Item 7. Management’s Discussion and Analysis
ITEM
7. 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 elsewhere in this report.
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 this Annual Report on Form 10-K for the year ended December 31, 2022.
Seasonality
Our
results of operations can fluctuate due to seasonal trends and other factors. Sales of our gaming machines can vary quarter on quarter
due to both supply and demand factors. Player activity for our holiday parks is generally higher in the second and third quarters of
the year, particularly during the summer months and slower during the first and fourth quarters of the year. Historical seasonality has
been impacted by COVID-19 business disruptions and could continue to be impacted in future periods.
36
COVID-19
Update
During
the twelve-month period ended December 31, 2021, all land-based operations were either subject to lockdown or had social distancing restriction
in place. These social distancing measures continued throughout Greece and Italy until the second quarter of 2022, however, were no longer
in place in the United Kingdom from July 2021, and therefore year on year comparisons may not be meaningful due to the COVID-19 impacts.
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,
the majority of our revenue is derived from, and the 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 and the rest of the world (including North
America).
For
the twelve months ended December 31, 2022, we derived approximately 73% of our revenue from the UK (including customers headquartered
in the UK but whose revenue is generated globally), 8% from Greece, and the remaining 19% across the rest of the world. During the twelve
months ended December 31, 2021, we derived approximately 71%, 9% and 20% of our revenue from those regions, respectively.
As
of December 31, 2022, our non-current assets (excluding goodwill) were attributable as follows: 78% to the UK, 6% to Greece and 16% across
the rest of the world.
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 geographic
region in which the largest portion of our business is operated 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 twelve months ended December 31, 2022, we derived approximately 27% of our revenue from sales to customers outside the UK, compared
to 29% during the twelve months ended December 31, 2021.
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.
37
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 periods ended December 31, 2022 and December 31, 2021, the average GBP:USD rates were for the twelve-month
period 1.23 and 1.37, 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 twelve-month period ended December 31, 2022, compared to the same period in
2021; and
●
a discussion and analysis
of the results of operations for each of the Company’s segments (Gaming, Virtual Sports, Interactive and Leisure) for the twelve-month
periods ended December 31, 2022, compared to the same period in 2021, 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.
Year-on-year comparisons may not be meaningful due to COVID-19 impacts in prior period, as noted above.
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.
Overall
Company Results
Twelve
Months ended December 31, 2022, compared to Twelve Months ended December 31, 2021
For the Twelve-Month
Variance
Period ended
2022 vs 2021
(In millions)
Dec 31,
2022
Dec 31,
2021
Variance Attributable to Currency Movement
Variance on a Functional currency basis
Total Functional Currency Variance %
Total Reported Variance %
Revenue:
Service
$ 251.8
$ 183.3
$ (29.1 )
$ 97.5
53.2 %
37.3 %
Product
33.6
25.6
(4.2 )
12.3
48.0 %
31.4 %
Total revenue
285.4
208.9
(33.3 )
109.8
52.6 %
36.6 %
Cost of Sales, excluding depreciation and amortization:
Cost of Service
(49.3 )
(34.3 )
5.9
(21.0 )
61.3 %
43.9 %
Cost of Product
(22.7 )
(16.4 )
2.9
(9.2 )
55.7 %
38.2 %
Selling, general and administrative expenses
(115.6 )
(97.2 )
13.6
(32.0 )
33.0 %
18.9 %
Stock-based compensation
(10.8 )
(13.0 )
1.2
1.0
(7.8 )%
(17.2 )%
Acquisition and integration related transaction expenses
(0.5 )
(1.6 )
0.1
1.0
(63.4 )%
(67.6 )%
Depreciation and amortization
(37.6 )
(47.0 )
4.2
5.2
(11.1 )%
(20.0 )%
Net operating Income (Loss)
48.9
(0.6 )
(5.4 )
54.9
(30632.3 )%
(8714.8 )%
Other income (expense)
Interest expense, net
(25.4 )
(44.3 )
3.2
15.7
(35.7 )%
(42.7 )%
Change in fair value of warrant liability
-
0.9
-
(0.9 )
(100.0 )%
(100.0 )%
Profit on disposal of trade & assets
0.9
-
(0.0 )
0.9
N/A
N/A
Other finance income (expense)
1.1
5.7
(0.1 )
(4.5 )
(78.0 )%
(80.2 )%
Total other income (expense), net
(23.4 )
(37.7 )
3.1
11.2
(29.2 )%
(38.0 )%
Net Income (loss) from continuing operations before income taxes
25.5
(38.3 )
(2.3 )
66.1
(177.4 )%
(166.6 )%
Income tax expense
(3.2 )
1.6
0.4
(5.3 )
(329.4 )%
(303.3 )%
Net Income (Loss)
$ 22.3
$ (36.7 )
$ (1.9 )
$ 60.9
(170.5 )%
(160.7 )%
Exchange Rate - $ to £
1.23
1.37
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
●
VAT-related revenue for
the twelve-months ended December 31, 2022 was $1.0 million, and for the twelve-months ended December 31, 2021 was $3.1 million.
“VAT-related
revenue” are payments from UK customers related to our contractual revenue share of their value-added tax rebate.
For
the twelve months ended December 31, 2022, revenue on a functional currency (at constant rate) basis increased by $109.8 million, or
53%.
For
the twelve-month period, Leisure and Gaming service revenue grew by $38.4 million and $30.4 million, respectively, predominately due
to COVID-19 related closures and restrictions in the first six months of the prior year. Virtual Sports and Interactive grew by $25.7
million and $3.0 million, respectively, with $22.6 million of the Virtuals Sports increase from Online and $3.1 million from Retail.
38
Cost
of Sales, excluding depreciation and amortization
Cost
of sales, excluding depreciation and amortization, for the twelve months ended December 31, 2022, increased by $30.2 million, or 60%.
The increase was driven by Cost of Service of $21.0 million due to COVID-19 related closures in the prior period, and a $9.2 million
increase in Cost of Product.
Selling,
general and administrative expenses
Selling,
general and administrative (“SG&A”) expenses for the twelve months ended December 31, 2022 increased by $32.0 million,
or 33%.
The
increase was driven primarily by the increase in staff cost of $29.2 million, due to the return of furloughed staff and return to full
pay for the current period as well as wage inflation particularly increases in the ‘UK’s national living wage’ of
6.6% (The National Living Wage is an obligatory minimum wage payable to workers in the United Kingdom).
Stock-based
compensation
During
the twelve months ended December 31, 2022, the Company recorded expenses of $10.8 million, compared to expenses of $13.0 million, for
the twelve months ended December 31, 2021. All expenses related to outstanding awards, but the twelve months ended December 31, 2021,
included $1.4 million of shares that fully vested on the date of grant.
