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 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 Quarterly Report on Form 10-Q for the period ended March 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.
COVID-19
Update
For
the three months ended March 31, 2021, all land based operations were subject to full lockdown restrictions, therefore year on year comparisons
may not be meaningful due to the COVID-19 impacts.
There
have been no COVID-19 restrictions in the United Kingdom since July 2021, however, there remains an element of social distancing in venues
in Greece and in Italy. It remains uncertain as to whether and when further restrictions or closures could happen in each jurisdiction
and how long they may last. We continue to protect our existing available liquidity by pro-actively managing capital expenditures and
working capital as well as identifying both immediate and longer-term opportunities for cost savings.
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 and the rest of the world (including North America).
For
the three months ended March 31, 2022, we derived approximately 75% of our revenue from the UK, 10% from Greece and the remaining 15%
across the rest of the world. During the three months ended March 31, 2021, we derived approximately 48%, 10% and 42% of our revenue
from those regions, respectively.
As
of March 31, 2022, our non-current assets (excluding goodwill) were attributable as follows: 74% to the UK, 9% to Greece and 17% 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 three months ended March 31, 2022, we derived approximately 25% of our revenue from sales to customers outside the UK, compared to
52% during the three months ended March 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.
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 March 31, 2022 and March 31, 2021, the average GBP:USD rates were 1.34 and 1.38,
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 ended March 31, 2022, compared to
the same period in 2021; |
|
|
|
|
● |
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 ended March 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
Three
Months ended March 31, 2022, compared to Three Months ended March 31, 2021
| |
For the Three-Month | | |
Variance | |
| |
Period ended | | |
2022 vs 2021 | |
(In millions) | |
March 31,
2022 | | |
March 31,
2021 | | |
Variance
Attributable
to Currency
Movement | | |
Variance
on a
Functional
currency
basis | | |
Total
Functional
Currency
Variance
% | | |
Total
Reported
Variance
% | |
Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Service | |
$ | 57.0 | | |
$ | 17.1 | | |
$ | (1.6 | ) | |
$ | 41.5 | | |
| 241.9 | % | |
| 233.0 | % |
Product | |
| 3.6 | | |
| 5.7 | | |
| (0.1 | ) | |
| (2.0 | ) | |
| (35.0 | )% | |
| (37.2 | )% |
Total revenue | |
| 60.6 | | |
| 22.8 | | |
| (1.7 | ) | |
| 39.5 | | |
| 173.0 | % | |
| 165.5 | % |
Cost of Sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Service | |
| (11.8 | ) | |
| (2.1 | ) | |
| 0.3 | | |
| (10.0 | ) | |
| 479.8 | % | |
| 463.3 | % |
Cost of Product | |
| (2.1 | ) | |
| (3.2 | ) | |
| 0.1 | | |
| 1.1 | | |
| (32.8 | )% | |
| (35.0 | )% |
Selling, general and administrative expenses | |
| (26.8 | ) | |
| (13.8 | ) | |
| 0.7 | | |
| (13.7 | ) | |
| 99.1 | % | |
| 93.8 | % |
Stock-based compensation | |
| (2.8 | ) | |
| (1.4 | ) | |
| 0.0 | | |
| (1.4 | ) | |
| 99.7 | % | |
| 96.3 | % |
Acquisition and integration related transaction expenses | |
| (0.1 | ) | |
| (1.4 | ) | |
| 0.0 | | |
| 1.2 | | |
| (87.2 | )% | |
| (89.5 | )% |
Depreciation and amortization | |
| (10.1 | ) | |
| (13.1 | ) | |
| 0.3 | | |
| 2.7 | | |
| (20.3 | )% | |
| (22.6 | )% |
Net operating Income (Loss) | |
| 6.9 | | |
| (12.2 | ) | |
| (0.2 | ) | |
| 19.2 | | |
| (158.6 | )% | |
| (156.4 | )% |
Other income (expense) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense, net | |
| (6.5 | ) | |
| (8.6 | ) | |
| 0.1 | | |
| 2.0 | | |
| (22.6 | %) | |
| (24.4 | )% |
Change in fair value of warrant liability | |
| - | | |
| (3.0 | ) | |
| 3.0 | | |
| - | | |
| (100.0 | %) | |
| (100.0 | )% |
Profit/Loss on disposal of trade & assets | |
| 0.9 | | |
| - | | |
| (0.0 | ) | |
| 0.9 | | |
| N/A | | |
| N/A | |
Other finance income (expense) | |
| 0.3 | | |
| 6.4 | | |
| (0.0 | ) | |
| (6.1 | ) | |
| (95.0 | )% | |
| (95.2 | )% |
Total other income (expense), net | |
| (5.3 | ) | |
| (5.2 | ) | |
| 3.1 | | |
| (3.2 | ) | |
| 3.7 | % | |
| 1.1 | % |
Net Income (loss) from continuing operations before income taxes | |
| 1.6 | | |
| (17.4 | ) | |
| 2.9 | | |
| 16.1 | | |
| (109.6 | )% | |
| (109.0 | )% |
Income tax expense | |
| (0.1 | ) | |
| 0.7 | | |
| (0.0 | ) | |
| (0.8 | ) | |
| (113.2 | )% | |
| (112.3 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income (Loss) | |
$ | 1.5 | | |
$ | (16.7 | ) | |
$ | 2.9 | | |
$ | 15.3 | | |
| (109.4 | )% | |
| (108.9 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ | |
| 1.34 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | |
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” are payments from UK customers related to our contractual revenue share of their value-added tax rebate
For the three months ended March 31, 2022, revenue
on a functional currency (at constant rate) basis increased by $39.5 million, or 166%. Leisure revenue grew by $19.7
million due to COVID-19 related closures in prior year. Gaming revenue increased by $16.1 million, due to COVID-19
related closures and restrictions in 2021, partly offset by $2.2 million of additional VAT-related revenue during 2021. Virtual Sports
and Interactive grew by $5.6 million and $0.2 million, respectively.
