long-term debt
|
|
|
(131
|
)
|
|
|
-
|
|
|
|
(131
|
)
|
Long-term debt, excluding current portion
|
|
|
425,207
|
|
|
|
(2,822
|
)
|
|
|
422,385
|
|
The company is in compliance with all relevant covenants and
the long term debt portion is correctly classified as such in line with the underlying agreements.
|
|
Principal
|
|
|
Unamortized
deferred
financing
charge
|
|
|
Book value,
September 27,
2014
|
|
|
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Senior bank debt
|
|
|
120,417
|
|
|
|
(4,518
|
)
|
|
|
115,899
|
|
PIK loan notes
|
|
|
290,772
|
|
|
|
(1,134
|
)
|
|
|
289,638
|
|
Capital leases and hire purchase contract
|
|
|
443
|
|
|
|
-
|
|
|
|
443
|
|
Total long-term debt outstanding
|
|
|
411,632
|
|
|
|
(5,652
|
)
|
|
|
405,980
|
|
Less: current portion of long-term debt
|
|
|
(127
|
)
|
|
|
-
|
|
|
|
(127
|
)
|
Long-term debt, excluding current portion
|
|
|
411,505
|
|
|
|
(5,652
|
)
|
|
|
405,853
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015, September
27, 2014, and September 28, 2013
(in thousands)
|
13.
|
Long
Term and Other Debt
(continued)
|
|
|
Principal
|
|
|
Unamortized
deferred
financing
charge
|
|
|
Book value,
September 28,
2013
|
|
|
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Senior bank debt
|
|
|
81,766
|
|
|
|
(2,768
|
)
|
|
|
78,998
|
|
PIK loan notes
|
|
|
252,659
|
|
|
|
(2,240
|
)
|
|
|
250,419
|
|
Capital Leases and hire purchase contract
|
|
|
622
|
|
|
|
-
|
|
|
|
622
|
|
Total long-term debt outstanding
|
|
|
335,047
|
|
|
|
(5,008
|
)
|
|
|
330,039
|
|
Less: current portion of long-term debt
|
|
|
(188
|
)
|
|
|
-
|
|
|
|
(188
|
)
|
Long-term debt, excluding current portion
|
|
|
334,859
|
|
|
|
(5,008
|
)
|
|
|
329,851
|
|
Debt consists of senior bank debt and
loan notes payable to the owners of Ordinary A shares (referred to as Payment in Kind (“PIK”) Loan Notes).
During 2014, the Company re-financed its
existing senior bank facility of $86.7 million with a new senior bank facility of $121.2 million. During 2014, unamortized senior
bank debt issuances fees of $2.0 million, were written off. The new senior bank facility has a cash interest rate on outstanding
borrowings for this line of credit being the Bank of England’s bank’s base rate plus the base rate margin or LIBOR
rate plus the bank’s LIBOR rate margin. The loan agreement includes a PIK interest rate on the outstanding borrowings that
can be paid for or added to the outstanding debt. Capitalized debt issuance fees of $5.4 million were realized in 2014 with the
issuance of new debt. Note, due to foreign currency translation, these figures are then revised at each Balance Sheet date. The
new senior bank debt is scheduled to mature on September 30, 2017.
The senior bank debt also included a revolving
facility commitment for $28.5 million. The revolver facility has an interest rate on unutilized borrowings of 2%. The line of
credit is scheduled to mature on September 30, 2017, although agreement has been reached to extend this by two years on successful
acquisition as discussed in Note 1 under the caption Going Concern. No revolver had been drawn on any of the period ends, but
an amount of the facility had been utilized in each year for the Duty Deferment guarantee and the company credit card scheme.
The amounts utilized at September 26, 2015, September 27, 2014 and September 28, 2013 amounted to $0.5million, $0.7 million, and
$1.6 million, respectively.
