UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period _______________

 

Commission File Number: 001-36689

 

INSPIRED ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   47-1025534
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)
     
250 West 57th Street, Suite 415    
New York, NY   10107
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (646) 565-3861

 

 

(Former name or former address, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐
Non-accelerated filer ☒   Smaller reporting company ☒
    Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock, par value $0.0001 per share   INSE   The NASDAQ Stock Market LLC
Preferred Stock Purchase Rights       The NASDAQ Stock Market LLC

 

As of August 11, 2020, there were 23,029,492 shares of the Company’s common stock issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 1
     
ITEM 1. FINANCIAL STATEMENTS 1
     
  Condensed Consolidated Balance Sheets 1
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss 2
     
  Condensed Consolidated Statement of Stockholders’ Deficit 3
     
  Condensed Consolidated Statements of Cash Flows 5
     
  Notes to Condensed Consolidated Financial Statements 6
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 58
     
ITEM 4. CONTROLS AND PROCEDURES 58
     
PART II. OTHER INFORMATION 59
     
ITEM 1. LEGAL PROCEEDINGS 59
     
ITEM 1A.  RISK FACTORS 59
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 59
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 59
     
ITEM 4. MINE SAFETY DISCLOSURES 59
     
ITEM 5. OTHER INFORMATION 59
     
ITEM 6. EXHIBITS 60
     
SIGNATURES 61

 

i

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

    June 30,
2020
    December 31,
2019
 
    (Unaudited)        
Assets            
Cash   $ 39.9     $ 29.1  
Accounts receivable, net     18.6       24.2  
Inventory, net     19.0       18.8  
Prepaid expenses and other current assets     17.0       23.2  
Total current assets     94.5       95.3  
                 
Property and equipment, net     68.4       79.3  
Software development costs, net     41.0       46.9  
Other acquired intangible assets subject to amortization, net     7.3       9.9  
Goodwill     75.4       80.9  
Right of use asset     12.7       9.4  
Investment           0.6  
Other assets     4.0       5.1  
Total assets   $ 303.3     $ 327.4  
                 
Liabilities and Stockholders’ Deficit                
Current liabilities                
Accounts payable   $ 21.3     $ 22.2  
Accrued expenses     26.7       31.2  
Corporate tax and other current taxes payable     6.0       6.6  
Deferred revenue, current     9.2       10.1  
Operating lease liabilities     3.3       3.6  
Other current liabilities     1.4       1.9  
Current portion of long-term debt     24.7       2.6  
Current portion of finance lease liabilities     0.6       0.1  
Total current liabilities     93.2       78.3  
                 
Long-term debt     268.4       270.5  
Long term finance lease liabilities     0.5        
Deferred revenue, net of current portion     13.9       17.7  
Derivative liability     1.6        
Operating lease liabilities     9.2       5.2  
Other long-term liabilities     8.3       5.2  
Total liabilities     395.1       376.9  
                 
Commitments and contingencies                
                 
Stockholders’ deficit                
Preferred stock; $0.0001 par value; 1,000,000 shares authorized            
Series A Junior Participating Preferred stock; $0.0001 par value; 1,000,000 shares authorized; 49,000 shares designated; no shares issued and outstanding at June 30, 2020 and December 31, 2019            
Common stock; $0.0001 par value; 49,000,000 shares authorized; 22,405,376 shares and 22,230,768 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively            
Additional paid in capital     348.6       346.6  
Accumulated other comprehensive income     42.7       45.1  
Accumulated deficit     (483.1 )     (441.2 )
Total stockholders’ deficit     (91.8 )     (49.5 )
Total liabilities and stockholders’ deficit   $ 303.3     $ 327.4  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1

 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(in millions, except share and per share data)

(Unaudited)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2020     2019     2020     2019  
Revenue:                        
Service   $ 15.2     $ 25.6     $ 58.4     $ 56.4  
Hardware     0.4       1.1       9.5       4.0  
Total revenue     15.6       26.7       67.9       60.4  
                                 
Cost of sales, excluding depreciation and amortization:                                
Cost of service     (3.1 )     (5.3 )     (9.7 )     (10.7 )
Cost of hardware     (0.3 )     (1.0 )     (7.3 )     (2.6 )
Selling, general and administrative expenses     (10.6 )     (12.8 )     (39.7 )     (27.5 )
Stock-based compensation expense     (1.0 )     (2.3 )     (2.0 )     (4.4 )
Acquisition and integration related transaction expenses     (1.2 )     (0.7 )     (4.4 )     (1.6 )
Depreciation and amortization     (13.3 )     (9.1 )     (25.9 )     (18.8 )
Net operating loss     (13.9 )     (4.5 )     (21.1 )     (5.2 )
                                 