Cost
of Sales, excluding depreciation and amortization
Cost
of Sales, excluding depreciation and amortization, for the three months ended March 31, 2022 increased by $9.0 million, or 170%. Of this
increase, $10.0 million was attributable to cost of Service due to COVID related closures in the prior period, partly offset by $1.1
million reduction of cost of Product.
Selling,
general and administrative expenses
Selling,
general and administrative (“SG&A”) expenses for the three months ended March 31, 2022 increased by $13.7 million, or
99.1%. The increase was driven primarily by the increase in staff cost of $12.9 million due to the return of furloughed staff and return
of full pay for the current period, this was partly offset by higher labor capitalization of $1.8 million which increased for the same
reasons.
Stock-based
compensation
During
the three months ended March 31, 2022, the Company recorded an expense of $2.8 million compared to a charge of $1.4 million for the three
months ended March 31, 2021. All expenses related to outstanding awards.
Acquisition
and integration related transaction expenses
Acquisition
and integration related transaction expenses decreased by $1.2 million, to $0.1 million.
All
expenses in the three months ended March 31, 2022 were integration costs in relation to the Sportech Lotteries LLC acquisition. All expenses
in the previous year were integration costs in relation to the NTG acquisition.
Depreciation
and amortization
Depreciation
and amortization decreased for the three-month period by $2.7 million, $2.0 million due to a decrease in software amortization, as software
was fully amortized and $0.7 million driven by a decrease in asset depreciation.
Net
operating income/(loss)
During
the three-month period, net operating income was $6.9 million, an increase of $19.2 million. This was attributable primarily
to the increase in revenue driven by the COVID-19 closures and restrictions in 2021, as well as growth in online revenue.
Interest
expense, net
Interest
expense, net decreased by $2.0 million in the three-month period ended March 31, 2022. This decrease was due primarily to lower interest
on term indebtedness and lower amortization of capitalised debt fees, $0.4 million and $0.6 million respectively. Currency movements
were $0.9m favorable compared to the three months ended March 31, 2021 and interest receivable $0.2 million favorable.
Change
in fair value of warrant liability
With
the expiry of the warrants on December 23, 2021, the liability and the requirement to fair value ceased to exist. In the three months
ended March 31, 2021, the change in fair value of the warrant liability resulted in a $3.0 million loss.
Gain
on disposal of business
For
the three-months ended March 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 three-months ended March 31, 2022, was $0.3 million. This compares to $6.4 million in the three-months ended March
31, 2021, giving a year-on-year movement of $6.1 million relating solely to the retranslation of the principal balance of our senior
debt facilities in place at that time.
Income
tax expense
Our
effective tax rate for the three months ended March 31, 2022, was (5.5%), compared to (4.0%) for the three months ended March 31, 2021.
Net
Income/ (loss)
During
the three-month period, we had a net income of $1.5 million, an increase of $15.3 million, primarily due to the increase in net operating
income ($19.2 million) and a decrease in interest expense, net ($2.0 million), partially offset by the decrease in other finance income
of $6.1 million.
Segment
Results (for the three months ended March 31, 2022, compared to the three months ended March 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 Three-Month Period ended | | |
Variance | |
| |
Mar 31, | | |
Mar 31, | | |
2022 vs 2021 | |
| |
2022 | | |
2021 | | |
| | |
% | |
Gaming | |
| | | |
| | | |
| | | |
| | |
End of period installed base (# of terminals) | |
| 34,501 | | |
| 31,508 | | |
| 2,993 | | |
| 9.5 | % |
Total Gaming - Average installed base (# of terminals) | |
| 34,693 | | |
| 31,509 | | |
| 3,183 | | |
| 10.1 | % |
Participation - Average installed base (# of terminals) | |
| 31,420 | | |
| 29,564 | | |
| 1,856 | | |
| 6.3 | % |
Fixed Rental - Average installed base (# of terminals) | |
| 3,273 | | |
| 1,945 | | |
| 1,328 | | |
| 68.3 | % |
Service Only - Average installed base (# of terminals) | |
| 17,915 | | |
| 21,738 | | |
| (3,823 | ) | |
| (17.6 | )% |
Customer Gross Win per unit per day (1) (2) | |
£ | 86.7 | | |
£ | 0.6 | | |
£ | 86.2 | | |
| 15378.3 | % |
Customer Net Win per unit per day (1) (2) | |
£ | 63.2 | | |
£ | 0.4 | | |
£ | 62.7 | | |
| 14554.2 | % |
Inspired Blended Participation Rate | |
| 5.6 | % | |
| 7.5 | % | |
| (1.9 | )% | |
| (25.3 | )% |
Inspired Fixed Rental Revenue per Gaming Machine per week | |
£ | 42.9 | | |
£ | 0.0 | | |
£ | 42.9 | | |
| N/A | |
Inspired Service Rental Revenue per Gaming Machine per week | |
£ | 4.6 | | |
£ | 0.8 | | |
£ | 3.9 | | |
| 510.6 | % |
Gaming Long term license amortization (£’m) | |
£ | 1.2 | | |
£ | 1.3 | | |
£ | (0.1 | ) | |
| (7.5 | )% |
Number of Machine sales | |
| 319 | | |
| 482 | | |
| (163 | ) | |
| (33.8 | )% |
Average selling price per terminal | |
£ | 6,775 | | |
£ | 6,944 | | |
£ | (169 | ) | |
| (2.4 | )% |
(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. |
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.
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”.