The company also has 13.5% PIK loan
notes payable to a syndicate of investors including parent entities to the group. PIK loan notes have a final repayment date of
July 6, 2018 and receive interest at a rate of 13.5%. This interest is accrued and compounded annually onto the loan notes
on September 30 each year. Loan notes may be transferred between parties but cannot be converted into other options or redeemed
before the final repayment date. At the repayment date, all PIK loan note liabilities are settled by GBP cheque payment.
PIK loan notes are repayable in full upon either a sale or a listing of the group
.
PIK loan notes are held in proportion to Ordinary A shares. PIK loan balance to parent company at September 26, 2015, September
27, 2014 and September 28, 2013 amounted to $261.5 million, $246.9 million, and $214.9 million, respectively.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
13.
|
Long
Term and Other Debt
(continued)
|
Long term debt at September 26, 2015
matures as follows:
Fiscal period
|
|
Senior bank
debt
|
|
|
PIK loan notes
|
|
|
Capital leases
and hire
purchase
contract
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2017
|
|
|
117,573
|
|
|
|
-
|
|
|
|
140
|
|
|
|
117,713
|
|
2018
|
|
|
-
|
|
|
|
307,444
|
|
|
|
40
|
|
|
|
307,484
|
|
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
2020
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
Total
|
|
|
117,573
|
|
|
|
307,444
|
|
|
|
190
|
|
|
|
425,207
|
|
|
14.
|
Fair
Value Measurements
|
Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset and liability in an orderly transaction between market participants at the measurement date. We estimate
the fair value of its assets and liabilities utilizing an established three-level hierarchy. The hierarchy is based upon the transparency
of inputs to the valuation of an asset or liability as of the measurement date as follows:
Level 1: Quoted
prices in active markets for identical assets or liabilities.
Level 2: Observable
inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient
volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable
or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or
liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data,
as well as quoted prices that were adjusted for security-specific restrictions.
Level 3: Unobservable
inputs that are supported by little or no market activity that are significant to the fair value of the asset or liability. Level
3 inputs also include non-binding market consensus prices or non-binding broker quotes that are unable to be corroborated with
observable market data.
The fair value of our financial assets
and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value
of our financial instruments, which are principally cash and cash equivalents, accounts receivable, other current assets, accounts
payable and accrued liabilities, approximates their recorded values.
For each period, derivative financial
instrument assets and liabilities measured at fair value on a recurring basis are included in the financial statements as per
the table below. All amounts are categorized as Level 2.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
14.
|
Fair
Value Measurements
(continued)
|
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
Consolidated Statement of Operations and Comprehensive Loss
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
364
|
|
|
|
-
|
|
Interest expense
|
|
|
(488
|
)
|
|
|
-
|
|
|
|
(212
|
)
|
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
Consolidated Balance Sheets
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
Other long-term liabilities
|
|
|
(321
|
)
|
|
|
-
|
|
|
|
(189
|
)
|
Foreign currency forward contracts
Throughout the period we enter into contracts
to buy and sell foreign currency. These contracts are recorded on the balance sheets at each period end at fair value. These contracts
are typically short term in nature with maturities of six months to a year. We entered into forward contracts to sell Euros and
to purchase USD and the change in fair value of the derivative is recorded within interest income or expense in the Consolidated
Statements of Operations and Comprehensive Loss. For the period ended September 26, 2015, September 27, 2014 and September 28,
2013, we realized interest income or expense of $(0.6) million, $1.5 million, and $0.3 million respectively from changes in the
fair value of the derivative instrument.
|
15.
