Item 2. Management’s Discussion and Analysis
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual future results could differ materially from the historical results discussed below. Factors that
could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section
titled “Risk Factors” included herein and in our annual report on Form 10-K for the fiscal year ended December 31, 2020.
Forward-Looking
Statements
We
make forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
For definitions of the term Forward-Looking Statements, see the definitions provided in the Cautionary Note Regarding Forward-Looking
Statements at the start of the Annual Report on Form 10-K for the year ended December 31, 2020.
COVID-19
Update
Governments
in all of the major jurisdictions in which our land-based customers operate have now reopened land-based venues. As of April 12, 2021,
in the United Kingdom, licensed betting offices in England and Wales have reopened with certain restrictions including operating two
of four gaming machines per venue, limited dwell time of 15 minutes, as well as a maximum of two visits per day per patron and an 8:00pm
curfew. These restrictions remained in place until May 17, 2021. Gaming machines in pubs, holiday parks, motorway services, Scottish
betting offices and adult gaming centers across the United Kingdom reopened on May 17, 2021, with social distancing restrictions in place.
All social distancing restrictions were removed in England as of July 19, 2021. As of August 9, 2021, no restrictions remain in the United
Kingdom. There remains an element of social distancing in venues in Greece and in Italy, there are restrictions in place that state only
fully vaccinated people can enter our venues which came into place in Italy on August 20, 2021, and in Greece on September 13, 2021.
It remains uncertain as to whether and when further restrictions or closures could happen in each jurisdiction and how long they may
last.
Segment
Reporting Recharacterizations
For
full information on this, see Part IV, Item 15 of the Annual Report on Form 10-K for the year ended December 31, 2020, ‘Exhibits,
Financial Statement Schedules’ Note 26 ‘Segment Reporting and Geographic Information’.
Revenue
We
generate revenue in four principal ways: i) on a participation basis, ii) on a fixed rental fee basis, iii) through product sales and
iv) through software license fees. Participation revenue generally includes a right to receive a share of our customers’ gaming
revenue, typically as a share of net win but sometimes as a share of the handle or “coin in” which represents the total amount
wagered.
Geographic
Range
Geographically,
a majority of our revenue is derived from, and majority of our non-current assets are attributable to our UK operations. The remainder
of our revenue is derived from, and non-current assets attributable to, Greece, Canada, Italy and the rest of the world.
For
the three months ended September 30, 2021, we earned approximately 76% of our revenue in the UK, 8% in Greece and the remaining 16% across
the rest of the world. During the three months ended September 30, 2020, we earned approximately 78%, 10% and 12% of our revenue in those
regions, respectively.
For
the nine months ended September 30, 2021, we earned approximately 70% of our revenue in the UK, 9% in Greece and the remaining 21% across
the rest of the world. During the nine months ended September 30, 2020, we earned approximately 73%, 10% and 17% of our revenue in those
regions, respectively.
As
of September 30, 2021, our non-current assets (excluding goodwill) attribution approximately 80% in the UK, 11% in Greece and
9% across the rest of the world.
22
Foreign
Exchange
Our
results are affected by changes in foreign currency exchange rates as a result of the translation of foreign functional currencies into
our reporting currency and the re-measurement of foreign currency transactions and 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 UK and the British pound (“GBP”) is considered to be our functional currency. Our reporting
currency is the U.S. dollar (“USD”). Our results are translated from our functional currency of GBP into the reporting currency
of USD using average rates for profit and loss transactions and applicable spot rates for period-end balances. The effect of translating
our functional currency into our reporting currency, as well as translating the results of foreign subsidiaries that have a different
functional currency into our functional currency, is reported separately in Accumulated Other Comprehensive Income.
During
the three months ended September 30, 2021, we derived approximately 24% of our revenue from sales to customers outside the UK, compared
to 22% during the three months ended September 30, 2020.
During
the nine months ended September 30, 2021, we derived approximately 30% of our revenue from sales to customers outside the UK, compared
to 27% during the nine months ended September 30, 2020.
In
the section “Results of Operations” below, currency impacts shown have been calculated as the current-period average GBP:USD
rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP).
The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency,
multiplied by the prior-period average GBP:USD rate. This is not a U.S. GAAP measure, but is one which management believes gives a clearer
indication of results. In the tables below, variances in particular line items from period to period exclude currency translation movements,
and currency translation impacts are shown independently.
Non-GAAP
Financial Measures
We
use certain financial measures that are not compliant with U.S. GAAP (“Non-GAAP financial measures”), including EBITDA and
Adjusted EBITDA, to analyze our operating performance. In this discussion and analysis, we present certain non-GAAP financial measures,
define and explain these measures and provide reconciliations to the most comparable U.S. GAAP measures. See “Non-GAAP Financial
Measures” below.
Results
of Operations
Our
results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting
currency (USD). During the three-month periods ended September 30, 2021 and September 30, 2020, the average GBP:USD rates were 1.38 and
1.29, respectively. During the nine-month periods ended September 30, 2021 and September 30, 2020, the average GBP:USD rates were 1.38
and 1.28, respectively.
The
following discussion and analysis of our results of operations has been organized in the following manner:
●
a
discussion and analysis of the Company’s results of operations for the three-month period and nine-month periods ended September
30, 2021, compared to the same periods in 2020;
●
a
discussion and analysis of the results of operations for each of the Company’s segments (Gaming, Virtual Sports, Interactive
and Leisure) for the three-month period and nine-month periods ended September 30, 2021, compared to the same periods in 2020, including
KPI analysis.
In
the discussion and analysis below, certain data may vary from the amounts presented in our consolidated financial statements due to rounding.
For
all reported variances, refer to the overall company and segment tables shown below. All variances discussed in the overall company and
segment results are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange
rates.
23
Overall
Company Results
Three
and Nine Months ended September 30, 2021, compared to Three and Nine Months ended September 30, 2020
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited September 30,
Unaudited September 30,
Variance
Unaudited September 30,
Unaudited September 30,
Variance
(In millions)
2021
2020
2021
vs 2020
2021
2020
2021
vs 2020
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Revenue:
Service
$ 68.7
$ 55.6
$ 4.5
$ 8.6
15.4 %
23.4 %
$ 123.3
$ 113.7
$ 9.3
$ 0.3
0.3 %
8.4 %
Product
8.9
4.5
0.6
3.8
85.7 %
97.7 %
18.6
14.3
1.3
2.9
20.6 %
29.9 %
Total revenue
77.6
60.1
5.0
12.4
20.6 %
29.0 %
141.9
128.0
10.6
3.2
2.5 %
10.8 %
Cost of Sales, excluding depreciation and amortization:
Cost of Service
(13.8 )
(10.8 )
(0.9 )
(2.1 )
19.0 %
27.1 %
(23.9 )
(21.8 )
)
(1.7 )
(0.4 )
1.7 %
9.6 %
Cost of Product
(4.7 )
(3.3 )
(0.3 )
(1.1 )
34.5 %
43.7 %
(10.6 )
(9.8 )
)
(0.8 )
0.0
(0.4 )%
8.1 %
Selling, general and administrative expenses
(29.2 )
(21.5 )
(1.8 )
(5.8 )
27.2 %
35.5 %
(68.1 )
(60.7 )
)
(5.3 )
(2.1 )
3.5 %
12.3 %
Stock-based compensation
(3.8 )
(1.1 )
(0.2 )
(2.4 )
221.4 %
242.9 %
(8.6 )
(3.1 )
)
(0.7 )
(4.8 )
154.7 %
177.7 %
Acquisition and integration related transaction expenses
-
(1.2 )
(0.1 )
1.2
(105.6 )%
(100.0 )%
(1.5 )
(5.6 )
(0.3 )
4.4
(77.0 )%
(73.8 )%
Depreciation and amortization
(11.2 )
(14.0 )
(0.7 )
3.5
(24.8 )%
(20.0 )%
(36.2 )
(39.9 )
(3.1 )
6.7
(16.7 )%
(9.2 )%
Net operating Income (Loss)
14.9
8.2
1.1
5.7
68.0 %
82.1 %
(7.0 )
(12.9 )
(1.3 )
7.1
(53.0 )%
(45.3 )%
Other income (expense)
Interest income
0.1
0.1
(0.0 )
0.0
11.4 %
(20.9 )%
0.2
0.5
)
0.0
(0.3 )
(62.4 )%
(58.5 )%
Interest expense
(7.3 )
(8.3 )
(0.5 )
1.5
(17.6 )%
(12.0 )%
(38.1 )
(22.5 )
)
(3.2 )
(12.4 )
54.7 %
69.4 %
Change in fair value of warrant liability
17.3
0.2
1.1
16.0
7526.4 %
8060.4 %
3.8
6.1
)
0.0
(2.3 )
(38.2 )%
(37.7 )%
Other finance income (expense)
0.3
0.3
0.0
(0.0 )
(5.4
%)
1.0 %
5.5
(5.9 )
0.2
11.2
(183.8 )%
(193.5 )%
Loss from equity method investee
-
-
-
-
NA
NA
-
(0.5 )
(0.0 )
0.5
(100.0 )%
(100.0 )%
Total other
income (expense), net
10.4
(7.7 )
0.6
17.4
(228.1 )%
(236.0 )%
(28.6 )
(22.3 )
)
(3.0 )
(3.3 )
14.7 %
28.1 %
Net Income (loss) from continuing
operations before income taxes
25.3
0.5
1.7
23.1
3419.8 %
4742.9
%
(35.6 )
(35.2 )
)
(4.2 )
3.8
(10.4 )%
1.3 %
Income tax expense
(0.3 )
(0.0 )
(0.0 )
(0.2 )
626.1 %
646.0 %
0.1
(0.3 )
0.0
0.4
(117.4 )%
(113.7 )%
Net Income
(Loss)
$ 25.0
$ 0.5
$ 1.7
$ 22.8
3571.8 %
5047.4 %
$ (35.5 )
$ (35.5 )
)
$ (4.2 )
$ 4.1
(11.4 )%
0.1 %
Exchange Rate - $ to £
1.38
1.29
1.38
1.28
24
See
“Segments Results” below for a more detailed explanation of the significant changes in our components of revenue within the
individual segment results of operations.