Other (expense) income                                
Interest income     0.1       0.1       0.4       0.1  
Interest expense     (8.1 )     (4.0 )     (14.2 )     (8.5 )
Change in fair value of earnout liability                       (2.3 )
Change in fair value of derivative liability           (1.3 )           (0.1 )
Loss from equity method investee                 (0.5 )      
Other finance income (expense)     (2.5 )     (0.9 )     (6.2 )     0.3  
                                 
Total other expense, net     (10.5 )     (6.1 )     (20.5 )     (10.5 )
                                 
Loss before income taxes     (24.4 )     (10.6 )     (41.6 )     (15.7 )
Income tax expense     (0.1 )     (0.1 )     (0.3 )      
Net loss     (24.5 )     (10.7 )     (41.9 )     (15.7 )
                                 
Other comprehensive (loss)/income:                                
Foreign currency translation gain     0.4       0.7       3.5       0.2  
Change in fair value of hedging instrument     (0.8 )     2.4       (2.3 )     0.3  
Reclassification of gain on hedging instrument to comprehensive income     0.3       (2.6 )     0.7       (1.1 )
Actuarial losses on pension plan     (8.7 )     (2.0 )     (4.3 )     (1.1 )
Other comprehensive loss     (8.8 )     (1.5 )     (2.4 )     (1.7 )
                                 
Comprehensive loss   $ (33.3 )   $ (12.2 )   $ (44.3 )   $ (17.4 )
                                 
Net loss per common share – basic and diluted   $ (1.09 )   $ (0.48 )   $ (1.87 )   $ (0.73 )
                                 
Weighted average number of shares outstanding during the period – basic and diluted     22,400,107       22,193,955       22,392,218       21,583,648  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD JANUARY 1, 2020 TO JUNE 30, 2020

(in millions, except share data)

(Unaudited)

 

    Common stock     Additional
paid in
    Accumulated
other
comprehensive
    Accumulated     Total
stockholders’
 
    Shares     Amount     capital     income     deficit     deficit  
                                     
Balance as of January 1, 2020     22,230,768     $     $ 346.6     $ 45.1     $ (441.2 )   $ (49.5 )
Foreign currency translation adjustments                       3.1             3.1  
Actuarial gains on pension plan                       4.4             4.4  
Change in fair value of hedging instrument                       (1.5 )           (1.5 )
Reclassification of loss on hedging instrument to comprehensive income                       0.4             0.4  
Shares issued in net settlement of RSUs     166,959                                
Stock-based compensation expense                 1.0                   1.0  
Net loss                             (17.4 )     (17.4 )
Balance as of March 31, 2020     22,397,727     $     $ 347.6     $ 51.5     $ (458.6 )   $ (59.5 )
Foreign currency translation adjustments                       0.4             0.4  
Actuarial loss on pension plan                       (8.7 )           (8.7 )
Change in fair value of hedging instrument                       (0.8 )           (0.8 )
Reclassification of loss on hedging instrument to comprehensive income                       0.3             0.3  
Stock-based compensation expense – ESPP     7,649                                
Stock-based compensation expense                 1.0                   1.0  
Net loss                             (24.5 )     (24.5 )
Balance as of June 30, 2020     22,405,376     $     $ 348.6     $ 42.7     $ (483.1 )   $ (91.8 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD JANUARY 1, 2019 TO JUNE 30, 2019

(in millions, except share data)

(Unaudited)

 

    Common stock     Additional
paid in
    Accumulated
other
comprehensive
    Accumulated     Total
stockholders’
 
    Shares     Amount     capital     income     deficit     deficit  
                                     
Balance as of January 1, 2019     20,870,397     $     $ 329.9     $ 55.9     $ (404.2 )   $ (18.4 )
Foreign currency translation adjustments                       (0.5 )           (0.5  
Actuarial gains on pension plan                       0.9             0.9  
Change in fair value of hedging instrument                       (2.1 )           (2.1 )
Reclassification of loss on hedging instrument to comprehensive income                       1.5             1.5  
Shares issued in earnout     1,323,558             8.6                   8.6 )
Stock-based compensation expense                 1.7                   1.7  
Net loss                             (5.0 )     (5.0 )
Balance as of March 31, 2019     22,193,955     $     $ 340.2     $ 55.7     $ (409.2 )   $ (13.3 )
Foreign currency translation adjustments                       0.7             0.7  
Actuarial losses on pension plan                       (2.0 )           (2.0 )
Change in fair value of hedging instrument                       2.4             2.4  
Reclassification of loss on hedging instrument to comprehensive income                       (2.6 )           (2.6 )
Conversion of awards previously classified as derivatives                 0.8                   0.8  
Stock-based compensation expense                 2.1                   2.1  
Net loss                               (10.7 )     (10.7 )
Balance as of June 30, 2019     22,193,955     $     $ 343.1     $ 54.2     $ (419.9 )   $ (22.6 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