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 Three-Month Period ended | | |
Variance | |
| |
March 31, | | |
March 31, | | |
2022 vs 2021 | |
(In £ millions) | |
2022 | | |
2021 | | |
| | |
% | |
Gaming Recurring Revenue | |
| | | |
| | | |
| | | |
| | |
Total Gaming Revenue | |
£ | 18.0 | | |
£ | 7.8 | | |
£ | 10.1 | | |
| 129.2 | % |
| |
| | | |
| | | |
| | | |
| | |
Gaming Participation Revenue | |
£ | 11.9 | | |
£ | 0.2 | | |
£ | 11.8 | | |
| 7314.7 | % |
Gaming Other Fixed Fee Recurring Revenue | |
£ | 2.4 | | |
£ | 0.3 | | |
£ | 2.2 | | |
| 852.2 | % |
Gaming Long-term license amortization | |
£ | 1.3 | | |
£ | 1.3 | | |
£ | 0.0 | | |
| 0.3 | % |
Total Gaming Recurring Revenue * | |
£ | 15.7 | | |
£ | 1.7 | | |
£ | 14.0 | | |
| 816.2 | % |
Gaming Recurring Revenue as a % of Total Gaming Revenue † | |
| 87.3 | % | |
| 21.8 | % | |
| 65.5 | % | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total Gaming excluding VAT-related revenue | |
£ | 17.3 | | |
£ | 5.5 | | |
| | | |
| | |
Gaming Recurring Revenue as a % of Total Gaming Revenue (excluding VAT-related revenue) | |
| 90.9 | % | |
| 30.9 | % | |
| | | |
| | |
* |
Does
not reflect VAT-related revenue. |
|
|
† |
Total
Gaming Revenue for the three-month period ended March 31, 2022, includes the £0.7 million for VAT-related revenue, which is
not reflected in Gaming Recurring Revenue for that period. Excluding VAT-related revenue, Gaming Recurring Revenue was 90.9% of Total
Gaming Revenue for such period. |
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.
| |
For the Three-Month Period ended | | |
Variance | |
(In millions) | |
March 31, 2022 | | |
March 31, 2021 | | |
2021 vs 2020 | | |
Total Functional Currency % | |
| |
| | |
| | |
| | |
| | |
| |
Service Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | |
UK LBO | |
$ | 10.2 | | |
$ | 0.6 | | |
$ | 9.6 | | |
| 1583.0 | % | |
| 1465.0 | % |
UK VAT - Related Income | |
| 0.9 | | |
| 3.1 | | |
$ | (2.2 | ) | |
| (70.1 | )% | |
| (69.1 | )% |
UK Other | |
| 3.0 | | |
| 0.1 | | |
| 2.9 | | |
| 4243.3 | % | |
| 5751.4 | % |
Italy | |
| 0.7 | | |
| 0.1 | | |
| 0.6 | | |
| 709.2 | % | |
| 731.0 | % |
Greece | |
| 4.8 | | |
| 1.7 | | |
| 3.1 | | |
| 181.5 | % | |
| 189.1 | % |
Rest of the World | |
| 0.2 | | |
| 0.0 | | |
| 0.2 | | |
| 672.6 | % | |
| 681.6 | % |
Lotteries | |
| 1.3 | | |
| - | | |
| 1.3 | | |
| NA | | |
| NA | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Service revenue | |
$ | 21.1 | | |
$ | 5.6 | | |
$ | 15.5 | | |
| 275.4 | % | |
| 283.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ | |
| 1.34 | | |
| 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 period increased by £86.15 to £86.71.
Despite a strong first quarter of trading, the majority of the increase is driven by retail venues being closed in the same period during
2021 as a result of COVID-19 restrictions, another factor being our first quarter recognizing the newly acquired lottery business in
the Dominican Republic, which 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 7.5% in 2021 to 5.6% in 2022. The 2021 figure was higher than normal
due to COVID-19 restrictions with just a small portion of UK customers live on higher than average terms. For reference our full year
rate was 6.4%. Approximately a decrease of 0.5% is due 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 more than 2,500 terminals in various locations and has an agreement for the supply of these terminals until
March 9, 2035. The first quarter of trading delivered $1.3 million of participation revenue.
During
the period ended March 31, 2022, Inspired received VAT-related revenue of $0.9 million from a major UK customer. During the same period
in 2021, Inspired received VAT-related revenue of $3.1 million from a major UK customer.
During
the period, Inspired upgraded its UK gaming estate with the installation of 104 “Flex” and 152 “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 a further 60
digital terminals.
In
the UK market, Inspired installed the a further 55 “Sabre Hydra” terminals into casino venues taking the total installed
to 75 of a 203 machine order with a major customer. The remaining terminals will be sited in the second quarter 2022.
In
the North America market, Inspired sold a further 36 “Valor” terminals across a number of customers in Illinois taking the
total since launch in December 2019 to 764.
During
the period, Inspired secured its second machine order from Western Canada Lottery Corporation (WCLC), our second jurisdiction in North
America. Inspired expect to deliver a further 700 “Valor” terminals in the fourth quarter 2022.
During
the period, we delivered the final 308 “Valor” terminals of a total 500 terminal award to OPAP in the Greek market. These
machines carry an upfront licence fee. The terminals will be fully deployed by the end of second quarter 2022 and will take Inspired’s
total contracted number of machines to 9,440.