Revenue
Consolidated
Reported Revenue by Segment
For
the three and nine months ended September 30, 2021, revenue on a functional currency (at constant rate) basis increased by $12.4 million
and $3.2 million, or 20.6% and 2.5%, respectively. The three-month increase included an increase from Leisure of $13.8 million, Interactive
of $2.2 million and Virtual Sports of $1.6 million, partly offset by a decrease in Gaming of $5.1 million, driven by $9.4 million VAT-related
revenue in the prior period. The nine-month increase included an increase from Leisure of $6.9 million and Interactive of $6.5 million,
offset by decreases from Gaming of $9.5 million and Virtual Sports of $0.7 million.
Cost
of Sales, excluding depreciation and amortization
Cost
of Sales, excluding depreciation and amortization for the three and nine months ended September 30, 2021, increased by $3.2 million and
$0.3 million, or 22.7% and 31.0% respectively. Of the three-month increase, $2.1 million was attributable to cost of Service and
$1.1 million was attributable to cost of Product sales. Of the nine-month increase, $0.4 million was attributable to cost of Service.
Selling,
general and administrative expenses
Selling,
general and administrative (“SG&A”) expenses for the three and nine months ended September 30, 2021 increased by $5.8
million and $2.1 million, or 27.2% and 3.5% respectively. The three-month increase was driven by all staff returning from furlough for
the whole period ($3.6 million), additional other employee costs ($0.4 million), additional IT costs due to returning staff ($0.3 million)
and lower labor capitalization ($0.3 million). The nine-month increase was driven by staff returning from furlough and additional distribution
costs as markets and retail venues reopened. $1.2 million of the additional cost in the nine-month period was for the provision following
a settlement with the Italian Tax Authorities in respect of an audit of the Italian Branch of Inspired Gaming (International) Limited
for the period 2015-2017 in respect of the historic VAT treatment of supplies.
25
Stock-based
compensation
During
the three months and nine months ended September 30, 2021, the Company recorded an expense of $3.8 million and $8.6 million respectively,
with respect to outstanding awards. The expense for the three-month and nine-month periods included $1.2 million and $4.1 million respectively,
related to awards made under the 2018 Plan, $2.4 million and $4.2 million (including $1.4 million of upfront recognition) respectively
related to awards made under the 2021 Plan and $0.2 million related to the vesting of awards from the 2018 Plan. The charge for stock-based
compensation for the three months and nine months ended September 30, 2020, was $1.1 million and $3.1 million, respectively. The expenses
for the three-month and nine-month periods included $1.1 million and $2.9 million, respectively, that
were related to awards made under the 2018 Plan The nine-month period ended September 30, 2020, also included $0.2 million, related
to costs from awards made under a 2016 long term incentive plan.
Acquisition
and integration related transaction expenses
Acquisition
and integration related transaction expenses decreased for both the three-month and nine-month periods by $1.2 million to zero and by
$4.4 million to $1.5 million, respectively. Both the 2021 and 2020 expenses were primarily integration costs in relation to the NTG acquisition.
Depreciation
and amortization
Depreciation
and amortization decreased for both the three-month and nine-month periods by $3.5 million and $6.7 million respectively, driven primarily
by a decrease in Gaming and Leisure due to certain assets being fully written down.
Net
operating income/(loss)
During
the three-month period, net operating income was $14.9 million, an increase of $5.7 million. This was attributable to the increase in
revenue, despite the $9.2 million of VAT-related income recorded in the prior period. The increase was due to retail venues across the
majority of the business being open for the entire period, with social distancing restrictions being removed, growth in Leisure driven
by Leisure parks, as well as growth in Interactive and Online Virtuals. During the nine-month period, net operating loss was $7.0 million
which improved by $7.1 million. This was attributable to the increase in our Interactive and Online Virtuals segments as well as our
Leisure segment, as well as the decrease in acquisition and integration related transaction expenses and depreciation and amortization.
Interest
expense
Net
interest expense decreased by $1.5 million in the three-month period, this decrease was due to a $0.6 million reduction in
the level of debt fee amortization after the refinance in May 2021, a $0.2million lower revolver interest charge and a
$0.5 million impact from currency movement. In the nine-month period net interest expense increased by $12.7 million.
This was driven by a $14.4 million increase due to the write-off of previously capitalized debt fees following the refinancing in
May 2021 and a $2.0m higher debt interest charge, offset by a $3.2 million currency movement.
Change
in fair value of warrant liability
Change
in fair value of warrant liability for the three and nine months ended September 30, 2021, resulted in a $17.3 million and $3.8 million
credit respectively. The credit for both periods was related to changes in liability accounting pursuant to the statement made by the
Office of Chief Accountant of the SEC, released on April 12, 2021, informing market participants that warrants issued by special purpose
acquisition companies may require classification as a liability of the entity measured at fair value, with changes in fair value each
period reported in earnings. The credits for the three-month and nine-month periods reflect the decrease in the value of the warrants,
driven by a decrease in the Company’s share price and a decrease in the time to warrant expiry, respectively. During the three-month
period, the Company’s share price decreased from $12.75 on June 30, 2021, to $11.70 on September 30, 2021. Although the Company’s
share price increased during the nine-month period, the time to expiry for the warrants decreased from approximately one year to three
months which drove the decrease in the value of the warrants.
26
Other
finance income
Other
finance income for the three and nine months ended September 30, 2021, resulted in a $0.3 million credit and a $5.5 million credit, respectively.
The three-month credit was in line with the prior year but the nine month credit was $11.4 million better than the corresponding period
in the prior year due to movements in the retranslation with respect to the principal balance of our senior debt facilities in place
at that time.
Income
tax expense
Our
effective tax rate for the three and nine months ended September 30, 2021, was (1.1%) and (0.3%), respectively. Our effective
tax rate for the three and nine months ended September 30, 2020, was (6.9%) and 0.9%, respectively.
Net
Income/ (loss)
During
the three-month period, net income was $25.0 million, an increase of $22.8 million, primarily due to the increase in net
operating income ($5.7 million), the increase in credit of the change in fair value of warrant liability ($16.0 million) and a decrease
in net interest expense ($1.5 million). During the nine-month period, net loss was $35.5 million, an improvement of $4.1
million, primarily due to the increase in net operating income ($7.1 million) and the increase in other finance income ($11.2 million),
partly offset by the increase in net interest expense ($12.7 million).
Segment
Results ( for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020)
Gaming
We
generate revenue from our Gaming segment through the selling and rental of our gaming machines. We receive rental fees for machines,
typically on a long-term contract basis, on both a participation and fixed fee basis. Our participation contracts are typically structured
to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays
and any relevant regulatory levies) from gaming terminals placed in our customers’ facilities. Typically, we recognize revenue
from these arrangements on a daily basis over the term of the contract.
Revenue
growth for our Gaming business is principally driven by the number of operator customers we have, the number of Gaming machines in operation,
the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
Gaming,
Key Performance Indicators
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
Sept
30,
Unaudited
Sept
30,
Variance
2021
vs 2020
Unaudited
Sept
30,
Unaudited
Sept
30,
Variance
2021
vs 2020
Gaming
2021
2020
%
2021
2020
%
End of period installed base (# of terminals)
32,236
31,725
511
1.6 %
32,236
31,725
511
1.6 %
Total Gaming - Average installed base (# of terminals)
32,204
32,117
87
0.3 %
31,860
32,148
(288 )
(0.9 )%
Participation - Average installed base (# of terminals)
29,140
30,188
(1,048 )
(3.5 )%
29,295
30,297
(1,002 )
(3.3 )%
Fixed Rental - Average installed base (# of terminals)
3,064
1,929
1,135
58.8 %
2,565
1,851
714
38.6 %
Service Only - Average installed base (# of terminals)
21,439
21,377
63
0.3 %
21,564
21,386
178
0.8 %
Customer Gross Win per unit
per day (1) (2)
£ 76.5
£ 70.4
£ 6.1
8.6 %
£ 41.5
£ 49.0
£ (7.5 )
(15.4 )%
Customer Net Win per unit per
day (1) (2)
£ 56.3
£ 51.4
£ 4.9
9.6 %
£ 31.2
£ 36.0
£ (4.8 )
(13.3 )%
Inspired Blended Participation Rate
6.5 %
6.7 %
(0.2 )%
(2.8 )%
6.3 %
6.6 %
(0.3 )%
(4.8 )%
Inspired Fixed Rental Revenue per Gaming Machine per week
£ 37.7
£ 37.9
£ (0 )
N/A
£ 21.0
£ 27.2
£ (6.2 )
(22.9 )%
Inspired Service Rental Revenue per Gaming Machine per week
£ 4.5
£ 4.5
£ (0.1 )
(2.0 )%
£ 3.1
£ 3.1
£ 0.0
0.6 %
Gaming Long term license amortization (£’m)
£ 1.3
£ 1.3
£ (0.1 )
(4.0 )%
£ 3.8
£ 3.8
£ (0.0 )
(0.7 )%
Number of Machine sales
1,747
363
1,384
381.3 %
2,625
1,561
1,064
68.2 %
Average selling price per terminal
£ 3,071
£ 6,422
£ (3,351 )
(52.2 )%
£ 4,141
£ 4,851
£ (710 )
(14.6 )%
(1)
Includes
all SBG terminals in which the company takes a participation revenue share across all territories
27
Please
refer to our Annual Report on Form 10-K for the year ended December 31, 2020, for definitions of terms used in the above table.