Acquisition
and integration related transaction expenses
During
the twelve months ended December 31, 2022, the Company recorded an expense of $0.5 million, compared to an expense of $1.6 million, for
the twelve months ended December 31, 2021.
Expenses
in both years related to integration costs for the Company’s acquisition of both Gaming Technology Group of Novomatic
UK Ltd., and acquisition costs of Sportech Lotteries, LLC as well as costs relating to potential acquisitions.
Depreciation
and amortization
Depreciation
and amortization decreased for the twelve-month period by $5.2 million. This was mostly driven by Gaming and Leisure with reductions
of $4.0 million and $1.0 million. The decrease in Gaming was due to a decrease in software amortization as software becomes fully amortized
and machine depreciation as machines in Greece become fully depreciated.
Net
operating income/(loss)
During
the twelve-month period, net operating income was $48.9 million, an increase of $54.9 million. These increases were attributable primarily
to the increases in revenue driven by the COVID-19 closures and restrictions in 2021, as well as growth in online revenue and the decrease
in depreciation, partly offset by an increase in Cost of sales and SG&A expenses.
Interest
expense, net
Interest
expense, net decreased by $15.7 million in the twelve-month period ended December 31, 2022, which was due to the refinancing in the previous
year with savings due to lower debt interest of $0.6 million, lower debt fee amortization of $0.9 million and the $14.1 million write-off
of debt fees relating to the previous debt.
Change
in fair value of warrant liability
With
the expiration of the warrants on December 23, 2021, the liability and the requirement to restate to fair value ceased to exist. For
the twelve months ended December 31, 2021, the change in fair value of the warrant liability resulted in a gain of $0.9 million.
Gain
on disposal of business
For
the twelve-months ended December 31, 2022, gain on disposal of business was $0.9 million due to the sale of part of our Italian Gaming
operations (see Gaming key events for more information).
Other
finance income
Other
finance income for the twelve months ended December 31, 2022, was a $1.1 million gain. This compares to a $5.7 million gain for the twelve
months ended December 31, 2021. The year-on-year movements relate solely to the retranslation of the principal balance of our senior
debt facilities in place in the previous year.
39
Income
tax expense
Our
effective tax rate for the twelve months ended December 31, 2022 was (12.9%), compared to 4.2% for the twelve months ended December
31, 2021.
Deferred Tax
We recorded a valuation allowance against all of our deferred tax assets
as of both December 31, 2022, and December 31, 2021. We intend to continue maintaining a full valuation allowance on our deferred tax
assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current
earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient
positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no
longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to
income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are
subject to change on the basis of the level of profitability that we are able to actually achieve.
Net
Income/ (loss)
During the twelve-month period, net income was $22.3
million, an increase of $60.9 million year-over-year, primarily due to an increase in net operating income $54.9 million, a decrease in
interest expense, net $15.7 million, a decrease in other finance income ($4.5 million) and increase in income tax expense of ($5.3 million).
Segment
Results ( for the twelve months ended December 31, 2022, compared to the twelve months ended December 31, 2021)
Gaming
We
generate revenue from our Gaming segment through the sales and rentals of our gaming machines. We receive rental fees for machines, typically
in conjunction with long-term contracts, 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 changes in (i) the number of operator customers we have, (ii) the number of Gaming
machines in operation, (iii) the net win performance of the machines and (iv) the net win percentage that we receive pursuant to our
contracts with our customers.
Gaming,
Key Performance Indicators
For the Twelve-Month
Period ended
Variance
2022 vs 2021
Gaming
Dec 31,
2022
Dec 31,
2021
%
End of period installed base (# of terminals) (3)
35,003
31,891
3,112
9.8 %
Total Gaming - Average installed base (# of terminals) (3)
34,781
31,894
2,886
9.0 %
Participation
- Average installed base (# of terminals) (3)
31,268
29,189
2,079
7.1 %
Fixed Rental - Average installed base (# of terminals)
3,512
2,705
807
29.8 %
Service Only - Average installed base (# of terminals)
16,854
21,563
(4,709 )
(21.8 )%
Customer Gross Win per unit per day (1) (2) (3)
£ 91.0
£ 50.7
£ 40.4
79.7 %
Customer Net Win per unit per day (1) (2) (3)
£ 66.5
£ 37.7
£ 28.7
76.2 %
Inspired Blended Participation Rate
5.7 %
6.4 %
(0.7 )%
(10.9 )%
Inspired Fixed Rental Revenue per Gaming Machine per week (2)
£ 47.8
£ 26.3
£ 21.4
81.4 %
Inspired Service Rental Revenue per Gaming Machine per week (2)
£ 4.7
£ 3.4
£ 1.3
36.9 %
Gaming Long term license amortization (£’m)
£ 4.3
£ 5.0
£ (0.7 )
(13.9 )%
Number of Machine sales
2,927
3,372
(545 )
(16.2 )%
Average selling price per terminal
£ 7,918
£ 4,436
£ 3,482
78.85 %
(1)
Includes all SBG terminals
in which the Company takes a participation revenue share across all territories.
(2)
Includes all days of the
year, including the days during which the Gaming terminals were not operating due to COVID-19 closures.
(3)
Includes circa 2,500 of
lottery terminals (zero in the prior year) where the share is on handle instead of net win.
In
the table above:
“End
of Period Installed Base” is equal to the number of deployed Gaming terminals at the end of each period that have been placed on
a participation or fixed rental basis. Gaming participation revenue, which comprises the majority of Gaming Service revenue, is directly
related to the participation terminal installed base. This is the medium by which our customers generate revenue and distribute a revenue
share to the Company. To the extent all other KPIs and certain other factors remain constant, the larger the installed base, the higher
the Company’s revenue would be for a given period. Management gives careful consideration to this KPI in terms of driving growth
across the segment. This does not include Service Only terminals.
Revenue
is derived from the performance of the installed base as described by the Gross and Net Win KPIs.
40
If
the End of Period Installed Base is materially different from the Average Installed Base (described below), we believe this gives an
indication as to potential future performance. We believe the End of Period Installed Base is particularly useful for assessing new customers
or markets, to indicate the progress being made with respect to entering new territories or jurisdictions.
“Total
Gaming - Average Installed Base” is the average number of deployed Gaming terminals during the period split by Participation terminals
and Fixed Rental terminals. Therefore, it is more closely aligned to revenue in the period. We believe this measure is particularly useful
for assessing existing customers or markets to provide comparisons of historical size and performance. This does not include Service
Only terminals.
“Participation
- Average Installed Base” is the average number of deployed Gaming terminals that generated revenue on a participation basis.