|
Stockholder's
Deficit
|
Common stock
Common stock consists of four classes
of common shares. There are no shares reserved for future issuance. Common stock balances of shares authorized, issued and outstanding
as of September 26, 2015, September 27, 2014 and September 28, 2013 were as follows:
|
|
Shares
|
|
|
Common Stock
|
|
|
|
each
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
Class A Voting Shares, par value of £0.01
|
|
|
8,750,000
|
|
|
|
132
|
|
Class B Non-voting Shares, par value of £0.01
|
|
|
1,250,000
|
|
|
|
18
|
|
Class B2 Non-voting Shares, par value of £0.75
|
|
|
11,150
|
|
|
|
13
|
|
Class B3 Voting Shares, par value of £0.01
|
|
|
154,500
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,165,650
|
|
|
|
165
|
|
Class A Voting Shares
The holders of Class A common stock are
entitled to receive dividends, when and as declared by the Board of Directors, and to vote on all matters entitled to be voted
on by the stockholders of the Company.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
15.
|
Stockholder's
Deficit
(continued)
|
Class B Non-voting Shares
The holders of Class B common stock have
the same rights on a winding up as the Class A shareholders. The holders of Class B shares have the right to receive 10% of dividends
paid to Class A shareholders.
Class B2 Non-voting Shares
The holders of Class B2 shares will only
participate up to the paid up amount plus a 10% per annum return of such paid up amount upon a winding up.
Class B3 Voting Shares
The holders of Class B3 shares will only
participate up to the paid up amount plus a 10% per annum return of such paid up amount upon a winding up. B3 shares carry 10
votes each on a poll.
Additional paid in capital
Additional paid in capital represents
the excess of amounts paid for common shares over their stated par value. There have been no changes in additional paid in capital
during the periods ended September 26, 2015, September 27, 2014 and September 28, 2013.
Prior to September 29, 2012 we granted
performance-conditioned Class B shares with a grant date fair value of nil and a three-year vesting schedule to certain members
of our management. The shares have an exit date enterprise value target. The shares vest over three years from the date of acquisition
by Vitruvian Partners Ltd. All shares were fully vested at the opening balance sheet date, September 29, 2012. If the enterprise
value is not met on winding up or exit by Vitruvian Partners Ltd, the shares will be worthless. The fair value of the shares is
nil as of September 26, 2015, September 27, 2014, and September 28, 2013, respectively.
We operate a combined scheme which comprises
of a defined benefit section and a defined contribution section.
The defined contribution scheme assets
are held separately from those of the group in an independently administered fund. The pension cost charge represents contributions
payable by the group and amounted to $1,549,000, $1,685,000 and $1,154,000 for the periods ending September 26, 2015, September
27 2014, and September 28 2013, respectively. Contributions totaling $240,000, $259,000 and $200,000 were payable to the fund
as at September 26, 2015, September 27 2014, and September 28 2013, respectively.
The defined benefit section has been closed
to future accruals for services rendered to the company for the entire financial statement periods presented in these consolidated
financial statements. Retirement benefits are generally based on a portion of an employee's pensionable earnings during years
prior to 2010. Our policy is to make contributions according to schedules agreed with the trustee every 3 years after completion
of the triennial valuation undertaken by the scheme’s actuaries. We estimate that $4.1 million will be contributed to the
pension plan in the period ending September 24, 2016.
The trustee has made an allowance for
the pension scheme liability profile when deciding the investment strategy of the pension scheme. Since the pension scheme is
closed to new entrants and ceased future accrual with effect from March 31, 2010 it has continued to mature gradually. Therefore,
the trustee reviews the investment strategy regularly to check whether any changes are needed. When considering the investment
strategy, the trustee has taken into account the effect of any possible increases in the deficit reduction contributions on the
financial position of the company, and the extent to which the company will be able to bear these changes.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
17.
|
Pension
Plan
(continued)
|
The plan investment
policy is to maximize long-term financial return commensurate with security and minimizing risk. This is achieved by holding a
portfolio of marketable investments that avoids over-concentration of investment and spreads assets both over industries and geographies.