Gaming,
Recurring Revenue
Set
forth below is a breakdown of our Gaming recurring revenue. Gaming recurring revenue consists principally of Gaming participation revenue
and fixed rental revenue.
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
September
30,
Unaudited
September
30,
Variance
2021
vs 2020
Unaudited
September
30,
Unaudited
September
30,
Variance
2021
vs 2020
(In £ millions)
2021
2020
%
2021
2020
%
Gaming Recurring Revenue
Total Gaming Revenue
£ 20.0
£ 24.0
£ (4.0 )
(16.7 )%
£ 39.4
£ 46.8
£ (7.4 )
(15.9 )%
Gaming Participation Revenue
£ 10.0
£ 9.6
£ 0.4
4.5 %
£ 16.2
£ 19.8
£ (3.7 )
(18.4 )%
Gaming Other Fixed Fee Recurring Revenue
£ 2.8
£ 2.7
£ 0.1
3.3 %
£ 4.6
£ 5.5
£ (0.8 )
(15.6 )%
Gaming Long-term license amortization
£ 1.3
£ 1.3
£ (0.0 )
(1.1 )%
£ 3.8
£ 3.8
£ (0.0 )
(0.1 )%
Total Gaming Recurring Revenue *
£ 14.1
£ 13.6
£ 0.5
3.7 %
£ 24.6
£ 29.1
£ (4.5 )
(15.5 )%
Gaming Recurring Revenue as a % of Total Gaming Revenue †
70.5 %
56.6 %
13.9 %
62.5 %
62.2 %
0.3 %
Total Gaming excluding VAT related-revenue
£ 20.0
£ 16.6
£ 37.1
£ 39.5
Gaming Recurring Revenue as a % of Total Gaming Revenue (excluding VAT
related-revenue)
70.5 %
81.6 %
66.4 %
73.8 %
*
Does
not reflect VAT-related revenue for the three-month period or nine-month period, there was no VAT-related income in the three-month
period for 2021
†
Total
Gaming Revenue for the nine-month period ended September 30, 2021, includes the £2.3 million for VAT-related revenue, which
is not reflected in Gaming Recurring Revenue for that period. Excluding VAT-related revenue, Gaming Recurring Revenue was 66.4% of
Total Gaming Revenue for such period.
28
Please
refer to our Annual Report on Form 10-K for the year ended December 31, 2020, for definitions of terms used in the above table.
Gaming,
Service Revenue by Region
Set
forth below is a breakdown of our Gaming service revenue by geographic region. Gaming Service revenue consists principally of Gaming
participation revenue, Gaming other fixed fee revenue, Gaming long-term license amortization and Gaming other non-recurring revenue.
See “Gaming Segment Revenue” below for a discussion of gaming service revenue between the periods under review.
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
September
30,
2021
Unaudited
September
30,
2020
Variance
Unaudited
September
30,
2021
Unaudited
September
30,
2020
Variance
(In millions)
2021
vs 2020
Total
Functional Currency %
2021
vs 2020
Total
Functional Currency %
Service Revenue:
UK LBO
$ 10.5
$ 9.7
$ 0.8
8.5 %
1.7 %
$ 19.4
$ 20.0
$ (0.7 )
(3.4 )%
(10.5 )%
UK VAT - Related Income
-
$ 9.3
$ (9.3 )
n/a
n/a
3.1
9.3
$ (6.2 )
(66.5 )%
(68.9 )%
UK Other
3.0
2.2
0.8
35.0 %
26.9 %
4.4
4.9
(0.6 )
(11.9 )%
(18.7 )%
Italy
0.9
0.9
(0.0 )
(5.2 )%
(11.2 )%
1.2
1.9
(0.7 )
(36.9 )%
(41.2 )%
Greece
5.1
4.8
0.3
5.7 %
(0.9 )%
9.9
11.3
(1.4 )
(12.1 )%
(18.8 )%
Rest of the World
0.1
0.2
(0.0 )
(26.6 )%
(30.8 )%
0.2
0.4
(0.3 )
(64.4 )%
(66.8 )%
Total Service revenue
$ 19.7
$ 27.2
$ (7.5 )
(27.7 )%
(32.7 )%
$ 38.1
$ 47.9
$ (9.8 )
(20.5 )%
(26.5 )%
Exchange Rate - $ to £
1.38
1.28
1.38
1.28
Note:
Exchange rate in the table is calculated by dividing the USD total service revenue by the GBP total service revenue, therefore this could
be slightly different from the average rate during the period depending on timing of transactions.
29
Gaming,
key events
For
the three and nine months ended September 30, 2021
Total
Gaming Customer Gross Win per unit per day (in our functional currency, GBP) for the three-month period increased by £6.08, or
8.6%, but decreased by £7.54, or 15.4%, for the nine-month period. The year-to-date decrease was due to the impact of COVID-19
as there was a longer period of retail venue closures compared to the prior period.
During
the three-month period, retail venues in the UK LBO estate showed significant year over year growth which contributed to the majority
of the overall Gross Win per unit per day increase. Revenues returned to prior year levels in the Greek and Italy markets. During the
nine-month period in 2021, retail venues across the business were in operation for approximately 53% of the period, compared to approximately
67% of the prior year period in 2020.
The
participation rate for the three-month period decreased from 6.7% to 6.5% year over year. This was primarily due to the COVID-19 restriction
in place in the prior period in UK venues compared to the 2021 as UK share terms are lower than the total blended Gaming
average (due to the fact we have higher gross win levels in the UK). The participation rate for the nine-month decreased from 6.6% to
6.3% due to the same factors.
During
the three-month period ended September 30, 2020, Inspired received VAT-related revenue of $9.4 million in July 2020 from a major UK customer.
During the nine-month period ended September 30, 2021, Inspired received VAT-related revenue of $2.9 million in January 2021 from a major
UK customer. Both receipts in 2020 and 2021 were recorded as revenue in our results.
During
the three-month period in the UK market, we sold 363 VLT’s to a major customer resulting in revenue of $2.4 million.
In
addition, during the nine-month period we upgraded our UK Gaming estate with the installation of 245 “Flex” and 375 “Prismatic”
terminals through a combination of outright sales and lease agreements.
Inspired
furthered its relationship with a major customer in the Dutch market with the sale and delivery of an additional 222 “Analogue”
terminals during the nine-month period.
In
the UK LBO market, during the three-month period Inspired continued its strong relationship with a major customer by securing a new three-year
contract extension for the service of self-service betting terminals “SSBTs” which are charged on a rental basis. In the
same period Inspired recognized hardware sales for an additional 150 SSBTs generating revenue of $0.6 million.
During
the three-month period, Inspired recognized a 944 VLT hardware sale to a major Italian customer, generating revenue of $1.1 million.
This completed a 1,624 VLT hardware sale.
During
the three-month period, Inspired sold a further 60 “Valor™” terminals to a number of customers in Illinois, bringing
the total terminals sold for the nine-month period to 171 and increasing the total number of North American unit sales since launch in
December 2019 to 600. Retail venues in Illinois were shut down during January 2021, which negatively impacted sales during this period.
As of February 2021, all eleven regions in Illinois had reopened.
During
the nine-month period, Inspired delivered its first sales to Western Canada Lottery Corporation (“WCLC”), our second jurisdiction
in North America. Inspired recorded the sale of 100 “Valor™” terminals to WCLC during March 2021, generating revenue
of $1.5 million.