“Fixed
Rental - Average Installed Base” is the average number of deployed Gaming terminals that generated revenue on a fixed rental basis.
“Service
Only - Average Installed Base” is the average number of terminals that generated revenue on a Service only basis.
“Customer
Gross Win per unit per day” is a KPI used by our management to (i) assess impact on the Company’s revenue, (ii) determine
changes in the performance 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 average per unit cash generated across all Gaming terminals in which the Company
takes a participation revenue share across all territories in the period, defined as the difference between the amounts staked less winnings
to players divided by the Average Installed Base in the period, then divided by the number of days in the period.
Gaming
revenue accrued in the period is derived from Customer Gross Win accrued in the period after deducting gaming taxes (defined as a regulatory
levy paid by the Customer to government bodies) and applying the Company’s contractual revenue share percentage.
Our
management believes Customer Gross Win measures are meaningful because they represent a view of customer operating performance that is
unaffected by our revenue share percentage and allow management to (1) readily view operating trends, (2) perform analytical comparisons
and benchmarking between customers and (3) identify strategies to improve operating performance in the different markets in which we
operate.
“Customer
Net Win per unit per day” is Customer Gross Win per unit per day after giving effect to the deduction of gaming taxes.
“Inspired
Blended Participation Rate” is the Company’s average revenue share percentage across all participation terminals where revenue
is earned on a participation basis, weighted by Customer Net Win per unit per day.
“Inspired
Fixed Rental Revenue per Gaming Machine per week” is the Company’s average fixed rental amount across all fixed rental terminals
where revenue is generated on a fixed fee basis, per unit per week.
“Inspired
Service Rental Revenue per Gaming Machine per week” is the Company’s average service rental amount across all service only
rental terminals where revenue is generated on a service only fixed fee basis, per unit per week.
“Gaming
Long term license amortization” is the upfront license fee per terminal which is typically spread over the life of the terminal.
Our
overall Gaming revenue from terminals placed on a participation basis can therefore be calculated as the product of the Participation
- Average Installed Base, the Customer Net Win per unit per day, the number of days in the period, and the Inspired Blended Participation
Rate, which is equal to “Participation Revenue”.
“Number
of Machine sales” is the number of terminals sold during the period.
“Average
selling price per terminal” is the total revenue in GBP of the Gaming terminals sold divided by the “number of Machine sales”.
41
Gaming,
Recurring Revenue
Set
forth below is a breakdown of our Gaming recurring revenue. Gaming recurring revenue principally consists of Gaming participation revenue
and fixed rental revenue.
For the Twelve-Month
Period ended
Variance
2022 vs 2021
(In £ millions)
Dec 31,
2022
Dec 31,
2021
%
Gaming Recurring Revenue
Total Gaming Revenue
£ 90.8
£ 59.4
£ 31.5
53.0 %
Gaming Participation Revenue
£ 43.0
£ 27.7
£ 15.3
55.3 %
Gaming Other Fixed Fee Recurring Revenue
£ 12.8
£ 6.9
£ 5.9
85.6 %
Gaming Long-term license amortization
£ 4.3
£ 5.2
£ (0.8 )
(16.1 )%
Total Gaming Recurring Revenue *
£ 60.2
£ 39.8
£ 20.4
51.3 %
Gaming Recurring Revenue as a % of Total Gaming Revenue †
66.3 %
67.0 %
(0.8 )%
Total Gaming excluding VAT-related revenue
£ 90.0
£ 57.1
Gaming Recurring Revenue as a % of Total Gaming Revenue (excluding VAT-related revenue)
66.9 %
69.7 %
*
Does not reflect VAT-related
revenue.
†
Total Gaming Revenue for
the twelve-month period ended December 31, 2022 and 2021, includes £0.8 million and £2.3 million, respectively of VAT-related
revenue, which is not reflected in Gaming Recurring Revenue for that period. Excluding VAT-related revenue, Gaming Recurring Revenue
was 67% and 70%, respectively of Total Gaming Revenue for such period.
Note – For the twelve-months
ending December 31, 2022, there has been some recharacterization between Gaming Participation Revenue and Other Fixed fee revenue
to ensure consistency with similar items across the Group. No changes to prior year.
In
the table above:
“Gaming
Participation Revenue” includes our share of revenue generated from (i) our Gaming terminals placed in gaming and lottery venues;
and (ii) licensing of our game content and intellectual property to third parties.
“Gaming
Other Fixed Fee Recurring Revenue” includes service revenue in which the Company earns a periodic fixed fee on a contracted basis.
“Gaming
Long term license amortization” – see the definition provided above.
“Total
Gaming Recurring Revenue” is equal to Gaming Participation Revenue plus Gaming Other Fixed Fee Recurring Revenue.
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.
42
For the Twelve-Month
Period ended
Variance
(In millions)
Dec 31,
2022
Dec 31,
2021
2022 vs 2021
Total Functional Currency %
Service Revenue:
UK LBO
$ 40.7
$ 30.3
$ 10.4
34.2 %
49.4 %
UK VAT - Related Income
1.0
3.1
$ (2.1 )
(66.9 )%
(65.5 )%
UK Other
12.1
7.9
4.2
52.6 %
69.0 %
Italy
2.7
2.2
0.5
24.4 %
37.7 %
Greece
18.1
14.9
3.2
21.6 %
35.1 %
Rest of the World
0.7
0.4
0.4
96.1 %
114.0 %
Lotteries
5.1
-
5.1
NA
NA
Total Service revenue
$ 80.4
$ 58.8
$ 21.6
36.8 %
51.8 %
Exchange Rate - $ to £
1.24
1.37
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.
Gaming,
key events
Total
Gaming Customer Gross Win per unit per day (in our functional currency, GBP) for the twelve-months ended December 31, 2022, increased
by £40.4, or 80%, to £91.0. Much of the increase is driven by retail venues being closed during the first quarter of 2021
and part of the second quarter as a result of COVID-19 restrictions. Another factor was our first year recognizing the newly
acquired Lottery business, which includes just under 2,500 lottery terminals (zero in the prior year) where the share is on handle instead
of net win and achieves Gross Win per unit per day figures above the average of the remaining Gaming sector.
The
overall participation rate for our installed base decreased from 6.4% for the twelve months ended December 31, 2021, to 5.7% in 2022.
The decrease was due mainly to the new Lottery business, which delivers high gross win values at lower participation terms than the average
of the remaining Gaming sector. The Lottery business operates close to 2,500 terminals in various locations in the Dominican Republic
and has an agreement for the supply of these terminals until March 9, 2035. The twelve months of trading delivered $5.1 million
of participation revenue.