In
the Italian market, from January 1, 2022, Inspired has transitioned to a content and platform supplier only model, 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 Three-Month
Period
ended | |
Variance
2022 vs
2021 | |
(In millions) | |
March
31,
2022 | | |
March
31,
2021 | | |
Total Variance $ | | |
Variance Attributable to Currency
Movement | | |
Variance on a Functional currency
basis | | |
Total Functional Currency Variance
% | | |
Total Reported Variance % | |
Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Service | |
$ | 21.1 | | |
$ | 5.6 | | |
$ | 15.5 | | |
$ | (0.5 | ) | |
$ | 16.0 | | |
| 283.6 | % | |
| 275.4 | % |
Product | |
| 3.0 | | |
| 5.2 | | |
| (2.2 | ) | |
$ | (0.1 | ) | |
$ | (2.1 | ) | |
| (40.2 | )% | |
| (42.3 | )% |
Total revenue | |
| 24.1 | | |
| 10.8 | | |
| 13.3 | | |
| (0.6 | ) | |
| 13.9 | | |
| 129.2 | % | |
| 123.2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Service | |
| (4.7 | ) | |
| (0.6 | ) | |
| (4.1 | ) | |
$ | 0.1 | | |
| (4.2 | ) | |
| 714.8 | % | |
| 692.6 | % |
Cost of Product | |
| (1.8 | ) | |
| (2.9 | ) | |
| 1.1 | | |
$ | 0.0 | | |
| 1.1 | | |
| (37.9 | )% | |
| (38.7 | )% |
Total cost of sales | |
| (6.5 | ) | |
| (3.5 | ) | |
| (2.9 | ) | |
| 0.1 | | |
| (3.1 | ) | |
| 86.1 | % | |
| 83.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| (6.8 | ) | |
| (4.1 | ) | |
| (2.7 | ) | |
$ | 0.2 | | |
| (2.9 | ) | |
| 69.4 | % | |
| 65.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| (0.3 | ) | |
| (0.2 | ) | |
| (0.1 | ) | |
$ | (0.0 | ) | |
| (0.1 | ) | |
| 25.9 | % | |
| 46.4 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Acquisition and integration related transaction expenses | |
| (0.1 | ) | |
| - | | |
| | | |
$ | 0.2 | | |
| (0.2 | ) | |
| N/A | | |
| N/A | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| (4.6 | ) | |
| (6.6 | ) | |
| 2.0 | | |
$ | 0.1 | | |
| 1.8 | | |
| (27.9 | )% | |
| (29.8 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net operating Income (Loss) | |
$ | 5.8 | | |
$ | (3.6 | ) | |
$ | 9.5 | | |
$ | (0.3 | ) | |
$ | 9.8 | | |
| (262.8 | )% | |
| (261.3 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Gain on disposal of business | |
| 0.9 | | |
| - | | |
| 0.9 | | |
$ | (0.0 | ) | |
| 0.9 | | |
| N/A | | |
| N/A | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income (Loss) | |
$ | 6.7 | | |
$ | (3.6 | ) | |
$ | 10.4 | | |
$ | (0.3 | ) | |
$ | 10.7 | | |
| (287.7 | )% | |
| (286.3 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ | |
| 1.34 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | | |
| | |
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, Gaming revenue increased by $13.9 million, or 129%, $16.0 million of which was driven by Service revenue, partly
offset by a $2.1 million decrease in Product revenue due to a large VLT sale in Canada in the prior year.
The
increase in Gaming Service revenue was driven by $12.8 million from the UK market, $3.2 million from the Greek market and $0.6 million
from the Italian market all due to them being 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. $1.3 million of the increase was due to the addition of the new Lotteries
market and $0.2 million from the Rest of the World. This was partly offset by a decrease in VAT-related revenue of $2.2 million and the
sale of part of the Italian business worth $0.3 million in the current period.
Product
revenue decreased in the three-month period by $2.1 million. This decrease was primarily driven by lower Product sales of $1.7 million
of Valor terminal sales in North America due to the sale in Canada in the prior year and $0.5 million of lower sales in Italy.
Gaming
Operating Income
Operating
Income increased during the three-month period by $9.8 million.
The increase in Operating Income in the three-month
period was primarily due to the increase in revenue of $13.9 million, a $1.8 million primarily due to the decrease in software amortization
as software became fully amortized. This was partially offset by an increase of cost of sales of $3.1 million and an increase of $2.9
million in SG&A as staff returned from furlough or to full salary. Excluding the VAT-related Income, Operating Income would have
increased by $12.0 million in the period.
Gaming Net Income
Income increased during the three-month period
by $10.7 million from a loss of $3.6 million to an income of $6.7 million this was due to the increase in operating income and a $0.9
million gain from the disposal of business 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.
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 Three-Month Period ended | | |
Variance | |
| |
Mar 31, | | |
Mar 31, | | |
2022 vs 2021 | |
Virtuals | |
2022 | | |
2021 | | |
| | |
% | |
| |
| | |
| | |
| | |
| |
No. of Live Customers at the end of the period | |
| 62 | | |
| 59 | | |
| 3 | | |
| 5.1 | % |
Average No. of Live Customers | |
| 62 | | |
| 59 | | |
| 3 | | |
| 4.5 | % |
Total Revenue (£’m) | |
£ | 8.7 | | |
£ | 4.6 | | |
£ | 4.1 | | |
| 89.7 | % |
Total Revenue £’m - Retail | |
£ | 2.4 | | |
£ | 0.6 | | |
£ | 1.8 | | |
| 296.1 | % |
Total Revenue £’m - Online Virtuals | |
£ | 6.3 | | |
£ | 4.0 | | |
£ | 2.3 | | |
| 58.5 | % |
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 Three-Month Period ended | | |
Variance | |
| |
March 31, | | |
March 31, | | |
2022 vs 2021 | |
(In £ millions) | |
2022 | | |
2021 | | |
| | |
% | |
Virtual Sports Recurring Revenue | |
| | | |
| | | |
| | | |
| | |
Total Virtual Sports Revenue | |
£ | 8.7 | | |
£ | 4.6 | | |
£ | 4.1 | | |
| 89.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Recurring Revenue - Retail Virtuals | |
£ | 2.2 | | |
£ | 0.5 | | |
£ | 1.7 | | |
| 332.6 | % |
Recurring Revenue - Online Virtuals | |
£ | 6.3 | | |
£ | 3.9 | | |
£ | 2.4 | | |
| 61.0 | % |
Total Virtual Sports Long-term license amortization | |
£ | 0.2 | | |
£ | 0.2 | | |
£ | 0.0 | | |
| 1.4 | % |
Total Virtual Sports Recurring Revenue | |
£ | 8.7 | | |
£ | 4.6 | | |
£ | 4.1 | | |
| 89.0 | % |
Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue | |
| 100.0 | % | |
| 100.0 | % | |
| 0.0 | % | |
| | |
“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 three months ended March 31, 2022, we launched Virtual Plug & Play (VPP) with Napoleon Sports (Belgium) and Mozzartbet (Serbia).
Fortuna
expanded their self-service betting terminals (SSBT) into Croatia with an initial 200 units in January 2022 and another 1000 to follow
in the year.
Sisal
(Italy) launched Multi-Stream Matchday, which is a new product that allows eight simultaneous soccer games to be streamed at the same
time.
New
signed contract with Scientific Games for content to be sold to Netherlands Lottery (NLO), Playport (Minnesota, Kansas, Wisconsin)
and Leisure Sports (Sri Lanka).
Contract
term extensions signed with Sisal (Italy), Niké, spol. s r.o (Slovakia) and contracted territories with Kaizen Gaming.