30
Gaming,
Results of Operations
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
September
30,
Unaudited
September
30,
Variance
Unaudited
September
30,
Unaudited
September
30,
Variance
(In millions)
2021
2020
2021
vs 2020
2021
2020
2021
vs 2020
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Revenue:
Service
$ 19.7
$ 27.2
$ 1.3
$ (8.9 )
(32.7 )%
(27.7 )%
$ 38.1
$ 47.9
$ 2.9
$ (12.7 )
(26.5 )%
(20.5 )%
Product
7.9
3.7
$ 0.5
3.7
103.5 %
115.4 %
16.5
12.1
$ 1.2
3.2
26.3 %
36.5 %
Total revenue
27.6
30.9
1.8
(5.1 )
(16.7 )%
(10.7 )%
54.6
60.0
4.1
(9.5 )
(15.9 )%
(9.0 )%
Cost of Sales, excluding depreciation and amortization:
Cost of Service
(4.1 )
(5.8 )
$ (0.3 )
1.9
(33.4 )%
(28.8 )%
(8.3 )
(11.1 )
$ (0.5 )
3.3
(30.2 )%
(25.0 )%
Cost of Product
(4.2 )
(2.7 )
$ (0.3 )
(1.1 )
42.3 %
52.8 %
(9.5 )
(8.3 )
$ (0.8 )
(0.4 )
4.6 %
14.5 %
Total cost of sales
(8.3 )
(8.5 )
(0.5 )
0.8
(9.1 )%
(2.6 )%
(17.8 )
(19.4 )
(1.3 )
2.9
(15.1 )%
(8.1 )%
Selling, general and administrative expenses
(8.4 )
(6.0 )
$ (0.5 )
(1.9 )
31.8 %
40.5 %
(19.2 )
(17.9 )
$ (1.4 )
0.1
(0.5 )%
7.3 %
Stock-based compensation
(0.5 )
(0.2 )
$ (0.0 )
(0.2 )
114.9 %
130.4 %
(1.1 )
(0.4 )
$ (0.1 )
(0.6 )
145.2 %
165.2 %
Depreciation and amortization
(5.3 )
(6.6 )
$ (0.3 )
1.6
(24.6 )%
(19.6 )%
(17.7 )
(21.0 )
$ (1.5 )
4.8
(22.6 )%
(15.7 )%
Net operating Income (Loss)
$ 5.1
$ 9.6
$ 0.4
$ (4.9 )
(50.5 )%
(46.6 )%
$ (1.2 )
$ 1.3
$ (0.2 )
$ (2.3 )
(190.7 )%
(186.5 )%
Exchange Rate - $ to £
1.38
1.29
1.38
1.28
Note:
Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly
different from the average rate during the period depending on timing of transactions.
All
variances discussed in the Gaming results below are on a functional currency (at constant rate) basis, which excludes the impact of any
changes in foreign currency exchange rates.
Gaming
Revenue
During
the three-month period, all COVID-19 closures and restrictions were removed for the key markets for the majority of both the current
and prior periods. During the nine-month, Gaming revenue was impacted by COVID-19 closures and restrictions for a portion of both the
current and prior periods (for more details please see the Gaming Revenue section in the Quarterly Report on Form 10-Q for the period
ended June 30, 2021).
During
the three-month and nine-month period, Gaming revenue decreased by $5.1 million and $9.5 million, or 16.7% and 15.9%, respectively. This
was driven by the decrease in VAT-related revenue of $9.4 million in the three-month period and $6.5 million in the nine-month period
compared to the prior period. Excluding the VAT-related revenue, Gaming revenue during the three-month period increased by $4.3 million
and decreased by $3.0 million during the nine-month period.
31
For
the three-month period, Gaming Service revenue (excluding VAT-related revenue) increased by $0.6 million. This was primarily driven by
an increase in UK sales (including Licensed Betting Offices (“LBOs”) and UK other) of $0.8 million due to the increase in
UK LBO Net Win (a record high average for the period since the implementation of the Triennial regulation changes).
For
the nine-month period, Gaming Service revenue (excluding VAT-related revenue) decreased by $6.2 million. This was driven by a decline
in UK sales (including LBOs and UK other) of $3.0 million primarily driven by the COVID-19 closures, with both markets experiencing additional
lockdowns and UK LBO capacity restrictions compared to the prior period. Greece and Italy experienced revenue declines of $2.1 million
and $0.8 million, respectively, driven by the COVID-19 closures as both markets experienced additional lockdowns compared to the prior
period.
Product
revenue increased in the three-month and nine-month period by $3.7 million and $3.2 million, respectively. The increase for both periods
was primarily driven by Product sales of $2.0 million in the UK markets, $1.1 million sales to Italy and $0.8 million of Valor terminal
sales in North America, all of which occurred during the three-month period.
Gaming
Operating Income
Operating
Income decreased during both the three-month and nine-month periods by $4.9 million and $2.3 million, respectively.
The
decrease in Operating Income in the three-month period was primarily due to the decrease in VAT-related income compared to the prior
period ($9.2 million) and an increase in SG&A ($1.9 million) as all staff returned from furlough for the whole period. This was partially
offset by the increase in product revenue (detailed above), a $1.6 million decrease in depreciation and amortization driven by a decrease
in depreciation in the UK LBO and Greece markets, and a decrease in Cost of Sales of $0.8 million. Excluding the VAT-related Income,
Operating Income would have increased by $4.2 million in the three-month period.
The
decrease in Operating Income in the nine-month period was primarily due to the decrease in VAT-related income compared to the prior periods
($6.3 million) and the decrease in Gaming Service revenue (detailed above). This was partially offset by the increase in product revenue
(detailed above), a decrease in cost of sales ($2.9 million), as well as a reduction in depreciation and amortization ($4.8 million)
particularly in UK LBO as certain assets have been fully written down. Excluding the VAT-related Income, Operating Income would have
increased by $4.0 million in the nine-month period.
Virtual
Sports
We
generate revenue from our Virtual Sports segment through the licensing of our products. We receive fees in exchange for the licensing
of our products, typically on a long-term contract basis, on a participation basis. Our participation contracts are typically structured
to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays
and other promotional costs and any relevant regulatory levies) from Virtual Sports content placed on our customers’ websites or
in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue
growth for our Virtual Sports segment is principally driven by the number of customers we have, the net win performance of the games
and the net win percentage that we receive pursuant to our contracts with our customers.
32
Virtual
Sports, Key Performance Indicators
For the Three-Month
Period ended
For the Nine-Month
Period ended
Unaudited
Sept 30,
Unaudited
Sept 30,
Variance
2021 vs 2020
Unaudited
Sept 30,
Unaudited
Sept 30,
Variance
2021 vs 2020
Virtuals
2021
2020
%
2021
2020
%
No. of Live Customers at the end of the period
61
56
5
8.9 %
61
56
5
8.9 %
Average No. of Live Customers
60
56
4
6.5 %
60
58
2
3.0 %
Total Revenue (£’m)
£ 7.6
£ 6.4
£ 1.2
19.3 %
£ 18.1
£ 18.6
£ (0.5 )
(2.9 )%
Total Revenue £’m - Retail
£ 2.6
£ 3.2
£ (0.6 )
(18.8 )%
£ 4.7
£ 7.5
£ (2.8 )
(37.5 )%
Total Revenue £’m - Online Virtuals
£ 5.1
£ 3.2
£ 1.8
56.6 %
£ 13.4
£ 11.1
£ 2.3
20.5 %
Please
refer to our Annual Report on Form 10-K for the year ended December 31, 2020, for definitions of terms used in the above table.
Virtual
Sports, Recurring Revenue
Set
forth below is a breakdown of our Virtual Sports recurring revenue, which consists of Retail Virtuals and Online Virtuals recurring revenue
as well as long-term license amortization. See “Virtual Sports Segment Revenue” below for a discussion of Virtual Sports
Service revenue between the periods under review.
For
the Three-Month
Period
ended
For
the Nine-Month
Period
ended
Unaudited
September
30,
Unaudited
September
30,
Variance
2021
vs 2020
Unaudited
September
30,
Unaudited
September
30,
Variance
2021
vs 2020
(In £ millions)
2021
2020
%
2021
2020
%
Virtual Sports Recurring Revenue
Total Virtual Sports Revenue
£ 7.6
£ 6.4
£ 1.2
19.3 %
£ 18.1
£ 18.6
£ (0.5 )
(2.9 )%
Recurring Revenue - Retail Virtuals
£ 2.4
£ 3.0
£ (0.5 )
(18.0 )%
£ 4.3
£ 6.6
£ (2.3 )
(34.6 )%
Recurring Revenue - Online Virtuals
£ 4.7
£ 3.1
£ 1.6
51.0 %
£ 12.9
£ 10.3
£ 2.6
25.7 %
Total Virtual Sports Long-term license amortization
£ 0.2
£ 0.2
£ 0.0
0.8 %
£ 0.5
£ 0.9
£ (0.3 )
(38.0 )%
Total Virtual Sports Recurring Revenue
£ 7.4
£ 6.3
£ 1.1
17.0 %
£ 17.8
£ 17.8
£ 0.0
0.1 %
Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports
Revenue
96.7 %
98.6 %
(1.9 )%
98.3 %
95.4 %
2.9 %
Please
refer to our Annual Report on Form 10-K for the year ended December 31, 2020, for definitions of terms used in the above table.
Virtual
Sports, key events
During
the three months ended September 30, 2021, we launched our Virtual Sports suite of products with BetMGM in New Jersey via our new proprietary
VPP (Virtuals Plug and Play) platform.
Our
largest online customer bet365 launched four channels of our brand-new V-Play Soccer 3 product. Furthermore, we signed new contracts
with Mozzarbet (Serbia), Betplay (Colombia), Novibet (Greece), Betshop (Greece), iBet and Fonbet to deliver Virtuals via the VPP platform.
33
During
August 2021, the Italian government introduced a proof of vaccination requirement to enter betting shops which has slowed recovery. Virtual
Sports have not resumed in Belgium betting shops in 2021 due to evolution in regulations.
In
Greece, US Basketball was deployed in September 2021 into the OPAP retail estate of approximately 3,500 venues.
In
Pennsylvania, Inspired revenue share increased by approximately 70% during the nine-month period ended September 30, 2021, driven
by our “Derby Cash” horse racing product.
Multiple
Italian clients (including Snaitech) launched in July 2021 with new products Penalty Shootout, Matchday Ultra and Marbles.