 

    Six Months Ended
June 30,
 
    2020     2019  
Cash flows from operating activities:            
Net loss   $ (41.9 )   $ (15.7 )
Adjustments to reconcile net loss to net cash provided by operating activities:                
Depreciation and amortization     25.9       18.8  
Amortization of right of use asset     2.0        
Stock-based compensation expense     2.0       4.4  
Change in fair value of derivative liability           0.1  
Change in fair value of earnout liability           2.3  
Impairment of investment in equity method investee     0.7        
Foreign currency translation on senior bank debt     6.6       0.3  
Foreign currency translation on cross currency swaps           (0.6 )
Reclassification of gain on hedging instrument to comprehensive income     0.5        
Non-cash interest expense relating to senior debt     1.2       0.9  
Changes in assets and liabilities:                
Accounts receivable     3.7       0.8  
Inventory     (1.4 )     (0.5 )
Prepaid expenses and other assets     5.7       4.5  
Corporate tax and other current taxes payable     0.1       (0.5 )
Accounts payable     0.8       4.4  
Deferred revenues and customer prepayment     (3.8 )     (2.1 )
Accrued expenses     9.3       2.4  
Operating lease liabilities     (1.6 )      
Other long-term liabilities     0.4     0.2  
Net cash provided by operating activities     10.2       19.7  
                 
Cash flows from investing activities:                
Purchases of property and equipment     (8.8 )     (2.2 )
Disposals of property and equipment           0.2  
Purchases of capital software     (6.7 )     (7.8 )
Net cash used in investing activities     (15.5 )     (9.8 )
                 
Cash flows from financing activities:                
Proceeds from issuance of revolver     22.3       9.3  
Debt fees incurred     (3.1 )      
Repayments of finance leases     (0.6 )     (0.3 )
Net cash provided by financing activities     18.6       9.0  
                 
Effect of exchange rate changes on cash     (2.5 )     (1.2 )
Net increase in cash     10.8       17.7  
Cash, beginning of period     29.1       16.0  
Cash, end of period   $ 39.9     $ 33.7  
                 
Supplemental cash flow disclosures                
Cash paid during the period for interest   $ 0.4     $ 8.2  
Cash paid during the period for income taxes   $ 0.1     $  
Cash paid during the period for operating leases   $ 1.2     $  
                 
Supplemental disclosure of non-cash investing and financing activities                
Lease liabilities arising from obtaining right of use assets   $ (6.1 )   $  
Adjustment to goodwill arising from adjustment to fair value of assets acquired   $ (0.3 )   $  
Capitalized interest payments   $ 10.6     $  
Property and equipment acquired through finance lease   $ 1.5     $  
Additional paid in capital reclassified from derivative liability   $     $ 0.8  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

 

1. Nature of Operations, Management’s Plans and Summary of Significant Accounting Policies

 

Company Description and Nature of Operations

 

Inspired Entertainment, Inc. (the “Company,” “we,” “our,” and “us”) is a global business-to-business gaming technology company, supplying Server Based Gaming (“SBG”) and Virtual Sports (which includes Interactive) systems to regulated lottery, betting and gaming operators worldwide through an “omni-channel” distribution strategy. We provide end-to-end digital gaming solutions on our proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices such as smartphones and tablets and online computer and social applications. Our products can be found in licensed betting offices, adult gaming centers, bingo halls, and through our Acquired Businesses (defined herein), in UK pubs, airports, motorway service areas, and leisure parks.

 

Management Liquidity Plans

 

As of June 30, 2020, the Company’s cash on hand was $39.9 million, and the Company had working capital of $1.3 million. The Company recorded net losses of $41.9 million and $15.7 million for the six months ended June 30, 2020 and 2019, respectively. Net losses include non-cash stock-based compensation of $2.0 million and $4.4 million for the six months ended June 30, 2020 and 2019, respectively. Historically, the Company has generally had positive cash flows from operating activities and has relied on a combination of cash flows provided by operations and the incurrence of debt and/or the refinancing of existing debt to fund its obligations. Cash flows provided by operations amounted to $10.2 million and $19.7 million for the six months ended June 30, 2020 and 2019, respectively. Working capital of $1.3 million includes a non-cash settled item of $9.2 million of deferred income. Management currently believes that, absent any unanticipated coronavirus (“COVID-19”) impact (see below), the Company’s cash balances on hand, cash flows expected to be generated from operations, ability to control and defer capital projects and amounts available from the Company’s external borrowings will be sufficient to fund the Company’s net cash requirements through August 2021.