In setting investment strategy, the trustees considered the lowest risk strategy that they could adopt in relation to the plan's
liabilities and designed an asset allocation to achieve a higher return while maintaining a cautious approach to meeting the plan's
liabilities. The trustees undertook a review of investment strategy and took advice from their investment advisors. They considered
a full range of asset classes, the risks and rewards of a range of alternative asset allocation strategies, the suitability of
each asset class and the need for appropriate diversification. The current strategy is to hold approximately 30% in a global return
fund, approximately 25% in U.K. equities, approximately 20% in real estate, approximately 16% in non-U.K. equities and approximately
9% in corporate bonds.
Our pension benefit costs are calculated
using various actuarial assumptions and methodologies. These assumptions include discount rates, inflation, expected returns on
plan assets, mortality rates and other factors. The assumptions utilized in recording the obligations under our plans represent
our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance
as well as other factors that might cause future expectations to differ from past trends. Differences in actual experience or
changes in assumptions may affect our pension obligations and future expense. The primary factors contributing to actuarial gains
and losses each year are (1) changes in the discount rate used to value pension benefit obligations as of the measurement date
and (2) differences between the expected and the actual return on plan assets.
The following table sets forth the combined
funded status of the pension plans and their reconciliation to the related amounts recognized in our consolidated financial statements
at our September 26, 2015, September 27, 2014, and September 28, 2013 measurement dates:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
|
100,315
|
|
|
|
101,701
|
|
|
|
83,196
|
|
Interest cost
|
|
|
3,879
|
|
|
|
4,666
|
|
|
|
3,816
|
|
Actuarial (gain) loss
|
|
|
3,585
|
|
|
|
(4,192
|
)
|
|
|
17,924
|
|
Benefits paid
|
|
|
(2,641
|
)
|
|
|
(3,112
|
)
|
|
|
(2,432
|
)
|
Foreign currency translation adjustments
|
|
|
(6,656
|
)
|
|
|
1,252
|
|
|
|
(803
|
)
|
Benefit obligation at end of period
|
|
|
98,482
|
|
|
|
100,315
|
|
|
|
101,701
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
95,460
|
|
|
|
101,869
|
|
|
|
90,937
|
|
Actual gain/(loss) on plan assets
|
|
|
3,245
|
|
|
|
(7,859
|
)
|
|
|
10,294
|
|
Employer contributions
|
|
|
3,876
|
|
|
|
3,309
|
|
|
|
3,948
|
|
Benefits paid
|
|
|
(2,641
|
)
|
|
|
(3,112
|
)
|
|
|
(2,432
|
)
|
Foreign currency translation adjustments
|
|
|
(6,335
|
)
|
|
|
1,253
|
|
|
|
(878
|
)
|
Fair value of assets at end of period
|
|
|
93,605
|
|
|
|
95,460
|
|
|
|
101,869
|
|
Amount recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status (current)
|
|
|
-
|
|
|
|
-
|
|
|
|
168
|
|
Unfunded status (non-current)
|
|
|
(4,877
|
)
|
|
|
(4,855
|
)
|
|
|
-
|
|
Unrecognized surplus
|
|
|
-
|
|
|
|
-
|
|
|
|
(168
|
)
|
Net amount recognized
|
|
|
(4,877
|
)
|
|
|
(4,855
|
)
|
|
|
-
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
17.
|
Pension
Plan
(continued)
|
The following table presents the components
of our net periodic pension benefit cost:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
Components of net periodic pension benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
3,879
|
|
|
|
4,666
|
|
|
|
3,816
|
|
Expected return on plan assets
|
|
|
(3,728
|
)
|
|
|
(4,933
|
)
|
|
|
(3,829
|
)
|
Net periodic cost
|
|
|
151
|
|
|
|
(267
|
)
|
|
|
(13
|
)
|
The accumulated benefit obligation for
all defined benefit pension plans was $98.5 million, $100.3 million and $101.7 million as of as of September 26, 2015, September
27, 2014, and September 28, 2013, respectively. The underfunded status of our defined benefit pension plans recorded as a liability
in our Consolidated Balance Sheets as of September 26, 2015 and September 27, 2014, was $4.9 million and $4.9 million, respectively.