Virtual
Sports, Results of Operations
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
September
30,
Unaudited
September
30,
Variance
Unaudited
September
30,
Unaudited
September
30,
Variance
(In millions)
2021
2020
2021
vs 2020
2021
2020
2021
vs 2020
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Service Revenue
$ 10.5
$ 8.3
$ 0.7
$ 1.6
19.3 %
27.3 %
$ 25.0
$ 23.7
$ 2.0
$ (0.7 )
(2.9 )%
5.4 %
Cost of Service
(0.5 )
(0.7 )
(0.0 )
0.2
(32.7 )%
(28.2 )%
(1.3 )
(2.2 )
(0.1 )
1.0
(45.3 )%
(40.4 )%
Selling, general and administrative expenses
(1.4 )
(0.8 )
0.1
(0.7 )
86.7 %
73.5 %
(5.2 )
(2.7 )
(0.4 )
(2.1 )
75.7 %
91.5 %
Stock-based compensation
(0.3 )
(0.1 )
(0.0 )
(0.1 )
147.6 %
164.4 %
(0.5 )
(0.3 )
(0.0 )
(0.1 )
42.6 %
54.8 %
Depreciation and amortization
(0.7 )
(1.0 )
(0.0 )
0.3
(29.7 )%
(25.0 )%
(2.5 )
(2.7 )
(0.1 )
0.3
(10.6 )%
(5.5 )%
Net operating Income (Loss)
$ 7.6
$ 5.7
$ 0.7
$ 1.3
23.0 %
35.0 %
$ 15.5
$ 15.8
$ 1.3
$ (1.6 )
(10.2 )%
(2.2 )%
Exchange Rate - $ to £
1.38
1.29
1.38
1.28
Note:
Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly
different from the average rate during the period depending on timing of transactions.
All
variances discussed in the Virtual Sports results below are on a functional currency (at constant rate) basis, which excludes the impact
of any changes in foreign currency exchange rates.
34
Virtual
Sports revenue
During
the three-month period, revenue increased by $1.6 million, or 19.3%. This increase was driven by a $2.1 million increase in Online Virtuals,
driven by the performance of one of our major online customers, which was partially offset by a decline in recurring Retail
Virtuals of $0.7 million, driven by slower recovery since reopening in all major markets compared to the prior year, as well as regulator
changes in Belgium resulting in no revenues for 2021.
During
the nine-month period, revenue decreased by $0.7 million, or 2.9%. This decrease was driven by a $3.0 million decrease in retail revenue
due to the COVID-19 closures and a decline of $0.5 million from historical license fee amortization contracts reaching their expiration.
This decline was partially offset by growth in recurring Online Virtuals of $3.4 million. Online revenues remain significantly higher
than pre-Covid-19 levels.
Virtual
Sports operating income
Operating
Income increased in the three-month period by $1.3 million but declined in the nine-month period by $1.6 million.
The
increase in the three-month period was primarily due to the increase in revenue of $1.6 million, the decrease in Depreciation and Amortization
of $0.3 million and the decrease in Cost of Sales of $0.2 million. This was partly offset by the increase in SG&A expenses of $0.7
million, driven by the increase in costs as all staff returned to full pay for the period and an increase in technology costs driven
by the growth of Online Virtuals.
The
decline in the nine-month period was primarily due to the decrease in revenue of $0.7 million and the increase in SG&A expenses of
$2.1 million driven by the $1.2 million increase from the settlement with the Italian Tax Authorities as well as staff returning from
furlough. This was partly offset by a decrease in Cost of Sales of $1.0 million.
Interactive
We
generate revenue from our Interactive segment through the licensing of our products. We receive fees in exchange for the licensing of
our products, typically on a long-term contract basis, on a participation basis. Our participation contracts are typically structured
to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays
and other promotional costs and any relevant regulatory levies) from Interactive content placed on our customers’ websites. Typically,
we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue
growth for our Interactive segment is principally driven by the number of customers we have, the number of live games, the net win performance
of the games and the net win percentage that we receive pursuant to our contracts with our customers.
35
Interactive,
Key Performance Indicators
For the Three-Month
Period ended
For the Nine-Month
Period ended
Unaudited
Sept 30,
Unaudited
Sept 30,
Variance
2021 vs 2020
Unaudited
Sept 30,
Unaudited
Sept 30,
Variance
2021 vs 2020
Interactive
2021
2020
%
2021
2020
%
No. of Live Customers at the end of the period
104
76
28
36.8 %
104
76
28
36.8 %
Average No. of Live Customers
102
75
28
37.1 %
98
71
27
38.0 %
No. of Live Games at the end of the period
226
200
26
13.0 %
226
200
26
13.0 %
Average No. of Live Games
224
198
26
13.2 %
213
187
26
14.0 %
Total Revenue (£’m)
£ 4.4
£ 2.7
£ 1.7
62.7 %
£ 12.3
£ 7.2
£ 5.2
72.3 %
Please
refer to our Annual Report on Form 10-K for the year ended December 31, 2020, for definitions of terms used in the above table.
Interactive,
Recurring Revenue
Set
forth below is a breakdown of our Interactive recurring revenue which consists principally of Interactive participation revenue. See
“Interactive Segment Revenue” below for a discussion of Interactive service revenue between the periods under review.
For
the Three-Month
Period
ended
For
the Nine-Month
Period
ended
Unaudited
September
30,
Unaudited
September
30,
Variance
2021
vs 2020
Unaudited
September
30,
Unaudited
September
30,
Variance
2021
vs 2020
(In £ millions)
2021
2020
%
2021
2020
%
Interactive Recurring Revenue
Total Interactive Revenue
£ 4.4
£ 2.7
£ 1.7
62.7 %
£ 12.3
£ 7.1
£ 5.3
74.3 %
Total Recurring Revenue - Interactive
£ 4.4
£ 2.6
£ 1.8
67.9 %
£ 12.3
£ 7.0
£ 5.3
75.0 %
Interactive Recurring Revenue as a Percentage of Total Interactive Revenue
100.0 %
96.9 %
3.1 %
100.0 %
99.6 %
0.4 %
Interactive,
key events
During
the three-month period, we were shortlisted for the SBC Awards for Casino / Slots Developer of the year.
There
were twelve new brand launches during the quarter ended September 2021 including Draftkings in Michigan, four brands with The Stars Group,
Pokerstars, Betstars, Full Tilt and Stars Casino and Leo Vegas in Spain.
There
were twenty-eight new brand launches across the nine-month period including BetMGM in New Jersey and Michigan, Golden Nugget in Michigan,
Gamesys, Draftkings in Michigan and four brands under The Stars Group. We also launched with our first operators in Spain, Luckia, 888
and Leo Vegas.
We
deployed twenty-three new games in the nine-month period across the estate and eight new games in the three-month period including “William
Hill Cash Spins”, “Big Piggy Bonus”, “Dice Spinner Megaways” and “Reel Spooky King Megaways”.
36
Interactive,
Results of Operations
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
September
30,
Unaudited
September
30,
Variance
Unaudited
September
30,
Unaudited
September
30,
Variance
(In millions)
2021
2020
2021
vs 2020
2021
2020
2021
vs 2020
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Service Revenue
$ 6.1
$ 3.5
$ 0.4
$ 2.2
62.7 %
73.4 %
$ 17.1
$ 9.0
$ 1.4
$ 6.7
74.3 %
90.2 %
Cost of Service
(1.0 )
(0.4 )
(0.1 )
(0.5 )
111.5 %
125.1 %
(2.7 )
(1.0 )
(0.3 )
(1.4 )
129.7 %
170.4 %
Selling, general and administrative expenses
(1.7 )
(0.9 )
(0.2 )
(0.7 )
79.0 %
102.1 %
(4.0 )
(2.7 )
(0.2 )
(1.1 )
41.6 %
49.0 %
Stock-based compensation
(0.2 )
(0.1 )
(0.0 )
(0.1 )
50.7 %
60.6 %
(0.4 )
(0.2 )
(0.0 )
(0.1 )
63.3 %
80.3 %
Depreciation and amortization
(0.9 )
(0.5 )
(0.1 )
(0.3 )
60.6 %
71.2 %
(2.5 )
(1.7 )
(0.2 )
(0.6 )
32.8 %
44.8 %
Net operating Income (Loss)
$ 2.3
$ 1.6
$ 0.1
$ 0.7
41.6 %
44.9 %
$ 7.5
$ 3.4
$ 0.7
$ 3.5
103.2 %
122.5 %
Exchange Rate - $ to £
1.38
1.29
1.39
1.27
Note:
Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly
different from the average rate during the period depending on timing of transactions.
All
variances discussed in the Interactive results below are on a functional currency (at constant rate) basis, which excludes the impact
of any changes in foreign currency exchange rates.
Interactive
revenue
During
the three-month and nine-month periods, revenue increased by $2.2 million and $6.7 million, respectively. These increases were
driven by recurring revenue growth due to the consistent launch of new content across the estate, growth in the customer base in new,
emerging and core markets and increased promotional activity through exclusive deals with tier-one customers.
37
Interactive
operating income
Operating
Income increased in the three-month and nine-month periods by $0.7 million and $3.3 million, respectively.
The
increase in both periods was primarily due to the increase in revenue (detailed above), partly offset by an increase in cost of sales
($0.5 million and $1.4 million for the three-month and nine-month periods, respectively) driven by an increase in third party platform
provider costs (in line with the revenue increase for the periods) as well as an increase in SG&A expenses ($0.7 million and $1.1
million for the three-month and nine-month periods, respectively) driven by the investment in the segment to help drive the increasing
revenues.