Inspired
rolled out new content across the UK LBO estate during the months of April and May 2022, which resulted in Gaming Customer Gross Win
per unit per day increasing by 4.8% from the second half of 2021 to the second half of 2022 (This comparison is used rather than full
year to help separate the impact of Covid closure in the first half of 2021).
43
During
the twelve-months ended December 31, 2022, Inspired recognized contractual performance bonuses of $2.0 million within UK
LBO segment. The bonus payments were triggered by strong year-on-year growth in Gaming Customer Gross Win per shop.
At
the end of the second quarter of 2022, Inspired secured a five-year contract extension for service and content fees with
one of its largest UK LBO customers. Over 400 “Vantage” terminals will go on trial during the first quarter of 2023 with
the full roll out plan expected to commence in the fourth quarter of 2023, expecting to be complete by the end of first quarter of 2024.
During
the fourth quarter of 2022, Inspired’s two other major UK LBO customers signed up for new five-year and four-year contracts
respectively. Both customers will refresh their estate with the new “Vantage” terminal on their own capital expenditure,
all installations are expected to be complete by the end of 2023.
During
the twelve-month period, Inspired upgraded its Non-LBO UK gaming estate with the installation of 460 “Flex” and 700 “Prismatic”
terminals through a combination of outright sales and lease agreements. In the Dutch gaming market, Inspired continued its
strong relationship with a major customer, delivering outright sales of over 360 digital terminals, which included 100 in the third quarter
and 160 in the fourth quarter.
In
the UK Casino market, Inspired installed 183 “Sabre Hydra” terminals into venues which completed the full machine order of
over 200 machines with a major customer.
In
the North America market, Inspired sold 186 “Valor” terminals across a number of customers in Illinois. The total sales since
launch in December 2019 are now over 880 terminals.
Inspired
delivered its second machine order to Western Canada Lottery Corporation (WCLC), our second jurisdiction in North America. Inspired completed
the outright sale of 820 “Valor Clamshell” terminals in the fourth quarter 2022 which represents the highest single machine
order. As part of the agreement, Inspired will take back the original 100 “Valor” terminals in the second quarter of 2023,
these terminals will either redeployed in North America or converted for another market.
During
2022, Inspired delivered the final 308 “Valor” terminals of a total 500-terminal award to OPAP (Greece) which include an
upfront license fee, this takes Inspired’s contracted volumes to 9,440. Inspired rolled out new content during the third quarter,
which has resulted in double-digit growth in Gaming Customer Gross Win per unit per day when compared to the second quarter.
In
the Italian market, Inspired has transitioned to a content and platform supplier only model beginning January 1, 2022, driving significant
operating expense savings. Inspired sold a large portion of its business to a major machine operator, including customer contracts and
“in country” staff.
Gaming,
Results of Operations
For the Twelve-Month
Period ended
Variance
2022 vs 2021
(In millions)
Dec 31,
2022
Dec 31,
2021
Variance Attributable to Currency Movement
Variance on a Functional currency basis
Total Functional Currency Variance %
Total Reported Variance %
Revenue:
Service
$ 80.4
$ 58.8
$ (8.8 )
$ 30.4
51.8 %
36.8 %
Product
31.3
22.6
$ (4.0 )
12.7
56.0 %
38.4 %
Total revenue
111.7
81.4
(12.8 )
43.1
53.0 %
37.2 %
Cost of Sales, excluding depreciation and amortization:
Cost of Service
(19.3 )
(12.8 )
$ 2.3
(8.8 )
69.2 %
51.3 %
Cost of Product
(21.0 )
(14.4 )
$ 2.7
(9.3 )
64.5 %
45.8 %
Total cost of sales
(40.3 )
(27.2 )
5.0
(18.1 )
66.7 %
48.4 %
Selling, general and administrative expenses
(30.1 )
(28.1 )
$ 3.6
(5.6 )
19.7 %
7.2 %
Stock-based compensation
(1.6 )
(1.8 )
$ 0.2
0.0
(0.9 )%
(11.1 )%
Depreciation and amortization
(16.6 )
(22.5 )
$ 2.0
4.0
(17.8 )%
(26.3 )%
Net operating Income (Loss)
$ 23.1
$ 1.8
$ (2.1 )
$ 23.4
1227.4 %
1156.3 %
Profit on disposal of trade & assets
0.9
-
-
0.9
N/A
N/A
Net Income (Loss)
$ 24.0
$ 1.8
$ (2.1 )
$ 24.3
1280.2 %
1205.7 %
Exchange Rate - $ to £
1.23
1.37
44
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 twelve-month period, Gaming revenue increased by $43.1 million, or 53%, this was driven by a $30.4 million increase in Service revenue
and $12.7 million increase in Product revenue.
The
increase in Gaming Service revenue was driven by $20.4 million from the UK market, $5.2 million from the Greek market and $0.9 million
from the Italian market, as all venues were open for the entire period compared to the prior period when the majority of the UK estate,
all Greece retail venues and all Italy retail venues were shut for some of the period and had restrictions for the remaining. $5.6 million
of the increase was due to the addition of the new Lotteries market and $0.4 million from the rest of the world. This was offset by lower
VAT-related revenue of $2.1 million.
Product
revenue increase was primarily driven by higher Product sales of $9.3 million in North America, $3.3 million of UK sales and $2.0 million
of higher spare sales, partly offset by lower sales of $2.1 million in Italy.
Gaming
Operating Income
Operating
income increased for the twelve-month period by $23.4 million. This increase was primarily due to the increase in revenues of $43.1 million
and decrease in depreciation of $4.0 million, primarily due to the decrease in software amortization as software became fully amortized
and due to a decrease in machine depreciation, as machines in Greece become fully depreciated. This was partially offset by an increase
of Cost of sales of $18.1 million and increase of $5.6 million in SG&A, as staff returned from furlough or to full salary.
Gaming
Net Income
For
the twelve-month period, Net income increased by $24.3 million, from an income of $1.8 million to an income of $24.0 million. This was
due to the increase in Operating income and a $0.9 million profit from the disposal of trade and assets from the sale of part of the
Italian VLT operations (see Gaming key events for more information).
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.
45
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.
Virtual
Sports, Key Performance Indicators
For the Twelve-Month
Period ended
Variance
2022 vs 2021
Virtuals
Dec 31,
2022
Dec 31,
2021
%
No. of Live Customers at the end of the period
66
61
5
8.2 %
Average No. of Live Customers
65
60
5
8.9 %
Total Revenue (£’m)
£ 44.9
£ 26.2
£ 18.7
71.4 %
Total Revenue £’m - Retail
£ 9.5
£ 7.2
£ 2.2
31.2 %
Total Revenue £’m - Online Virtuals
£ 35.4
£ 19.0
£ 16.5
86.7 %
In
the table above:
“No.
of Live Customers at the end of the period” and “Average No. of Live Customers” represent the number of customers from
which there is Virtual Sports revenue at the end of the period and the average number of customers from which there is Virtual Sports
revenue during the period, respectively.