As of September 28, 2013 the plan was not underfunded.
The fair value of the plan assets at September
26, 2015 by asset category is presented below:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
22,340
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,340
|
|
Property funds
|
|
|
-
|
|
|
|
-
|
|
|
|
9,486
|
|
|
|
9,486
|
|
UK Government Bonds
|
|
|
-
|
|
|
|
5,616
|
|
|
|
-
|
|
|
|
5,616
|
|
Corporate Bonds
|
|
|
-
|
|
|
|
14,041
|
|
|
|
-
|
|
|
|
14,041
|
|
Buy-in Contract
|
|
|
-
|
|
|
|
-
|
|
|
|
42,122
|
|
|
|
42,122
|
|
Total
|
|
|
22,340
|
|
|
|
19,657
|
|
|
|
51,608
|
|
|
|
93,605
|
|
The change in fair value of the pension
assets during 2015 valued using significant unobservable inputs (Level 3) is presented below:
|
|
$ '000
|
|
|
|
|
|
Beginning balance at September 27, 2014
|
|
|
53,660
|
|
Purchases
|
|
|
-
|
|
Unrealized loss on asset still held at September 26, 2015
|
|
|
(2,052
|
)
|
Ending balance at September 26, 2015
|
|
|
51,608
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
17.
|
Pension
Plan
(continued)
|
The fair value of the plan assets at September
27, 2014 by asset category is presented below:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
21,755
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,755
|
|
Property funds
|
|
|
-
|
|
|
|
-
|
|
|
|
9,748
|
|
|
|
9,748
|
|
UK Government Bonds
|
|
|
-
|
|
|
|
5,728
|
|
|
|
-
|
|
|
|
5,728
|
|
Corporate Bonds
|
|
|
-
|
|
|
|
14,317
|
|
|
|
-
|
|
|
|
14,317
|
|
Buy-in Contract
|
|
|
-
|
|
|
|
-
|
|
|
|
43,912
|
|
|
|
43,912
|
|
Total
|
|
|
21,755
|
|
|
|
20,045
|
|
|
|
53,660
|
|
|
|
95,460
|
|
The change in fair value of the pension
assets during 2014 valued using significant unobservable inputs (Level 3) is presented below:
|
|
$ '000
|
|
|
|
|
|
Beginning balance at September 28, 2013
|
|
|
9,120
|
|
Purchases
|
|
|
43,594
|
|
Unrealized gain on asset still held at September 27, 2014
|
|
|
946
|
|
Ending balance at September 27, 2014
|
|
|
53,660
|
|
The fair value of the plan assets at September
28, 2013 by asset category is presented below:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
49,964
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,964
|
|
Property funds
|
|
|
-
|
|
|
|
-
|
|
|
|
9,120
|
|
|
|
9,120
|
|
UK Government Bonds
|
|
|
-
|
|
|
|
41,766
|
|
|
|
-
|
|
|
|
41,766
|
|
Cash
|
|
|
1,019
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,019
|
|
Total
|
|
|
50,983
|
|
|
|
41,766
|
|
|
|
9,120
|
|
|
|
101,869
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
17.
|
Pension
Plan
(continued)
|
The table below presents the weighted-average
actuarial assumptions used to determine the benefit obligation and net periodic benefit cost for the Plan.