Leisure
We
generate revenue from our Leisure segment through the rental of our gaming and amusement machines. We receive rental fees for machines,
typically on a long-term contract basis, on both a participation and fixed fee basis, with our newer digital pub machines typically contracted
on a fixed fee basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue
to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming terminals
placed in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of
the contract.
Revenue
growth for our Leisure segment is principally driven by the number of customers we have, the number of gaming machines in operation,
the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
Leisure,
Key Performance Indicators
For the Three-Month
Period ended
For the Nine-Month
Period ended
Unaudited
Sept 30,
Unaudited
Sept 30,
Variance
2021 vs 2020
Unaudited
Sept 30,
Unaudited
Sept 30,
Variance
2021 vs 2020
Leisure
2021
2020
%
2021
2020
%
End of period installed base Gaming machines (# of terminals)
11,546
11,964
(418 )
(3.5 )%
11,546
11,964
(418 )
(3.5 )%
Average installed base Gaming machines (# of terminals)
11,548
12,101
(553 )
(4.6 )%
11,626
12,165
(539 )
(4.4 )%
End of period installed base Other (# of terminals)
6,989
7,719
(730 )
(9.5 )%
6,989
7,719
(730 )
(9.5 )%
Average installed base Other (# of terminals)
7,062
7,935
(873 )
(11.0 )%
7,134
8,059
(925 )
(11.5 )%
Pub Digital Gaming Machines - Average installed base (# of terminals)
6,238
5,772
465
8.1 %
5,978
5,764
214
3.7 %
Pub Analogue Gaming Machines - Average installed base (# of terminals)
1,969
2,602
(634 )
(24.3 )%
2,146
2,677
(531 )
(19.8 )%
MSA and Bingo Gaming Machines - Average installed base (# of terminals) (1)
3,085
3,464
(379 )
(10.9 )%
3,239
3,497
(258 )
(7.4 )%
Inspired Leisure Revenue per Gaming Machine per week
£ 60.4
£ 40.4
£ 20.0
49.4 %
£ 28.3
£ 31.4
£ (3.1 )
(9.8 )%
Inspired Pub Digital Revenue per Gaming Machine per week
£ 57.5
£ 49.2
£ 8.3
16.8 %
£ 27.8
£ 36.5
£ (8.6 )
(23.7 )%
Inspired Pub Analogue Revenue per Gaming Machine per week
£ 37.2
£ 25.3
£ 11.9
46.9 %
£ 16.8
£ 21.2
£ (4.4 )
(20.7) %
Inspired MSA and Bingo Revenue per Gaming Machine per week
£ 83.2
£ 39.4
£ 43.8
111 %
£ 37.8
£ 32.1
£ 5.7
17.9 %
Inspired Other Revenue per Machine per week
£ 19.8
£ 4.3
£ 15.5
356 %
£ 8.2
£ 7.8
£ 0.4
5.3 %
Total Leisure Parks Revenue (Gaming and Non Gaming) (£’m)
£ 12.5
£ 5.4
£ 7.1
132 %
£ 15.8
£ 7.1
£ 8.7
123 %
(1)
Motorway
Service Area machines
Please
refer to our Annual Report on Form 10-K for the year ended December 31, 2020, for definitions of terms used in the above table.
38
Leisure,
Recurring Revenue
Set
forth below is a breakdown of our Leisure recurring revenue which consists principally of Leisure participation revenue and Leisure other
fixed fee revenue. See “Leisure Segment Revenue” below for a discussion of leisure service revenue between the periods under
review.
Set
forth below is a breakdown of our Leisure recurring revenue.
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
September
30,
Unaudited
September
30,
Variance
2021
vs 2020
Unaudited
September
30,
Unaudited
September
30,
Variance
2021
vs 2020
(In £ millions)
2021
2020
%
2021
2020
%
Leisure Recurring Revenue
Total Leisure Revenue
£ 24.2
£ 13.5
£ 10.7
79.3 %
£ 32.7
£ 27.4
£ 5.3
19.4 %
Total Leisure Recurring Revenue
£ 23.4
£ 12.8
£ 10.6
82.3 %
£ 31.0
£ 25.6
£ 5.4
21.2 %
Leisure Recurring Revenue as a Percentage of Total Leisure Revenue
96.6 %
95.0 %
1.6 %
95.0 %
93.6 %
1.4 %
Leisure,
key events
During
the nine-month period ending September 30, 2021, all major sectors of the Leisure segment (Pubs, Holiday Parks, Motorway Service Areas
and Bingo Halls) remained closed due to the COVID-19 closures in the UK until May 17 th , 2021. Venues subsequently reopened
with social distancing and other restrictions imposed due to COVID-19. All significant COVID-19 restrictions were lifted on July 19,
2021.
During
the three-month period, COVID-19 restrictions resulted in frequent amendments to overseas travel policies in the UK. The additional costs
and uncertainty of overseas travel during the quarter resulted in a strong summer season for our Leisure Parks business despite initial
restrictions in Wales and Scotland.
During
the three-month period, new investments in cashless operations proved popular at an increased number of sites The MSA sector continued
to trade strongly due to increased travel within the UK and increasing volume of road transport.
39
Leisure,
Results of Operations
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
September
30,
Unaudited
September
30,
Variance
Unaudited
September
30,
Unaudited
September
30,
Variance
(In millions)
2021
2020
2021
vs 2020
2021
2020
2021
vs 2020
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Total
Variance $
Variance
Attributable to Currency Movement
Variance
on a Functional currency basis
Total
Functional Currency Variance %
Total
Reported Variance %
Revenue:
Service
$ 32.4
$ 16.6
$ 2.1
$ 13.7
82.8 %
95 %
$ 43.1
$ 33.1
$ 10.0
$ 2.9
$ 7.1
21.4 %
30.3 %
Product
1.0
0.8
0.1
0.1
9.2 %
17 %
2.1
2.2
(0.1 )
0.2
(0.2 )
(10.8 )%
(4.0 )%
Total revenue
33.4
17.4
2.1
13.8
79.3 %
92 %
45.2
35.3
9.9
3.1
6.9
19.4 %
28.2 %
Cost of Sales, excluding depreciation and amortization:
Cost of Service
(8.2 )
(3.9 )
(0.5 )
(3.7 )
96.4 %
108 %
(11.6 )
(7.5 )
(4.1 )
(0.8 )
(3.3 )
43.9 %
54.8 %
Cost of Product
(0.5 )
(0.6 )
0.0
0.0
(2.6 )%
(5 )%
(1.1 )
(1.5 )
0.4
(0.1 )
0.4
(28.7 )%
(25.4 )%
Total cost of sales
(8.7 )
(4.5 )
(0.5 )
(3.7 )
83.8 %
94 %
(12.7 )
(9.0 )
(3.7 )
(0.9 )
(2.9 )
31.8 %
41.3 %
Selling, general and administrative expenses
(11.7 )
(9.6 )
(0.7 )
(1.4 )
15.0 %
22 %
(23.1 )
(23.2 )
0.1
(1.8 )
1.9
(8.1 )%
(0.5 )%
Stock-based compensation
(0.1 )
-
(0.0 )
(0.1 )
NA
NA
(0.3 )
(0.0 )
(0.3 )
(0.0 )
(0.3 )
627 %
680 %
Depreciation and amortization
(3.9 )
(5.4 )
(0.2 )
1.8
(32.4 )%
(28.3 )%
(12.2 )
(13.2 )
1.0
(1.0 )
2.0
(15.1 )%
(7.6 )%
Net operating Income (Loss)
9.0
(2.1 )
$ 0.7
$ 10.3
(515 )%
(532 )%
(3.1 )
(10.1 )
7.0
$ (0.6 )
$ 7.6
(72.5 )%
(69.5 )%
Exchange Rate - $ to £
1.38
1.29
1.38
1.29
Note:
Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly
different from the average rate during the period depending on timing of transactions.
All
variances discussed in the Leisure results below are on a functional currency (at constant rate) basis, which excludes the impact of
any changes in foreign currency exchange rates.
Leisure
Revenue
The
three-month period was the first quarter in 2021 when revenue was not impacted by COVID-19 closures and restrictions. For the three-month
period, revenue increased by $13.8 million or 79.3%, as all social distancing restrictions were removed. For the nine-month period revenue
increased by $6.9 million, or 19.4%.
For
the three-month period, Service revenue increased by $13.7 million to $32.4 million. This was driven by strong incomes in leisure parks
with the removal of all COVID-19 restrictions for the majority of the period. Product revenue increased by $0.1 million.
For
the nine-month period, Service revenue increased by $7.1 million to $43.1 million. This was driven by the leisure park reopenings and
the removal of COVID-19 restrictions which began in the third quarter. Product revenue decreased by $0.2 million to $2.1 million.
40
Leisure
Operating Income
Operating
Income for the three-month period improved by $10.3 million to income of $9.0 million. This was primarily due to the increase in revenue
as venues reopened and COVID-19 restrictions were removed.
Operating
Loss for the nine-month period improved by $7.6 million to a loss of $3.1 million. This was primarily due to the increase in revenue
as venues reopened as well as cost of sales and SG&A savings driven by COVID-19 closures earlier in the period.
Non-GAAP
Financial Measures
We
use certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA, to analyze our operating performance. We use these financial
measures to manage our business on a day-to-day basis. We believe that these measures are also commonly used in our industry to measure
performance. For these reasons, we believe that these non-GAAP financial measures provide expanded insight into our business, in addition
to standard U.S. GAAP financial measures. There are no specific rules or regulations for defining and using non-GAAP financial measures,
and as a result the measures we use may not be comparable to measures used by other companies, even if they have similar labels. The
presentation of non-GAAP financial information should not be considered in isolation from, or as a substitute for, or superior to, financial
information prepared and presented in accordance with U.S. GAAP. You should consider our non-GAAP financial measures in conjunction with
our U.S. GAAP financial measures.