“Total
Revenue (£m)” represents total revenue for the Virtual Sports segment, including recurring and upfront service revenue. Total
revenue is also divided between “Total Revenue (£m) – Retail,” which consists of revenue earned through players
wagering at Virtual Sports venues, “Total Revenue (£m) – Online Virtuals,” which consists of revenue earned through
players wagering on Virtual Sports online.
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 Twelve-Month Period ended
Variance
2022 vs 2021
(In £ millions)
Dec 31,
2022
Dec 31,
2021
%
Virtual Sports Recurring Revenue
Total Virtual Sports Revenue
£ 44.9
£ 26.2
£ 18.7
71.2 %
Recurring Revenue - Retail Virtuals
£ 9.2
£ 6.8
£ 2.4
34.8 %
Recurring Revenue - Online Virtuals
£ 35.1
£ 18.1
£ 17.0
93.6 %
Total Virtual Sports Long-term license amortization
£ 0.5
£ 0.8
£ (0.3 )
(34.6 )%
Total Virtual Sports Recurring Revenue
£ 44.8
£ 25.7
£ 19.0
73.9 %
Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue
99.7 %
98.1 %
1.6 %
46
“Recurring
Revenue” includes our share of revenue generated from (i) our Virtual Sports products placed with operators; (ii) licensing our
game content and intellectual property to third parties; and (iii) our games on third-party online gaming platforms that are interoperable
with our game servers.
“Virtual
Sports Long term license amortization” is the upfront license fee which is typically spread over the life of the contract.
Virtual
Sports, key events
During
the period, we launched Virtual Horse racing with the DC Lottery into their lottery locations.
New
contracts were signed with Scientific Games for Virtual Sports content to be sold to Netherlands Lottery (NLO), Goldbet covering the
provision of Virtual Sports into both their retail and online channels in Italy and a contract for Class 4 VLT games in Ladbrokes Belgium
retail.
We
signed a long-term extension to our contract with Betfred covering the provision of Virtual Sports into their retail LBO
estate in the UK. In addition, we signed contract term extensions with Bet Victor, Sisal (Italy), Niké, spol. s r.o (Slovakia)
and additional territories were added to our contract with Kaizen Gaming.
A
new Virtuals Plug and Play contract was signed with Morocco Lottery and launched, plus an extension to the retail contract.
We
launched Virtuals Women’s Soccer to coincide with UEFA Women’s Euro 2022. We also launched Matchday multi-stream with one
of our biggest online customers and Matchday Ultra 2 and Soccer Ultra 2 with SNAI (Italy) retail and online, and optimized OPAP retail
schedule increasing the frequency of events and added product enhancements.
We
also signed a long-term extension to our contract with 49’s .
Virtual
Sports, Results of Operations
For the Twelve-Month
Period ended
Variance
2022 vs 2021
(In millions)
Dec 31,
2022
Dec 31,
2021
Variance Attributable to Currency Movement
Variance on a Functional currency basis
Total Functional Currency Variance %
Total Reported Variance %
Service Revenue
$ 55.1
$ 36.0
$ (6.6 )
$ 25.7
71.4 %
53.2 %
Cost of Service
(2.4 )
(1.9 )
0.3
(0.8 )
(44.5 )%
29.4 %
Selling, general and administrative expenses
(6.9 )
(7.1 )
0.8
(0.6 )
8.9 %
(2.6 )%
Stock-based compensation
(0.7 )
(0.8 )
0.1
0.0
(2.1 )%
(12.5 )%
Depreciation and amortization
(2.6 )
(3.4 )
0.3
0.5
(14.4 )%
(23.5 )%
Net operating Income (Loss)
$ 42.5
$ 22.8
$ (5.1 )
$ 24.7
108.4 %
86.1 %
Exchange Rate - $ to £
1.23
1.37
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.
Virtual
Sports revenue
During
the twelve-month period, revenue increased by $25.7 million, or 71%. This increase was driven by $22.6 million increase in
Online Virtuals, primarily driven by the growth from our existing online customers along with expanding jurisdictions, as well as increases
in Retail Virtuals of $3.1 million, due to retail venues being open for the whole of the period compared to the prior period.
Virtual
Sports operating income
Operating
income increased by $25.3 million in the twelve-month period. This increase was primarily due to the increase in revenue of $25.7 million
and a decrease in depreciation and amortization of $0.5 million, partly offset by an increase of $0.8 million of cost of sales.
Interactive
We
generate revenue from our Interactive segment through the licensing of our products. Typically, we receive fees in exchange for the licensing
of our products, on a long-term contract basis, on a participation basis. Our participation contracts are usually 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.
47
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.
Interactive,
Key Performance Indicators
For the Twelve-Month
Period ended
Variance
2022 vs 2021
Interactive
Dec 31,
2022
Dec 31,
2021
%
No. of Live Customers at the end of the period
130
109
21
19.3 %
Average No. of Live Customers
125
100
25
24.5 %
No. of Live Games at the end of the period
270
232
38
16.4 %
Average No. of Live Games
254
216
38
17.6 %
Total Revenue (£’m)
£ 18.8
£ 16.6
£ 2.2
13.0 %
In
the table above:
“No.
of Live Customers at the end of the period” and “Average No. of Live Customers” represent the number of customers from
which there is Interactive revenue at the end of the period and the average number of customers from which there is Interactive revenue
during the period, respectively.
“No.
of Live Games at the end of the period” and “Average No. of Live Games” represents the number of games from which there
is Interactive revenue at the end of the period and the average number of games from which there is Interactive revenue during the period,
respectively.
“Total
Revenue (£m)” represents total revenue for the Interactive segment, including recurring and upfront service revenue.
Interactive,
Recurring Revenue
All
Interactive revenue in both years was recurring.
Interactive,
key events
During
the period ended December 31, 2022, we undertook 49 new brand launches, 24 during the first half of 2022 and 25 during the second half
of 2022. We expanded territories with Bet365, BetMGM and Gamesys in Ontario, along with DraftKings in New Jersey, Connecticut and Pennsylvania
and Rush Street Interactive in Michigan and Pennsylvania. We also expanded into Pennsylvania with BetMGM.
We
deployed 34 new games in the year, 20 new games in the first half of the year, including Big Egyptian Fortune TM and Big Wheel Bonus TM and
14 new games in the second half, including Cops N Robbers Big Money TM and Santa Linking TM .