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.20
|
%
|
|
|
4.60
|
%
|
|
|
4.70
|
%
|
Expected return on assets
|
|
|
4.15
|
%
|
|
|
4.80
|
%
|
|
|
4.24
|
%
|
RPI inflation
|
|
|
3.20
|
%
|
|
|
3.50
|
%
|
|
|
2.80
|
%
|
CPI inflation
|
|
|
2.20
|
%
|
|
|
2.70
|
%
|
|
|
2.00
|
%
|
Pension increases – pre-2006 service
|
|
|
3.10
|
%
|
|
|
3.40
|
%
|
|
|
2.80
|
%
|
Pension increases – post-2006 service
|
|
|
2.20
|
%
|
|
|
2.30
|
%
|
|
|
2.00
|
%
|
The following benefit payments are expected
to be paid:
|
|
$ '000
|
|
|
|
|
|
2016
|
|
|
2,700
|
|
2017
|
|
|
2,790
|
|
2018
|
|
|
2,881
|
|
2019
|
|
|
2,977
|
|
2020
|
|
|
3,074
|
|
Thereafter (5 years from September 2020)
|
|
|
16,965
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
On December 23, 2014, the group purchased
the remaining 50% shares in Merkur Inspired Limited for a total consideration of £1. As part of the transaction, the selling
party agreed to waive payables amounting to $2,430,589. The purchase has been accounted for under the acquisition method, On January
2, 2015, Merkur Inspired Limited changed its name to Inspired Gaming (Italy) Limited.
Assets and liabilities acquired in the acquisition were as
follows:
|
|
Fair value
|
|
|
|
$ '000
|
|
Assets and liabilities acquired
|
|
|
|
|
Property and equipment
|
|
|
39
|
|
Inventory
|
|
|
2
|
|
Accounts receivable, prepaid expenses and other current assets
|
|
|
357
|
|
Cash and cash equivalents
|
|
|
506
|
|
Accounts payable
|
|
|
(712
|
)
|
Accrued expenses
|
|
|
(954
|
)
|
Corporate tax and other current taxes payable
|
|
|
(53
|
)
|
Other current liabilities
|
|
|
(228
|
)
|
Total identifiable net assets assumed
|
|
|
(1,043
|
)
|
Goodwill
|
|
|
1,043
|
|
Total
|
|
|
-
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
19.
|
Accumulated
Other Comprehensive (Loss) Income
|
The accumulated balances for each classification
of comprehensive (loss) income are presented below:
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrecognized
pension
benefit costs
|
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 29, 2012
|
|
|
(51
|
)
|
|
|
4,818
|
|
|
|
4,767
|
|
Change during the period
|
|
|
2,028
|
|
|
|
2,637
|
|
|
|
4,665
|
|
Reclassified into operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at September 28, 2013
|
|
|
1,977
|
|
|
|
7,455
|
|
|
|
9,432
|
|
Change during the period
|
|
|
383
|
|
|
|
8,739
|
|
|
|
9,122
|
|
Reclassified into operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at September 27, 2014
|
|
|
2,360
|
|
|
|
16,194
|
|
|
|
18,554
|
|
Change during the period
|
|
|
(11,547
|
)
|
|
|
3,950
|
|
|
|
(7,597
|
)
|
Reclassified into operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at September 26, 2015
|
|
|
(9,187
|
)
|
|
|
20,144
|
|
|
|
10,957
|
|
The following is income (loss) before
income taxes:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
UK
|
|
|
(57,587
|
)
|
|
|
(69,098
|
)
|
|
|
(40,901
|
)
|
Mainland Europe
|
|
|
(1,610
|
)
|
|
|
1,372
|
|
|
|
179
|
|
South America
|
|
|
(711
|
)
|
|
|
(516
|
)
|
|
|
(564
|
)
|
Total loss before income taxes
|
|
|
(59,908
|
)
|
|
|
(68,242
|
)
|
|
|
(41,286
|
)
|
The income tax expense (benefit) consisted
of the following for the periods ended September 26, 2015, September 27, 2014, and September 28, 2013:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
UK
|
|
|
163
|
|
|
|
86
|
|
|
|
-
|
|
Mainland Europe
|
|
|
395
|
|
|
|
222
|
|
|
|
367
|
|
South America
|
|
|
73
|
|
|
|
-
|
|
|
|
-
|
|
Total current taxes
|
|
|
631
|
|
|
|
308
|
|
|
|
367
|
|
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
20.