We
define our non-GAAP financial measures as follows:
EBITDA
is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income
tax expense.
Adjusted
EBITDA is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and
income tax expense, and other additional exclusions and adjustments . Such additional excluded amounts include stock-based compensation
U.S. GAAP charges where the associated liability is expected to be settled in stock, and changes in the value of earnout liabilities
and income and expenditure in relation to legacy portions of the business (being those portions where trading no longer occurs) including
closed defined benefit pension schemes. Additional adjustments are made for items considered outside the normal course of business, including
(1) restructuring costs, which include charges attributable to employee severance, management changes, restructuring, dual running costs,
costs related to facility closures and integration costs, (2) merger and acquisition costs and (3) gains or losses not in the ordinary
course of business. This does not include any adjustments related to COVID-19.
We
believe Adjusted EBITDA, when considered along with other performance measures, is a particularly useful performance measure, because
it focuses on certain operating drivers of the business, including sales growth, operating costs, selling and administrative expense
and other operating income and expense. We believe Adjusted EBITDA can provide a more complete understanding of our operating results
and the trends to which we are subject, and an enhanced overall understanding of our financial performance and prospects for the future.
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,
because it does not take into account certain aspects of our operating performance (for example, it excludes non-recurring gains and
losses which are not deemed to be a normal part of underlying business activities) . Our use of Adjusted EBITDA may not be comparable
to the use by other companies of similarly termed measures. Management compensates for these limitations by using Adjusted EBITDA as
only one of several measures for evaluating our operating performance. In addition, capital expenditures, which affect depreciation and
amortization, interest expense, and income tax benefit (expense), are evaluated separately by management.
Functional
Currency at Constant rate. Currency impacts discussed have been calculated as the current-period average GBP: USD rate less the
equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining
difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied
by the prior-period average GBP: USD rate, as a proxy for functional currency at constant rate movement.
Currency
Movement represents the difference between the results in our reporting currency (USD) and the results on a functional currency
(at constant rate) basis.
41
Reconciliations
from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Loss, to Adjusted EBITDA are shown below.
Reconciliation
to Adjusted EBITDA by segment for the Three and Nine Months ended September 30, 2021
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
September
30,
Unaudited
September
30,
(In millions)
2021
2021
Total
Gaming
Virtual
Sports
Interactive
Leisure
Corporate
Total
Gaming
Virtual
Sports
Interactive
Leisure
Corporate
Net Income/ (loss)
$ 25.0
$ 5.1
$ 7.6
$ 2.3
$ 9.0
$ 1.0
$ (35.5 )
$ (1.2 )
$ 15.5
$ 7.5
$ (3.1 )
$ (54.2 )
Items Relating to Legacy
Activities:
Pension charges
(1)
0.2
0.2
0.6
0.6
Items outside the normal
course of business:
Acquisition
and integration related transaction expenses (3)
-
-
1.5
1.5
Refinancing
of Company Debt (4)
-
-
0.8
0.8
Italian tax
related costs relating to prior years (5)
-
-
-
1.4
1.4
-
Stock-based compensation expense
3.8
0.5
0.3
0.2
0.1
2.7
8.6
1.1
0.5
0.4
0.3
6.3
Depreciation and amortization
11.2
5.3
0.7
0.9
3.9
0.4
36.2
17.7
2.5
2.5
12.2
1.3
Interest Income
(0.1 )
(0.1 )
(0.2 )
(0.2 )
Interest Expense
7.3
7.3
38.1
38.1
Change in fair value of warrant
liability
(17.3 )
(17.3 )
(3.8 )
(3.8 )
Other finance expenses / (income)
(0.3 )
(0.3 )
(5.5 )
(5.5 )
Income
tax
0.3
0.3
(0.1 )
(0.1 )
Adjusted EBITDA
$ 30.1
$ 10.9
$ 8.6
$ 3.4
$ 13.0
$ (5.8 )
$ 42.0
$ 17.6
$ 19.9
$ 10.4
$ 9.4
$ (15.2 )
Adjusted EBITDA
£ 21.8
£ 30.4
Exchange Rate - $ to £
(7)
1.38
1.38
Note:
Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these
costs are not allocable and to do so would not be practical, these are shown in the Corporate category.
42
Reconciliation
to Adjusted EBITDA by segment for the Three and Nine Months ended September 30, 2020
For
the Three-Month Period ended
For
the Nine-Month Period ended
Unaudited
September
30,
Unaudited
September
30,
(In millions)
2020
2020
Total
Gaming
Virtual Sports
Interactive
Leisure
Corporate
Total
Gaming
Virtual Sports
Interactive
Leisure
Corporate
Net Income/ (loss)
$ 0.5
$ 9.6
$ 5.7
$ 1.6
$ (2.1 )
$ (14.3 )
$ (35.5 )
$ 1.3
$ 15.8
$ 3.4
$ (10.1 )
$ (45.9 )
Items Relating to Legacy Activities:
Pension charges (1)
0.2
0.2
0.5
0.5
Items outside the normal course of business:
Costs of group restructure (2)
0.4
0.4
0.8
0.8
Acquisition and integration related transaction expenses
(3)
1.2
1.2
5.6
5.6
Impairment on interest in equity method investee(6)
-
-
0.7
0.7
Stock-based compensation expense
1.1
0.2
0.1
0.1
-
0.7
3.1
0.4
0.3
0.2
0.0
2.2
Depreciation and amortization
14.0
6.6
1.0
0.5
5.4
0.5
39.9
21.0
2.7
1.7
13.2
1.3
Interest Income
(0.1 )
(0.1 )
(0.5 )
(0.5 )
Interest Expense
8.3
8.3
22.5
22.5
Change in fair value of warrant liability
(0.2 )
(0.2 )
(6.1 )
(6.1 )
Other finance expenses / (income)
(0.3 )
(0.3 )
5.9
5.9
Income tax
0.0
0.0
0.3
0.3
Adjusted EBITDA
$ 25.0
$ 16.4
$ 6.8
$ 2.2
$ 3.3
$ (3.7 )
$ 37.2
$ 22.7
$ 18.8
$ 5.3
$ 3.1
$ (12.7 )
Adjusted EBITDA
£ 19.5
£ 29.0
Exchange Rate - $ to £ (7)
1.29
1.26
Note:
Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these
costs are not allocable and to do so would not be practical, these are shown in the Corporate category.
Notes
to Adjusted EBITDA reconciliation tables above:
(1)
“Pension
charges” are profit and loss charges included within selling, general and administrative expenses, relating to a defined benefit
scheme which was closed to new entrants in 1999 and to future accrual in 2010. As well as the amortization of net loss, the figure
also includes charges relating to the Pension Protection Fund (which were historically borne by the pension scheme) and a small amount
of associated professional services expenses. These costs are included within Corporate Functions.
43
(2)
“Costs of group restructure” include redundancy costs, Payments In Lieu of Notice costs, any associated employer taxes and costs associated with onerous property leases. To qualify as being an adjusting item, costs must be part of a large restructuring project, which will net save ongoing future costs. These costs were primarily incurred in connection with the property consolidation.
(3)
Acquisition and integration related transaction expenses, Stock-based compensation expense, Depreciation and amortization, Total other expense, net and Income tax are as described above in the Results of Operations line item discussions. Total expense, net includes interest income, interest expense, change in fair value of earnout liability, change in fair value of derivative liability and other finance income.
(4)
In May 2021, the Company refinanced its debt. These are the one-off fees as a result of the refinance.
(5)
“Italian tax related costs relating to prior years invoicing” relate to a settlement with the Italian Tax Authorities in respect of an audit of the Italian Branch of Inspired Gaming (International) Limited for the period 2015-2017 in respect of the historic VAT treatment of supplies.
(6)
In April 2020, the Company disposed of its 40% non-controlling equity interest in Innov8 Gaming Limited which resulted in the investment of $0.7 million being written off.
(7)
Exchange rate in the table is calculated by dividing the USD Adjusted EBITDA by the GBP Adjusted EBITDA, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Liquidity
and Capital Resources
Nine
Months ended September 30, 2021, compared to Nine Months ended September 30, 2020
9
Months ended
Variance
(in
millions)
Sept
30,
Sept
30,
2021
2020
2021
to 2020
Net
loss
$ (35.5 )
$ (35.5 )
$ (0.0 )
Amortization
of debt fees
16.7
2.2
14.5
Change
in fair value of derivative and warrant liabilities and stock-based compensation expense
6.1
(2.3 )
8.4
Impairment
expense
0.0
0.7
(0.7 )
Foreign
currency translation on senior bank debt and cross currency swaps
(4.6 )
6.6
(11.2 )
Depreciation
and amortization (incl RoU assets)
38.7
42.6
(3.9 )
Other
net cash (utilized)/generated by operating activities
(14.4 )
17.2
(31.6 )
Net
cash provided by operating activities
7.0
31.5
(24.5 )
Net
cash used in investing activities
(18.2 )
(22.0 )
3.8
Net
cash generated by financing activities
0.9
5.4
(4.5 )
Effect
of exchange rates on cash
0.3
(0.1 )
0.4
Net
(decrease)/increase in cash and cash equivalents
$ (10.0 )
$ 14.8
$ (24.8 )
44
Net
cash provided by operating activities
For the nine months ended September 30, 2021,
net cash inflow provided by operating activities was $7.0 million, compared to a $31.5 million inflow for the nine months ended September
30, 2020, representing a $24.5 million decrease in cash generation. This decrease was driven by interest timing differences resulting
in interest payments of $17.6 million compared to $0.6 million in the prior period. The prior period also included a receipt in relation
to VAT related income.