Loto-Quebec
launched our first iLottery title with Pharaon Reaction TM in the first half of 2022 and followed up with a second title in
the second half of 2022.
48
Interactive,
Results of Operations
For the Twelve-Month Period ended
Variance
2022 vs 2021
(In millions)
Dec 31,
2022
Dec 31,
2021
Variance Attributable to Currency Movement
Variance on a Functional currency basis
Total Functional Currency Variance %
Total Reported Variance %
Service Revenue
$ 23.1
$ 22.8
$ (2.7 )
$ 3.0
13.0 %
1.2 %
Cost of Service
(3.7 )
(3.7 )
0.4
(0.4 )
10.0 %
(1.3 )%
Selling, general and administrative expenses
(7.1 )
(6.1 )
0.8
(1.9 )
30.9 %
17.1 %
Stock-based compensation
(0.7 )
(0.6 )
0.1
(0.2 )
30.2 %
16.7 %
Depreciation and amortization
(2.9 )
(3.2 )
0.3
(0.0 )
1.2 %
(9.4 )%
Net operating Income (Loss)
$ 8.7
$ 9.2
$ (1.0 )
$ 0.5
5.3 %
(5.5 )%
Exchange Rate - $ to £
1.23
1.37
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
twelve-month period, revenue increased by $3.0 million, primarily 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.
Interactive
operating income
Operating
income for the twelve-month period increased by $0.5 million. This increase was driven by the increase in revenue, partially offset by
a $1.9 million increase in SG&A expenses driven by the investment in the segment to help drive revenues and for staff returning from
furlough and to full pay.
Leisure
We
typically generate revenue from our Leisure segment through the supply 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. Our participation contracts are usually
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, any relevant regulatory levies and minimum fixed incomes where applicable) from machines placed in our customers’
facilities. We generally 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 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.
49
Leisure,
Key Performance Indicators
For the Twelve-Month
Period ended
Variance
2022 vs 2021
Leisure
Dec 31,
2022
Dec 31,
2021
%
End of period installed base Gaming machines (# of terminals)
11,008
11,418
(410 )
(3.6 )%
Average installed base Gaming machines (# of terminals)
10,960
11,576
(616 )
(5.3 )%
End of period installed base Other (# of terminals)
4,646
6,838
(2,192 )
(32.1 )%
Average installed base Other (# of terminals)
5,306
7,080
(1,774 )
(25.1 )%
Pub Digital Gaming Machines - Average installed base (# of terminals)
6,102
6,087
15
0.2 %
Pub Analogue Gaming Machines - Average installed base (# of terminals)
1,334
2,092
(759 )
(36.3 )%
MSA and Bingo Gaming Machines - Average installed base (# of terminals) (1)
3,216
3,204
11
0.4 %
Inspired Leisure Revenue per Gaming Machine per week
£ 64.3
£ 36.9
£ 27.4
74.3 %
Inspired Pub Digital Revenue per Gaming Machine per week
£ 68.6
£ 36.2
£ 32.4
89.5 %
Inspired Pub Analogue Revenue per Gaming Machine per week
£ 38.3
£ 22.5
£ 15.9
70.7 %
Inspired MSA and Bingo Revenue per Gaming Machine per week
£ 91.0
£ 50.3
£ 40.7
81.0 %
Inspired Other Revenue per Machine per week
£ 19.7
£ 11.0
£ 8.7
78.7 %
Total Holiday Parks Revenue (Gaming and Non Gaming) (£’m)
£ 30.0
£ 21.1
£ 8.9
42 %
(1)
Motorway
Service Area machines
In
the table above:
“End
of period installed base Gaming” and “Average installed base Gaming” represent the number of gaming machines installed
(excluding Holiday Park machines) that are Category B and Category C only, from which there is participation or rental revenue at the
end of the period or as an average over the period.
“End
of period installed base Other” and “Average installed base Other” represent the number of all other category machines
installed (excluding Holiday Park machines) from which there is participation or rental revenue at the end of the period or as an average
over the period.
“Revenue
per machine unit per week” represents the average weekly participation or rental revenue recognized during the period.
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.
For the Twelve-Month
Period ended
Variance
2022 vs 2021
(In £ millions)
Dec 31,
2022
Dec 31,
2021
%
Leisure Recurring Revenue
Total Leisure Revenue
£ 77.7
£ 50.0
£ 27.7
55.3 %
Total Leisure Recurring Revenue
£ 75.4
£ 47.9
£ 27.6
57.6 %
Leisure Recurring Revenue as a Percentage of Total Leisure Revenue
97.1 %
95.7 %
1.4 %
50
Leisure,
key events
During
the twelve-month period ended December 31, 2022 the holiday parks business delivered record sales and we successfully contracted another
Butlins site, which started earning income in January 2023 making Inspired the sole supplier of amusement
and gaming machines for Butlins for the next seven years, and we secured a new five-year deal with Haven.
In
the Pubs sector we successfully renewed our contract with Greene King for a further three years and increased our share of the estate
from 36% to 42%. We signed a three-year extension with Mitchells and Butler and were reappointed as a supplier to Marstons for a further
four years. We also divested our prize vend assets in the estate to allow focus on core gaming products with increased margins, which
is the reason for the decline in Other installed base year on year.
During
the year we have deployed several new titles across the pubs estate, including ‘Cops n Robbers Bank Buster’, Space Invaders,
‘Centurion’ ‘Gold Cash Freespins’ and “Party Time Pub Addition’ demonstrating our commitment to leveraging
Inspired’s successful game portfolio for the pub sector.
Leisure,
Results of Operations
For the Twelve-Month
Period ended
Variance
2022 vs 2021
(In millions)
Dec 31,
2022
Dec 31,
2021
Variance Attributable to Currency Movement
Variance on a Functional currency basis
Total Functional Currency Variance %
Total Reported Variance %
Revenue:
Service
$ 93.2
$ 65.7
$ (10.9 )
$ 38.4
58.4 %
41.8 %
Product
2.3
3.0
(0.3 )
(0.4 )
(14.0 )%
(23.1 )%
Total revenue
95.5
68.7
(11.2 )
38.0
55.3 %
39.0 %
Cost of Sales, excluding depreciation and amortization:
Cost of Service
(23.9 )
(15.9 )
2.9
(10.9 )
69.0 %
50.6 %
Cost of Product
(1.7 )
(2.0 )
0.2
0.1
(6.2 )%
(14.3 )%
Total cost of sales
(25.6 )
(17.9 )
3.1
(10.8 )
60.5 %
43.3 %
Selling, general and administrative expenses
(45.8 )
(35.1 )
5.2
(15.9 )
45.1 %
30.3 %
Stock-based compensation
(0.6 )
(0.6 )
0.1
(0.1 )
11.7 %
0.0 %
Depreciation and amortization
(13.5 )
(16.1 )
1.6
1.0
(6.3 )%
(16.1 )%
Net operating Income (Loss)
10.0
(1.0 )
$ (1.3 )
$ 12.3
N/A
N/A
Exchange Rate - $ to £
1.23
1.37
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
For
the twelve-month period, revenue increased by $38.0 million, or 55%, respectively, as our business benefitted from no COVID-19 closures
and fewer social distancing restrictions and growth in Service revenue.