|
Income
Taxes
(continued)
|
The net deferred tax assets and liabilities
arising from temporary differences at September 26, 2015, September 27, 2014, and September 28, 2013 are as follows:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
30,103
|
|
|
|
37,817
|
|
|
|
34,963
|
|
Net operating losses
|
|
|
16,560
|
|
|
|
8,447
|
|
|
|
5,086
|
|
Other temporary differences
|
|
|
503
|
|
|
|
529
|
|
|
|
3,145
|
|
Total deferred tax assets, net
|
|
|
47,166
|
|
|
|
46,793
|
|
|
|
43,194
|
|
Valuation allowance balance
|
|
|
(42,898
|
)
|
|
|
(41,259
|
)
|
|
|
(36,776
|
)
|
Net deferred tax assets
|
|
|
4,268
|
|
|
|
5,534
|
|
|
|
6,418
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(4,268
|
)
|
|
|
(5,534
|
)
|
|
|
(6,418
|
)
|
Net deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The differences between the UK statutory
tax rate and our effective rate for the periods ended September 26, 2015, September 27, 2014, and September 28, 2013 are reflected
in the following table:
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
|
|
|
|
|
|
|
|
UK statutory income tax
|
|
|
20.5
|
%
|
|
|
22.0
|
%
|
|
|
23.5
|
%
|
Tax effect of permanent differences
|
|
|
-2.2
|
%
|
|
|
-4.5
|
%
|
|
|
-9.9
|
%
|
Income not taxable
|
|
|
-
|
|
|
|
-
|
|
|
|
6.3
|
%
|
ATCA interest disallowed
|
|
|
-14.7
|
%
|
|
|
-11.1
|
%
|
|
|
-15.9
|
%
|
Movement in provisions
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
-
|
|
Effect of foreign taxes
|
|
|
-0.9
|
%
|
|
|
-0.4
|
%
|
|
|
-
|
|
Tax losses utilized
|
|
|
-
|
|
|
|
1.4
|
%
|
|
|
-
|
|
Valuation allowance
|
|
|
-3.8
|
%
|
|
|
-7.9
|
%
|
|
|
-4.8
|
%
|
Effective income tax rate
|
|
|
-1.0
|
%
|
|
|
-0.5
|
%
|
|
|
-0.8
|
%
|
The valuation allowance on deferred tax
assets has been determined by considering all available evidence, both positive and negative, in order to ascertain whether it
is more likely than not that carried forward deferred tax assets will be realized. Inspired Gaming UK Limited has a total potential
deferred tax asset carried forward of $37,448,000 at September 26, 2015 (forming the majority of the total potential group deferred
tax asset carried forward of $47,166,000). In addition, Gaming Acquisition Limited (a group subsidiary) has a deferred tax asset
of $6,589,000 which relates to non-trade losses carried forward. Information provided by management indicates that current level
of profitability across the group will not be sufficient to obtain relief for these losses in the current period (as has been
done in previous periods). Losses can be carried forward indefinitely.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
|
20.
|
Income
Taxes
(continued)
|
On consideration of the cumulative net
losses in Inspired Gaming UK Limited and Gaming Acquisitions Limited over the three periods ending September 26, 2015, the group
has recorded a full valuation allowance of $42,898,000.
As at September 26, 2015 there are no
liabilities relating to tax penalties and interest and the periods ending September 27, 2014 and September 26, 2015 remain open.
The group is not subject to taxation in
the US. However, foreign tax is applicable in foreign jurisdictions (primarily in Europe), where the total of non-UK taxes payable
for the period ended September 26, 2015 is $467,000. All deferred tax items are attributable to UK operations.
A provision of $46,000 has been included
within current taxes as at September 26, 2015 to reflect an uncertain tax position relating to interest deductions. There are
no similar tax provisions included as at September 27, 2014 or September 28, 2013.
Reductions in the UK corporation tax rate
from 20% to 19% (effective April 1, 2017), and to 18% (effective April 1, 2020) were substantively enacted on October 26, 2015.