Virtual
Sports, Results of Operations
| |
For the Three-Month Period ended | | |
Variance
2022 vs 2021 | |
(In millions) | |
March 31,
2022 | | |
March 31,
2021 | | |
Variance Attributable to Currency Movement | | |
Variance on a Functional currency basis | | |
Total Functional Currency Variance % | | |
Total Reported Variance % | |
Service Revenue | |
$ | 11.6 | | |
$ | 6.3 | | |
$ | (0.3 | ) | |
$ | 5.6 | | |
| 89.0 | % | |
| 83.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Service | |
| (0.6 | ) | |
| (0.3 | ) | |
| 0.0 | | |
| (0.3 | ) | |
| 120.7 | % | |
| 114.2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| (1.6 | ) | |
| (1.1 | ) | |
| 0.1 | | |
| (0.6 | ) | |
| 58.8 | % | |
| 46.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| (0.1 | ) | |
| (0.1 | ) | |
| 0.0 | | |
| (0.0 | ) | |
| 3.4 | % | |
| 0.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| (0.6 | ) | |
| (1.1 | ) | |
| 0.0 | | |
| 0.5 | | |
| (44.3 | )% | |
| (45.5 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net operating Income (Loss) | |
$ | 8.7 | | |
$ | 3.7 | | |
$ | (0.2 | ) | |
$ | 5.2 | | |
| 136.2 | % | |
| 132.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ | |
| 1.34 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | |
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 three-month period, revenue increased by $5.6 million, or 89.0%. This increase was driven by a $3.3 million increase in Online Virtuals,
primarily driven by the growth from our existing online customers and an increase in recurring Retail Virtuals of $2.3 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 $5.2 million during the three-month period.
The
increase in the period was primarily due to the increase in revenue of $5.6 million and the decrease in Depreciation and Amortization
of $0.5 million. This was partly offset by the increase in Cost of Sales of $0.3 million and SG&A expenses of $0.6 million, driven
by an increase in staff costs as staff returned from furlough and to full pay and an increase in technology costs driven by the growth
of Online Virtuals.
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.
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 Three-Month Period ended | | |
Variance | |
| |
Mar 31, | | |
Mar 31, | | |
2022 vs 2021 | |
Interactive | |
2022 | | |
2021 | | |
| | |
% | |
| |
| | |
| | |
| | |
| |
No. of Live Customers at the end of the period | |
| 112 | | |
| 96 | | |
| 16 | | |
| 16.7 | % |
Average No. of Live Customers | |
| 111 | | |
| 93 | | |
| 18 | | |
| 19.4 | % |
No. of Live Games at the end of the period | |
| 242 | | |
| 209 | | |
| 33 | | |
| 15.8 | % |
Average No. of Live Games | |
| 239 | | |
| 206 | | |
| 33 | | |
| 16.0 | % |
Total Revenue (£’m) | |
£ | 3.9 | | |
£ | 3.8 | | |
£ | 0.2 | | |
| 4.6 | % |
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
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 | | |
Variance | |
| |
March 31, | | |
March 31, | | |
2022 vs 2021 | |
(In £ millions) | |
2022 | | |
2021 | | |
| | |
% | |
Interactive Recurring Revenue | |
| | | |
| | | |
| | | |
| | |
Total Interactive Revenue | |
£ | 3.9 | | |
£ | 3.8 | | |
£ | 0.2 | | |
| 4.6 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Recurring Revenue - Interactive | |
£ | 3.9 | | |
£ | 3.8 | | |
£ | 0.2 | | |
| 4.6 | % |
Interactive Recurring Revenue as a Percentage of Total Interactive Revenue | |
| 100.0 | % | |
| 100.0 | % | |
| 0.0 | % | |
| | |
Interactive,
key events
We
undertook 8 new brand launches during first quarter 2022, and expanded territories with DraftKings in New Jersey and Connecticut
and Rush Street Interactive in Michigan.
During
the three-month period we were shortlisted for three awards: -
|
● |
CasinoBeats
Game Developer Awards: Game Licensed Content – Space Invaders Roulette |
|
● |
CasinoBeats
Game Developer Awards: Game Retro-style – Space Invaders |
|
● |
Eilers
& Krejcik Gaming, LLC Slot Award: Top Performing Online Slot – Big Spin Bonus |
We
deployed 8 new games in first quarter 2022 across the estate including “Catch of the Day”, “Tin Can Cash”
and a new version of our branded game “Reel King – Reel LinKing”.
Interactive,
Results of Operations
| |
For the Three-Month Period ended | | |
Variance
2022 vs 2021 | |
(In millions) | |
March 31,
2022 | | |
March 31,
2021 | | |
Variance Attributable to Currency Movement | | |
Variance on a Functional currency basis | | |
Total Functional Currency Variance % | | |
Total Reported Variance % | |
Service Revenue | |
$ | 5.3 | | |
$ | 5.2 | | |
$ | (0.1 | ) | |
$ | 0.2 | | |
| 4.6 | % | |
| 2.2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Service | |
| (1.0 | ) | |
| (0.8 | ) | |
| 0.0 | | |
| (0.3 | ) | |
| 35.5 | % | |
| 31.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| (1.4 | ) | |
| (1.0 | ) | |
| 0.0 | | |
| (0.4 | ) | |
| 38.6 | % | |
| 35.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| (0.1 | ) | |
| (0.1 | ) | |
| 0.0 | | |
| (0.0 | ) | |
| 24.9 | % | |
| 22.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| (0.7 | ) | |
| (0.7 | ) | |
| 0.0 | | |
| (0.0 | ) | |
| 2.3 | % | |
| 0.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net operating Income (Loss) | |
$ | 2.1 | | |
$ | 2.6 | | |
$ | (0.0 | ) | |
$ | (0.5 | ) | |
| (18.3 | )% | |
| (19.7 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ | |
| 1.35 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | |
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 period, revenue increased by $0.2 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 decreased in the three-month period by $0.5 million.