Amortization
of debt fees increased by $14.5 million to $16.7 million due to the write-off in May 2021 of capitalized debt fees totaling $14.4 million
following the Company refinancing. The remainder of the current year’s non-cash interest expense related to amortization of debt
fees incurred in relation to the business refinancing in October 2019 up to the refinancing. Post refinancing the amortization of debt
fees related to those incurred and capitalized as part of the May 2021 refinancing. The prior year’s non-cash interest expense
related to amortization of debt fees incurred in relation to the business refinancing in October 2019.
Change
in fair value of derivative and warrant liabilities and stock-based compensation expense increased by $8.4 million, from an outflow of
$2.3 million to an inflow of $6.1 million. Movements in the fair valuation of warrant liabilities increased the inflow by $2.3 million,
$5.5 million related to stock-based compensation expense and $0.6 million related to the movement in cross-currency swaps.
Foreign
currency translation on senior bank debt and cross currency swaps resulted in a loss in the nine months ended September 30, 2021, of
$4.6 million as a result of the movement in exchange rates during the period, compared to a $6.6 million gain in the nine months ended
September 30, 2020.
Depreciation
and amortization decreased by $3.9 million to $38.7 million with reductions of a $2.9 million in machine depreciation and $1.5 million
in amortization of intangible assets offset through an increase of $0.6 million in development costs and licenses amortization.
Other
net cash utilized by operating activities decreased by $31.6 million, to a $14.4 million outflow following the significant
impact of the COVID-19 closures. Movements due to different timing of interest payments following the May 2021 refinancing have resulted
in a $15.6 million higher outflow in the nine months ended September 30, 2021. In addition a higher VAT accrual level at
the start of 2021 resulted in a net $10.6 million adverse movement in the nine months ended September 30, 2021. Further adverse
movements were also seen on deferred revenue creditors ($3.3 million) long term liabilities ($1.8 million) and accounts receivable
($7.7 million), caused by the variability of trading levels caused by COVID-19 lockdowns and the unwind period needed when
lockdown restrictions were eased are partly offset by favorable movements in accounts payable and accruals ($6.6 million).
Net
cash used in investing activities
Net
cash used in investing activities decreased by $3.8 million to $18.2 million in the nine months ended September 30, 2021.
Net
cash generated by financing activities
During
the nine months ended September 30, 2021, net cash generated by financing activities was an inflow of $0.9 million, compared to a $5.4
million inflow in the nine months ended September 30, 2020. The inflow in the nine months ended September 30, 2021, related to the net
movement from the May 2021 refinancing and finance lease spend of $0.4 million. During the nine months ended September 30, 2020, an increase
in the amount drawn on the revolver provided a $9.2 million inflow which was partly offset by $3.1 million of debt fees incurred and
$0.7 million of finance lease spend.
45
Funding
Needs and Sources
To
fund our obligations we have relied historically on a combination of cash flows provided by operations and the incurrence of additional
debt or the refinancing of existing debt. As of September 30, 2021, we had liquidity of $37.1 million in cash and cash equivalents and
a further $27.0 million of an undrawn revolver facility. This compares to $43.9 million of cash and cash equivalents as of September
30, 2020, but $12.9 million drawn on the revolver facility with a further $12.9 million of revolver facilities undrawn. We had a working
capital outflow of $14.4 million for the nine months ended September 30, 2021, compared to an $17.3 million inflow for the nine
months ended September 30, 2020. The level of our working capital surplus or deficit varies with the level of machine production we are
undertaking and our capitalization as well as the seasonality evident in some of the businesses purchased as part of the NTG Acquisition.
In periods with minimal machine volumes and capital spend, our working capital is more stable. In periods where significant numbers of
machines are being produced, the levels of inventory and creditors are higher than typical and there is a natural timing difference between
converting the stock into sellable or capitalized plant and settling payments to suppliers. These factors, along with movements in trading
activity levels which have been seen during 2020 and 2021 following the COVID-19 closures, can result in significant working capital
volatility. In periods of low activity, our working capital volatility is reduced. Working capital is reviewed and managed with the aim
of ensuring that current liabilities are covered by the level of cash held and the expected level of short-term receipts.
Some
of our business operations require cash to be held within the machines. As of September 30, 2021, $5.0 million of our $37.1 million of
cash and cash equivalents were held as operational floats within the machines.
Subsequent to the balance sheet date, holders
of the Company’s public warrants exercised 109,346 warrants for a total exercise price of $0.6 million, resulting in the issue
of 54,673 common shares. As of November 9, 2021, there were 23,433,386 shares of the Company’s common stock outstanding.
The Company
may from time to time to purchase all or a portion of the Company’s outstanding debt, or a portion of the Company’s
outstanding equity securities. Such purchases may be effected in the open market, through redemptions, or through privately
negotiated transactions.
Management
currently believes that the Company’s cash balances on hand, cash flows expected to be generated from operations, and the ability
to control and defer capital projects will be sufficient to fund the Company’s net cash requirements through November 2022.
Long
Term and Other Debt
See
Note 4 Long Term and Other Debt of the Financial Statements for detail of the debts held during 2020 and 2021.
Debt
Covenants
Under
our debt facilities in place as of September 30, 2021, we are not subject to covenant testing on the Senior Secured Notes. We are, however,
subject to covenant testing at the level of Inspired Entertainment Inc., the ultimate holding company, on our Super Senior Revolving
Credit Facility which requires the Company to maintain a maximum consolidated senior secured net leverage ratio of 6.25x on the test
date for the relevant period ending June 30, 2021, stepping down to 6.0x on March 31, 2022, 5.75x on March 31, 2023 and 5.50x from March
31, 2024 and thereafter (the “RCF Financial Covenant”). The RCF Financial Covenant is calculated as the ratio of consolidated
senior secured net debt to consolidated pro forma EBITDA (defined as net loss excluding depreciation and amortization, interest expense,
interest income and income tax expense) for the 12-month period preceding the relevant quarterly testing date and is tested quarterly
on a rolling basis, subject to the Initial Facility (as defined in the RCF Agreement) being drawn on the relevant test date. The RCF
Financial Covenant does not include a minimum interest coverage ratio or other financial covenants. As the RCF has never been drawn at
any point since being in place, no covenant testing was required at September 30, 2021.
Under
our debt facilities in place as of September 30, 2020, we were subject to covenant testing on the Senior Secured Notes. The covenant
testing is set at the level of Inspired Entertainment Inc., the ultimate holding company, and consists of a test on Leverage (Consolidated
Total Net Debt/Consolidated Pro Forma EBITDA) and a test on the level of capital expenditure. These are measured under U.S. GAAP. Leverage
was tested at quarterly intervals commencing for the period ending June 30, 2020, and capital expenditure was tested annually commencing
on December 31, 2019.
Prior
to reaching our first leverage covenant test on June 30, 2020, the covenants were reset as a direct result of the COVID-19 closures and
subsequent loss of trading as a result of government lockdowns in many key trading countries around the world. Formal agreement of the
revised covenants was achieved on June 25, 2020.
46
There
were no breaches of the debt covenants in the periods ended September 30, 2021, and September 30, 2020.
Liens
and Encumbrances
As
of September 30, 2021, our senior bank debt was secured by the imposition of a fixed and floating charge in favor of the lender over
all the assets of the Company and certain of the Company’s subsidiaries.
Contractual
Obligations
As
of September 30, 2021, our contractual obligations were as follows:
Less
than
More
than
Contractual
Obligations (in millions)
Total
1
yr
1-3
years
3-5
years
5
yrs
Operating
activities
Interest
on long term debt
$ 125.4
$ 25.6
$ 49.9
$ 49.9
$ -
Financing
activities
Senior
bank debt - principal repayment
316.9
-
-
316.9
-
Finance
lease payments
1.7
0.9
0.5
0.3
-
Operating
lease payments
10.5
3.2
3.4
1.9
2.0
Interest
on non-utilisation fees
1.7
0.4
0.8
0.5
-
Total
$ 456.2
$ 30.1
$ 54.6
$ 369.5
$ 2.0
Off-Balance
Sheet Arrangements
As
of September 30, 2021, there were no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, promulgated
by the U.S. Securities and Exchange Commission.
Critical
Accounting Policies
The
preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted
in the United States (“U.S. GAAP”) requires management to make estimates and assumptions. We exercise considerable judgment
with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our
assets and liabilities, our recognition of revenue and expenses, and our disclosure of commitments and contingencies at the date of the
consolidated financial statements. On an on-going basis, we evaluate our estimates and judgments. We base our estimates and judgments
on a variety of factors, including our historical experience, knowledge of our business and industry and current and expected economic
conditions, that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate our estimates
and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies,
we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment,
actual results could differ from such estimates.
For
a discussion of other recently issued accounting standards, and assessments as to their impacts on the Company, see Nature of Operations,
Management’s Plans and Summary of Significant Accounting Policies, Note 1 to the consolidated financial statements included elsewhere
in this report.
47
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.