Service
revenue increased by $38.4 million, driven by all markets being open for the whole of the period, particularly Pubs ($14.1 million),
Holiday parks ($12.3 million), Motorway service areas ($8.1 million) and Bingo Halls ($2.3 million).
Leisure
Operating Income/ (Loss)
Operating
income for the twelve-month period improved by $12.3 million, from a loss of $1.0 million to income of $10.0 million. This was primarily
due to the increase in revenue as venues reopened and COVID-19 restrictions were removed, as well as a reduction in depreciation and
amortization of $1.0 million. This was partially offset by increases in Cost of sales ($10.8 million) and SG&A expenses ($15.9 million),
due to staff returning from furlough and to full pay and in the later months from the increase in the UK national living wage.
51
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.
Reconciliations
from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Income (Loss), to Adjusted EBITDA are shown
below.
52
Reconciliation
to Adjusted EBITDA by segment for the Twelve Months ended December 31, 2022
For the Twelve-Month Period ended
Dec 31, 2022
(In millions)
Statutory
Heading
Total
Gaming
Virtual Sports
Interactive
Leisure
Corporate
Net Income/ (loss)
Net Income
$ 22.3
$ 24.0
$ 42.5
$ 8.7
$ 10.0
$ (62.9 )
Items Relating to Legacy Activities:
Pension charges (1)
SG&A
$ 0.7
0.7
Items outside the normal course of business:
Acquisition and integration related transaction expenses (2)
SG&A
$ 0.5
-
0.5
Acquisition and integration related transaction expenses (2)
Cost of Sale
$ 0.6
0.3
0.3
-
Litigation Settlement (3)
SG&A
$ 0.5
0.5
-
Stock-based compensation expense (4)
Stock-based compensation expense
$ 10.8
1.6
0.7
0.7
0.6
7.2
Depreciation and amortization (4)
Depreciation and amortization
$ 37.6
16.6
2.6
2.9
13.5
2.0
Interest expense net (4)
Interest expense net
$ 25.4
25.4
Profit on disposal of trade & assets (5)
Profit on disposal of trade & assets
$ (0.9 )
(0.9 )
-
Other finance expenses / (income) (4)
Other finance expenses / (income)
$ (1.1 )
(1.1 )
Income tax (4)
Income tax
$ 3.2
3.2
Adjusted EBITDA
$ 99.6
$ 41.6
$ 46.3
$ 12.3
$ 24.4
$ (25.0 )
Adjusted EBITDA
£ 80.8
£ 33.6
£ 37.7
£ 10.0
£ 19.9
£ (20.4 )
Exchange Rate - $ to £ (6)
1.23
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.
53
Reconciliation
to Adjusted EBITDA by segment for the Twelve Months ended December 31, 2021
For the Twelve-Month Period ended Dec 31,2021
(In millions)
Statutory
Heading
Total
Gaming
Virtual Sports
Interactive
Leisure
Corporate
Net Income/ (loss)
$ (36.7 )
$ 1.8
$ 22.8
$ 9.2
$ (1.0 )
$ (69.5 )
Items Relating to Legacy Activities:
Pension charges (1)
SG&A
0.8
0.8
Items outside the normal course of business:
Acquisition and integration related transaction expenses (2)
SG&A
1.6
1.6
Refinancing of Company Debt (7)
SG&A
0.8
0.8
Italian tax related costs relating to prior years (8)
SG&A
1.4
1.4
-
Stock-based compensation expense (4)
Stock-based compensation expense
13.0
1.8
0.8
0.6
0.6
9.2
Depreciation and amortization (4)
Depreciation and amortization
47.0
22.5
3.4
3.2
16.1
1.8
Interest expense net (4)
Interest expense net
44.3
44.3
Change in fair value of warrant liability (4)
Change in fair value of warrant liability
(0.9 )
(0.9 )
Other finance expenses / (income) (4)
Other finance expenses / (income)
(5.7 )
(5.7 )
Income tax (4)
Income tax
(1.6 )
(1.6 )
Adjusted EBITDA
$ 64.0
$ 26.1
$ 28.4
$ 13.0
$ 15.7
$ (19.2 )
Adjusted EBITDA
£ 46.7
£ 19.2
£ 20.6
£ 9.5
£ 11.4
£ (14.0 )
Exchange Rate - $ to £ (6)
1.37
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.
(2)
Acquisition
and integration related transaction expenses, are as described above in the Results of Operations line item discussions.
For 2022 this includes a write-off of inventory items related to the integration of Gaming Technology Group of Novomatic UK Ltd.
(3)
“Litigation
Settlement” refers to full and final settlement of a contractual dispute relating to a Development Services and Management
Agreement.
54
(4)
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.
(5)
“Profit
on disposal of trade & assets” — In January 2022, the Company sold its Italian VLT business, including all terminals
and other assets, staff costs and facilities and contracts to a non-connected party, recognizing a profit on this disposal.
(6)
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.
(7)
In
May 2021, the Company refinanced its debt. These are outside of the write off of old debt fees recognized in the interest line.
(8)
“Italian
tax related costs relating to prior years invoicing” relate to a settlement with the Italian Tax Authorities in respect of
an audit for the period 2015-2017 in respect of the historic VAT treatment of supplies.
Liquidity
and Capital Resources
Twelve
Months ended December 31, 2022, compared to Twelve Months ended December 31, 2021
Cash
Flow Summary - A Two Year Comparative
Twelve Months ended
Variance
(in millions)
Dec 31,
2022
Dec 31,
2021
2022 to 2021
Net profit/(loss)
$ 22.3
$ (36.7 )
$ 59.0
Amortization of debt fees
1.8
17.2
(15.4 )
Change in fair value of derivative and warrant liabilities and stock-based compensation expense
11.5
13.6
(2.1 )
Foreign currency translation on senior bank debt and cross currency swaps
0.0
(4.6 )
4.6
Depreciation and amortization (incl RoU assets)
40.0
50.3
(10.3 )
Other net cash utilized by operating activities
(40.9 )
(33.6 )
(7.3 )
Net cash provided by operating activities
34.7
6.2
28.5
Net cash used in investing activities
(40.4 )
(37.9 )
(2.5 )
Net cash used/(generated) by financing activities
(11.0 )
31.2
(42.2 )
Effect of exchange rates on cash
(6.1 )
1.2
(7.3 )
Net decrease in cash and cash equivalents
$ (22.8 )
$ 0.7
$ (23.5 )
Net
cash provided by operating activities
For
the twelve months ended December 31, 2022, net cash inflow provided by operating activities was $34.7 million, compared to a $6.2 million
inflow for the twelve months ended December 31, 2021, representing a $28.5 million increase in cash generation. This increase was driven
primarily by trading levels through increases in our online businesses and the worldwide trading restrictions in the previous year resulting
from the COVID-19 pandemic.