The
decrease was primarily due to an increase in cost of sales ($0.3 million) caused by an increase in third party platform provider costs,
as well as an increase in SG&A expenses ($0.4 million) driven by the investment in the segment to help drive revenues. Partly offset
by an increase in revenue (detailed above).
Leisure
We
typically 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 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 any relevant regulatory levies) from gaming
terminals 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 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 | | |
Variance | |
| |
Mar 31, | | |
Mar 31, | | |
2022 vs 2021 | |
Leisure | |
2022 | | |
2021 | | |
| | |
% | |
| |
| | |
| | |
| | |
| |
End of period installed base Gaming machines (# of terminals) | |
| 11,060 | | |
| 11,610 | | |
| (550 | ) | |
| (4.7 | %) |
Average installed base Gaming machines (# of terminals) | |
| 11,248 | | |
| 11,631 | | |
| (383 | ) | |
| (3.3 | %) |
End of period installed base Other (# of terminals) | |
| 6,356 | | |
| 7,169 | | |
| (813 | ) | |
| (11.3 | %) |
Average installed base Other (# of terminals) | |
| 6,524 | | |
| 7,193 | | |
| (669 | ) | |
| (9.3 | %) |
Pub Digital Gaming Machines - Average installed base (# of terminals) | |
| 6,326 | | |
| 5,801 | | |
| 524 | | |
| 9.0 | % |
Pub Analogue Gaming Machines - Average installed base (# of terminals) | |
| 1,720 | | |
| 2,236 | | |
| (516 | ) | |
| (23.1 | %) |
MSA and Bingo Gaming Machines - Average installed base (# of terminals)(1) | |
| 3,189 | | |
| 3,338 | | |
| (149 | ) | |
| (4.5 | %) |
Inspired Leisure Revenue per Gaming Machine per week | |
£ | 64.2 | | |
£ | 0.1 | | |
£ | 64.1 | | |
| N/A | |
Inspired Pub Digital Revenue per Gaming Machine per week | |
£ | 66.1 | | |
£ | 0.0 | | |
£ | 66.1 | | |
| N/A | |
Inspired Pub Analogue Revenue per Gaming Machine per week | |
£ | 39.2 | | |
£ | 0.0 | | |
£ | 39.2 | | |
| N/A | |
Inspired MSA and Bingo Revenue per Gaming Machine per week | |
£ | 87.3 | | |
£ | 0.2 | | |
£ | 87.1 | | |
| 35794 | % |
Inspired Other Revenue per Machine per week | |
£ | 20.2 | | |
£ | 0.0 | | |
£ | 20.1 | | |
| N/A | |
| |
| | | |
| | | |
| | | |
| | |
Total Leisure Parks Revenue (Gaming and Non Gaming) (£’m) | |
£ | 2.5 | | |
£ | 0.0 | | |
£ | 2.5 | | |
| N/A | |
(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 Leisure 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 Leisure 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 Three-Month Period ended | | |
Variance | |
| |
March 31, | | |
March 31, | | |
2022 vs 2021 | |
(In £ millions) | |
2022 | | |
2021 | | |
| | |
% | |
Leisure Recurring Revenue | |
| | | |
| | | |
| | | |
| | |
Total Leisure Revenue | |
£ | 14.6 | | |
£ | 0.4 | | |
£ | 14.3 | | |
| 3652.5 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Leisure Recurring Revenue | |
£ | 14.2 | | |
£ | 0.0 | | |
£ | 14.2 | | |
| 789586.2 | % |
Leisure Recurring Revenue as a Percentage of Total Leisure Revenue | |
| 96.9 | % | |
| 0.5 | % | |
| 96.4 | % | |
| | |
Leisure,
key events
During
the three-month period ending March 31, 2022, the leisure segment has seen a strong start to the year with all sectors of the business
performing in line with or ahead of internal expectations, in spite of the challenges presented by the Omicron COVID-19 variant which
impacted footfall in the early part of the year.
‘Centurion’
‘Gold Cash Freespins’ and ‘Party Time Pub Addition’ were deployed across the pub estate during the quarter demonstrating
our commitment to leveraging Inspired’s successful game portfolio for the pub sector.
Preparations
for the 2022 Holiday Parks season began in earnest during the quarter with a considerable influx of new machines delivered and installed
across our customers’ estates. Some parks opened early for the February half-term school holiday. In addition, we have added five
new parks to our portfolio in the quarter.
Leisure,
Results of Operations
| |
For the Three-Month Period ended | | |
Variance
2022 vs 2021 | |
(In millions) | |
March 31,
2022 | | |
March 31,
2021 | | |
Variance Attributable to Currency Movement | | |
Variance on a Functional currency basis | | |
Total Functional Currency Variance % | | |
Total Reported Variance % | |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
| |
Service | |
$ | 19.0 | | |
$ | 0.0 | | |
$ | (0.6 | ) | |
$ | 19.6 | | |
| NA | | |
| NA | |
Product | |
| 0.6 | | |
| 0.5 | | |
| (0.0 | ) | |
| 0.1 | | |
| 14.8 | % | |
| 11.5 | % |
Total revenue | |
| 19.6 | | |
| 0.5 | | |
| (0.6 | ) | |
| 19.7 | | |
| 3652.5 | % | |
| 3541 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Service | |
| (5.5 | ) | |
| (0.4 | ) | |
| 0.2 | | |
| (5.3 | ) | |
| 1158.7 | % | |
| 1136 | % |
Cost of Product | |
| (0.3 | ) | |
| (0.3 | ) | |
| 0.0 | | |
| (0.0 | ) | |
| 15.4 | % | |
| 13 | % |
Total cost of sales | |
| (5.8 | ) | |
| (0.7 | ) | |
| 0.2 | | |
| (5.3 | ) | |
| 742.9 | % | |
| 724 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| (11.3 | ) | |
| (3.2 | ) | |
| 0.3 | | |
| (8.4 | ) | |
| 263.4 | % | |
| 253 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| (0.2 | ) | |
| (0.1 | ) | |
| 0.0 | | |
| (0.1 | ) | |
| NA | | |
| NA | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| (3.7 | ) | |
| (4.2 | ) | |
| 0.1 | | |
| 0.4 | | |
| (9.2 | )% | |
| (11.9 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net operating Income (Loss) | |
| (1.4 | ) | |
| (7.7 | ) | |
$ | 0.1 | | |
$ | 6.2 | | |
| (81 | )% | |
| (81 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ | |
| 1.34 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | |
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 three-month period, revenue increased by $19.7 million, or 3,653%, as our business benefitted from no COVID-19 closures and fewer
social distancing restrictions during the period than in the prior period.