This will reduce the group’s future tax charge accordingly.
The group has not recognized deferred
tax liabilities in respect of unremitted earnings that are considered indefinitely reinvested in foreign subsidiaries.
We entered into several agreements with
various service companies in which certain of our current Board members have direct or indirect ownership interests, and, in some
cases, are also directors of these companies.
|
|
|
|
September 26,
2015
|
|
|
September 27,
2014
|
|
|
September 28,
2013
|
|
|
|
|
|
$ '000
|
|
|
$ '000
|
|
|
$ '000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
Inspired
Gaming (Italy) Limited
|
|
Total revenue
|
|
|
394
|
|
|
|
2,478
|
|
|
|
2,587
|
|
Openbet Retail Limited
|
|
Total revenue
|
|
|
2,436
|
|
|
|
2,685
|
|
|
|
2,631
|
|
Loxley Strategic Consulting Limited
|
|
Selling, general and administrative expenses
|
|
|
(223
|
)
|
|
|
-
|
|
|
|
-
|
|
Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inspired
Gaming (Italy) Limited
|
|
Accounts receivable
|
|
|
-
|
|
|
|
4,347
|
|
|
|
3,710
|
|
Openbet Retail Limited
|
|
Accounts receivable
|
|
|
189
|
|
|
|
459
|
|
|
|
209
|
|
Openbet Limited
|
|
Accounts receivable
|
|
|
17
|
|
|
|
49
|
|
|
|
60
|
|
Transactions and balances with Inspired
Gaming (Italy) Limited are disclosed for the period when the company was not a member of the group.
DMWSL 633 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Periods Ended September 26, 2015,
September 27, 2014, and September 28, 2013
(in thousands)
The Company evaluates subsequent events
occurring between the most recent balance sheet date and the date that the financial statements are available to be issued in
order to determine whether the subsequent events are to be recorded and/or disclosed in the Company’s financial statements
and footnotes. We have evaluated subsequent events through September 16, 2016, the date these financial statements were available
to be issued.
A claim from the Performing Rights Society
is ongoing and relates to the alleged infringement of copyrighted material of the Performing Rights Society's members in certain
games on Fixed Odds Betting Terminals in UK Licensed Betting Offices. The Company and the other defendants (who have formed a
litigation club) filed a defense to the claim raised by the Performing Rights Society on December 22, 2015. The parties have mutually
agreed to begin a process of mediation in September 2016. The Company has made a provision in the subsequent period ending April,
9 2016, of $0.4 million, which management believes to be adequate to cover the total net exposure to the Company, including professional
fees.
On July 14, 2016 it was announced that
Hydra Industries Acquisition Corp. (“Hydra”), a special purpose acquisition company listed on the NASDAQ stock exchange,
had entered into a definitive agreement to acquire DMWSL 633 Limited and associated subsidiaries. The proposed transaction has
been unanimously approved by the Boards of Directors of both Hydra and Inspired, and is expected to close in October 2016, subject
to approval by Hydra's shareholders, required regulatory approvals and other customary closing conditions. Immediately after the
closing, Hydra intends to change its name to Inspired Entertainment, Inc.
On completion of the transaction, the
company will receive a cash injection of approximately $6.6million in addition to funds to settle transaction costs for the combined
group of approximately $20.4million, $5.4million of management bonuses, the settlement of $11.4million of PIK interest on senior
debt and the settlement of $2.8million of cash accrued interest. The management bonuses, settlement of PIK interest
and certain other transaction costs are contingent on the completion of the transaction
There were no other subsequent events
or transactions that required recognition or disclosure in the consolidated financial statements.
Hydra Industries Acquisition Corp. (NASDAQ:HDRA)
Historical Stock Chart
From Sep 2024 to Oct 2024
Hydra Industries Acquisition Corp. (NASDAQ:HDRA)
Historical Stock Chart
From Oct 2023 to Oct 2024