Amortization
of debt fees decreased by $15.4 million, to $1.8 million, due to the reduction in the level of capitalized debt fees after May 2021 following
the Company’s refinancing of its debt and the $14.4 million write off of the remaining debt fees from the previous financing arrangement.
Change
in the fair value of derivative and warrant liabilities and stock-based compensation expense decreased by $2.1 million, from $13.6 million
to $11.5 million. A lower stock-based compensation expense ($2.2 million) and a lower gain relating to terminated cross currency swaps
($0.8 million) was partly offset by movements in the fair value of warrant liabilities in the prior year ($0.9 million).
Following
the refinancing in May 2021, there has been no foreign currency translation on senior bank debt and cross currency swaps. In the twelve
months ended December 31, 2021, the foreign currency translation on senior bank debt and cross currency swaps resulted in a loss of $4.6
million as a result of the movement in exchange rates during the period.
Depreciation
and amortization decreased by $10.3 million, to $40.0 million, with reductions of $4.4 million in machine depreciation, $5.0 million
in amortization of intangible assets and $1.0 million in amortization of right of use assets.
Other
net cash utilized by operating activities increased by $7.3 million, to a $40.9 million outflow. The relative movements between the
twelve months ended December 31, 2022 and the twelve months ended December 31, 2021 resulted in a $17.6 million outflow through
increased inventory holding as Inspired made the strategic decision to secure components and protect sales in a challenging global
supply chain market and a $7.0 million increase in receivables due to timing of sales. These were offset by relative
favorable movements between the twelve months ended December 31, 2022 and the twelve months ended December 31, 2021 for prepayments
and accrued income of $10.2 million due to lower trading levels at the start of the previous year, interest accruals of $5.0 million
following the debt refinancing in May 2021 and trade payables and accruals of $1.9 million.
55
Net
cash used in investing activities
Net
cash utilized in investing activities increased by $2.5 million, to $40.4 million in the twelve months ended December 31, 2022. This
was driven by higher spend on plant, property and equipment (an $9.6 million increase compared to 2021) and capitalized software (a $4.8
million increase compared to 2021) due to spending in the previous year being low as a result of the pandemic. These were largely offset
by the $12.5 million acquisition of Sportech Lotteries, LLC on December 31, 2021 for which the twelve months ended December 31, 2022
included the final payment of $0.6 million.
Net
cash (used)/generated by financing activities
During
the twelve months ended December 31, 2022, net cash utilized by financing activities was $11.0 million, $10.4 million of which related
to the Company’s repurchase of its common shares under the Share Repurchase Program and $0.6 million of which related to finance
lease spend. During the twelve months ended December 31, 2021, financing activities generated $31.2 million of cash following the receipt
of $30.5 million proceeds from the warrant exercise and a net $1.3 million from the refinancing in May 2021 after payment of associated
fees less a spend of $0.6 million on finance leases.
Funding
Needs and Sources
To
fund our obligations, historically we have relied on a combination of cash flows provided by operations and the incurrence of additional
debt or the refinancing of existing debt. As of December 31, 2022, we had liquidity consisting of $25.0 million in cash and cash equivalents
and a further $24.1 million of undrawn revolver facility. This compares to $47.8 million of cash and cash equivalents as of December
31, 2021, with a further $27.0 million of revolver facilities undrawn. We had a working capital outflow of $40.9 million for the twelve
months ended December 31, 2022, compared to a $33.6 million outflow for the twelve months ended December 31, 2021.
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. In periods with minimal machine volumes and capital spend, our working
capital is typically more stable. In periods where significant numbers of machines are being produced, the levels of inventory and creditors
are typically higher 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 were seen during 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 December 31, 2022, $2.5 million of our $25.0 million of
cash and cash equivalents were held as operational floats within the machines. At December 31, 2021, $2.7 million of
our $47.8 million of cash and cash equivalents were held as operational floats within the machines
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 March 2024.
56
Long
Term and Other Debt
(In millions)
December 31, 2022
December 31, 2021
Cash held
£ 20.8
$ 25.0
£ 35.4
$ 47.8
Original principal senior debt
(235.0 )
(282.9 )
(235.0 )
(316.7 )
Cash interest accrued
(1.5 )
(1.8 )
(1.6 )
(2.1 )
Finance lease creditors
(1.8 )
(2.2 )
(2.1 )
(2.8 )
Total
£ (217.6 )
$ (261.9 )
£ (203.3 )
$ (273.8 )
Debt
Covenants
Under
our debt facilities in place as of December 31, 2022, 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. Covenant testing at December 31,
2022 showed covenant compliance.
There
were no breaches of the debt covenants in the periods ended December 31, 2022 or December 31, 2021.
Liens
and Encumbrances
As
of December 31, 2022, 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.
Share
Repurchases
The
Board of Directors has authorized that the Company may use up to $25.0 million to repurchase Inspired shares of common stock, subject
to repurchases being effected on or before May 10, 2025. Management has discretion as to whether to repurchase shares of the Company
and as of December 31, 2022, an aggregate of $10.5 million of our shares of common stock had been repurchased.
Contractual
Obligations
As
of December 31, 2022, our contractual obligations were as follows:
Less than
More than
Contractual Obligations (in millions)
Total
1 yr
1-2 years
3-5 years
5 yrs
Operating activities
Interest on long term debt
$ 77.9
$ 22.2
$ 44.6
$ 11.1
$ -
Financing activities
Senior bank debt - principal repayment
282.9
-
-
282.9
-
Finance lease payments
2.2
1.0
1.2
-
-
Operating lease payments
8.7
2.8
3.3
1.2
1.4
Interest on non-utilization fees
1.0
0.3
0.7
-
-
Total
$ 372.7
$ 26.3
$ 49.8
$ 295.2
$ 1.4
Off-Balance
Sheet Arrangements
As
of December 31, 2022, 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 and Accounting Estimates
The
preparation of our audited 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.
57