Service
revenue increased by $19.6 million driven by all markets being open for the whole of the period, particularly Pubs, Motorway service
areas, Holiday parks and Bingo Halls.
Leisure
Operating Loss
Operating
Loss for the three-month period improved by $6.2 million, to a loss of $1.4 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 $0.4 million. This
was partially offset by increases in cost of sales ($5.3 million), and SG&A expenses ($8.4 million), due to staff returning from
furlough and to full pay.
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 Loss, to Adjusted EBITDA are shown below.
Reconciliation
to Adjusted EBITDA by segment for the Three Months ended March 31, 2022
| |
For the Three-Month Period ended | |
| |
March 31, | |
(In millions) | |
2022 | |
| |
Total | | |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate | |
Net Income/ (loss) | |
$ | 1.5 | | |
$ | 6.7 | | |
$ | 8.7 | | |
$ | 2.1 | | |
$ | (1.4 | ) | |
$ | (14.6 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Items Relating to Legacy Activities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pension charges (1) | |
| 0.1 | | |
| | | |
| | | |
| | | |
| | | |
| 0.1 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Items outside the normal course of business: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Acquisition and integration related transaction expenses (2) | |
| 0.1 | | |
| 0.1 | | |
| | | |
| | | |
| | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation expense | |
| 2.8 | | |
| 0.3 | | |
| 0.1 | | |
| 0.1 | | |
| 0.2 | | |
| 2.1 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| 10.1 | | |
| 4.6 | | |
| 0.6 | | |
| 0.7 | | |
| 3.7 | | |
| 0.5 | |
Interest expense net | |
| 6.5 | | |
| | | |
| | | |
| | | |
| | | |
| 6.5 | |
Change in fair value of warrant liability | |
| - | | |
| | | |
| | | |
| | | |
| | | |
| - | |
Profit/Loss on disposal of trade & assets | |
| (0.9 | ) | |
| (0.9 | ) | |
| | | |
| | | |
| | | |
| - | |
Other finance expenses / (income) | |
| (0.3 | ) | |
| | | |
| | | |
| | | |
| | | |
| (0.3 | ) |
Income tax | |
| 0.1 | | |
| | | |
| | | |
| | | |
| | | |
| 0.1 | |
Adjusted EBITDA | |
$ | 20.1 | | |
$ | 10.8 | | |
$ | 9.4 | | |
$ | 2.9 | | |
$ | 2.5 | | |
$ | (5.5 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Adjusted EBITDA | |
£ | 15.0 | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ (3) | |
| 1.34 | | |
| | | |
| | | |
| | | |
| | | |
| | |
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.
Reconciliation
to Adjusted EBITDA by segment for the Three Months ended March 31, 2021
| |
For the Three-Month Period ended | |
| |
March 31, | |
(In millions) | |
2021 | |
| |
Total | | |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate | |
Net Income/ (loss) | |
$ | (16.7 | ) | |
$ | (3.6 | ) | |
$ | 3.7 | | |
$ | 2.6 | | |
$ | (7.7 | ) | |
$ | (11.7 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Items Relating to Legacy Activities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pension charges (1) | |
| 0.2 | | |
| | | |
| | | |
| | | |
| | | |
| 0.2 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Items outside the normal course of business: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Acquisition and integration related transaction expenses (2) | |
| 1.4 | | |
| | | |
| | | |
| | | |
| | | |
| 1.4 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation expense | |
| 1.4 | | |
| 0.2 | | |
| 0.1 | | |
| 0.1 | | |
| 0.1 | | |
| 0.9 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| 13.1 | | |
| 6.6 | | |
| 1.1 | | |
| 0.7 | | |
| 4.2 | | |
| 0.5 | |
Interest expense net | |
| 8.6 | | |
| | | |
| | | |
| | | |
| | | |
| 8.6 | |
Change in fair value of warrant liability | |
| 3.0 | | |
| | | |
| | | |
| | | |
| | | |
| 3.0 | |
Other finance expenses / (income) | |
| (6.4 | ) | |
| | | |
| | | |
| | | |
| | | |
| (6.4 | ) |
Income tax | |
| (0.7 | ) | |
| | | |
| | | |
| | | |
| | | |
| (0.7 | ) |
Adjusted EBITDA | |
$ | 3.9 | | |
$ | 3.2 | | |
$ | 4.9 | | |
$ | 3.4 | | |
$ | (3.4 | ) | |
$ | (4.2 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Adjusted EBITDA | |
£ | 2.8 | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ (3) | |
| 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, 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.
|
(3) |
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
Three
Months ended March 31, 2022, compared to Three Months ended March 31, 2021
| |
3 Months ended | | |
Variance | |
(in millions) | |
Mar 31, | | |
Mar 31, | | |
| |
| |
2022 | | |
2021 | | |
2022 to 2021 | |
Net profit/(loss) | |
$ | 1.5 | | |
($ | 16.7 | ) | |
$ | 18.2 | |
Amortization of debt fees | |
| 0.4 | | |
| 1.3 | | |
| (0.9 | ) |
Change in fair value of derivative and warrant liabilities and stock-based compensation expense | |
| 3.0 | | |
| 4.6 | | |
| (1.6 | ) |
Foreign currency translation on senior bank debt and cross currency swaps | |
| 0.0 | | |
| (6.1 | ) | |
| 6.1 | |
Depreciation and amortization (incl RoU assets) | |
| 10.8 | | |
| 13.7 | | |
| (2.9 | ) |
Other net cash (utilized)/generated by operating activities | |
| (10.6 | ) | |
| 1.2 | | |
| (11.8 | ) |
Net cash provided by operating activities | |
| 5.1 | | |
| (2.0 | ) | |
| 7.1 | |
| |
| | | |
| | | |
| | |
Net cash used in investing activities | |
| (10.9 | ) | |
| (4.8 | ) | |
| (6.1 | ) |
Net cash used by financing activities | |
| (0.1 | ) | |
| (0.2 | ) | |
| 0.1 | |
Effect of exchange rates on cash | |
| (1.1 | ) | |
| 1.1 | | |
| (2.2 | ) |
Net decrease in cash and cash equivalents | |
($ | 7.0 | ) | |
($ | 5.9 | ) | |
($ | 1.1 | ) |
Net
cash provided by operating activities
For
the three months ended March 31, 2022, net cash inflow provided by operating activities was $5.1 million, compared to a $2.0 million
outflow for the three months ended March 31, 2021, representing a $7.1 million increase in cash generation. This increase was driven
primarily by trading levels given the worldwide trading restrictions in the three months ended March 31, 2021, resulting from the COVID-19
pandemic.
Amortization
of debt fees decreased by $0.9 million, to $0.4 million, due to the reduction in the level of capitalized debt fees after May 2021 following
the Company’s refinancing.
Change
in fair value of derivative and warrant liabilities and stock-based compensation expense decreased by $1.6 million, from $4.6 million
to $3.0 million. Movements in the fair value of warrant liabilities decreased by $2.9 million with a $1.4 million increase related to
stock-based compensation expense.
Following
the refinancing in May 2021, there has been no foreign currency translation on senior bank debt and cross currency swaps. In the three
months ended March 31, 2021, the foreign currency translation on senior bank debt and cross currency swaps resulted in a loss of $6.1
million as a result of the movement in exchange rates during the period.
Depreciation
and amortization decreased by $2.9 million, to $10.8 million, with reductions of $1.0 million in machine depreciation and $1.9 million
in amortization of intangible assets.
Other
net cash utilized by operating activities decreased by $11.8 million, to a $10.6 million outflow following the impact of the COVID-19
closures restricting activities in the previous year. Increases in inventory holding and higher trading receivables due to the previous
year having low receivable levels due to the restricted trading imposed worldwide due to the pandemic have resulted in adverse movements
of $12.6 million and $9.4 million respectively. These were offset by favorable movements in interest accruals ($6.3 million) and deferred
revenue ($4.1 million).
Net
cash used in investing activities
Net
cash used in investing activities increased by $6.1 million, to $10.9 million in the three months ended March 31, 2022. This was driven
by higher spend on plant, property and equipment ($3.3 million increase compared to 2021) and capitalized software ($2.3 million increase
compared to 2021) due to spending in the previous year being low as a result of the pandemic. The first three months ended March 31,
2022, also included the final payment of $0.6 million related to the acquisition of Sportech Lotteries LLC which was acquired on December
31, 2021.
Net
cash generated by financing activities
During
the three months ended March 31, 2022, net cash utilized by financing activities was $0.1 million, compared to a $0.2 million outflow
in the three months ended March 31, 2021. Both outflows related to finance lease spend.
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 March 31, 2022, we had liquidity consisting of $40.8 million in cash and cash equivalents
and a further $26.3 million of undrawn revolver facility. This compares to $41.2 million of cash and cash equivalents as of March 31,
2021, with a further $27.6 million of revolver facilities undrawn. We had a working capital outflow of $10.6 million for the three months
ended March 31, 2022, compared to an $1.2 million inflow for the three months ended March 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
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 March 31, 2022, $4.9 million of our $40.8 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 June 2023.
Long
Term and Other Debt
(In millions) | |
March 31, 2022 | | |
March 31, 2021 | |
Cash held | |
£ | 31.0 | | |
$ | 40.8 | | |
£ | 29.9 | | |
$ | 41.2 | |
Original principal senior debt | |
| (235.0 | ) | |
| (309.3 | ) | |
| (225.1 | ) | |
| (310.6 | ) |
Cash interest accrued | |
| (6.1 | ) | |
| (8.1 | ) | |
| (4.8 | ) | |
| (6.7 | ) |
Finance lease creditors | |
| (2.0 | ) | |
| (2.7 | ) | |
| (1.5 | ) | |
| (2.0 | ) |
Total | |
£ | (212.2 | ) | |
$ | (279.3 | ) | |
£ | (201.6 | ) | |
$ | (278.1 | ) |
Debt
Covenants
Under
our debt facilities in place as of March 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 March 21, 2022
showed covenant compliance.
There
were no breaches of the debt covenants in the periods ended March 31, 2022 or March 31, 2021.
Liens
and Encumbrances
As
of March 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 has authorized that the Company
may use up to $25.0 million to repurchase Inspired common shares, subject to repurchases being effected on or before May 10, 2025. Management
has discretion as to whether to repurchase shares of the Company and there is no assurance that buybacks will occur.
Contractual
Obligations
As
of March 31, 2022, 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 | |
$ | 109.5 | | |
$ | 24.4 | | |
$ | 48.6 | | |
$ | 36.5 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financing activities | |
| | | |
| | | |
| | | |
| | | |
| | |
Senior bank debt - principal repayment | |
| 309.3 | | |
| - | | |
| - | | |
| 309.3 | | |
| - | |
Finance lease payments | |
| 2.7 | | |
| 0.7 | | |
| 1.5 | | |
| 0.5 | | |
| - | |
Operating lease payments | |
| 9.9 | | |
| 3.0 | | |
| 3.6 | | |
| 1.5 | | |
| 1.8 | |
Interest on non-utilisation fees | |
| 1.5 | | |
| 0.4 | | |
| 0.8 | | |
| 0.3 | | |
| - | |
Total | |
$ | 432.9 | | |
$ | 28.5 | | |
$ | 54.5 | | |
$ | 348.1 | | |
$ | 1.8 | |
Off-Balance
Sheet Arrangements
As
of March 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 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. Accounting policies concerning revenue recognition, inventories, software development costs, allowance
for doubtful accounts and the pension asset/liability are considered by management to be critical, and further detail on these policies
can be found in our Annual Report on Form 10-K filed with the SEC on March 31, 2022. 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.