 

Our business is being, and will continue to be, adversely affected by the rapidly expanding nature of the COVID-19 pandemic. Whilst the majority of venues offering land-based gaming, including our products, have now re-opened, social distancing measures have impacted the ability of some venues to operate to the same capacity. In addition, the risk of there being a “second wave” or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which we operate, which could see the government re-impose restrictions on, or changes to, our operations up to and including complete or partial closures of retail venues, and the long-term impacts of the pandemic on the global economy, trade relations, consumer behavior, our industry and our business operations, remains.

 

Due to the closure of land-based revenues we saw a significant increase in our online revenues from slots and virtual sports and following the success of this area of the business and the successful re-opening of various revenue streams, the Company repaid £10 million ($12.4 million) of the revolving credit facility subsequent to the end of the period, on July 14, 2020.  There is a risk of further shutdowns in certain markets if COVID-19 cases increase. 

 

6

 

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s opinion, however, that the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

 

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended December 31, 2019 and 2018. The financial information as of December 31, 2019 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2020. The interim results for the six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim periods.

  

2. Inventory

 

Inventory consists of the following:

 

    June 30,
2020
   

December 31,

2019

 
    (in millions)  
Component parts   $ 13.3     $ 12.7  
Work in progress     1.5       2.1  
Finished goods     4.2       4.0  
Total inventories   $ 19.0     $ 18.8  

 

Component parts include parts for gaming terminals. Included in inventory are reserves for excess and slow-moving inventory of $1.2 million and $0.9 million as of June 30, 2020 and December 31, 2019, respectively. Our finished goods inventory primarily consists of gaming terminals which are ready for sale.

  

3. Contract Liabilities and Other Disclosures

 

The following table summarizes contract related balances:

 

    Accounts
Receivable
    Unbilled
Accounts
Receivable
    Deferred
Income
    Customer
Prepayments
and Deposits
 
    (in millions)  
At June 30, 2020   $ 19.7     $ 7.4     $ (24.0 )   $ (0.9 )
At December 31, 2019   $ 24.5     $ 15.3     $ (27.8 )   $ (1.9 )
At December 31, 2018   $ 11.5     $ 11.0     $ (32.0 )   $ (3.6 )

 

Revenue recognized that was included in the deferred income balance at the beginning of the period amounted to $5.9 million and $9.6 million for the six months ended June 30, 2020 and the year ended December 31, 2019, respectively.

 

7

 

 

4. Long Term and Other Debt

 

On September 27, 2019, the Company, together with certain direct and indirect wholly-owned subsidiaries, entered into a Senior Facilities Agreement (the “SFA”) with Lucid Agency Services Limited, as agent, Nomura International plc and Macquarie Corporate Holdings Pty Limited (UK Branch) as arrangers and/or bookrunners and each lender party thereto (the “Lenders”), pursuant to which the Lenders agreed to provide, subject to certain conditions, two tranches of senior secured term loans (the “Term Loans”), in an original principal amount of £140.0 million ($173.0 million) and €90.0 million ($101.1 million), respectively and a secured revolving facility loan in an original principal amount of £20.0 million ($24.7 million).

 

On June 25, 2020, the Company, certain direct and indirect subsidiaries of the Company, Lucid Agency Services Limited, and Lucid Trustee Services Limited as security agent under the SFA and the Intercreditor Agreement (as defined in the SFA), entered into an Amendment and Restatement Agreement (the “ARA”) with respect to the SFA.

 

The ARA amends the SFA by, among other things, (i) capitalizing certain interest payments that fell due on April 1, 2020, (ii) resetting the leverage and capital expenditure financial covenants applicable under the SFA, removing certain rating requirements under the SFA, (iii) allowing the Company and its subsidiaries to incur additional indebtedness under the UK Coronavirus Large Business Interruption Loan Scheme under a stand-alone facility, which may rank pari passu or junior to the facilities under the SFA, in an amount not exceeding £10.0 million ($12.4 million), (iv) removing certain rating requirements under the SFA, (v) limiting the ability of the Company and its subsidiaries to incur additional indebtedness, including by reducing the amount of general indebtedness the Company and its subsidiaries are permitted to incur and removing the ability to incur senior secured, second lien and unsecured indebtedness in an amount not exceeding the aggregate of (A) an unlimited amount, as long as, pro forma for the utilization of such indebtedness, the consolidated total net leverage ratio does not exceed the lower of 3.4:1 and the then applicable ratio with respect to the consolidated total net leverage financial covenant summarized further below, plus (B) an amount equal to the greater of £16.0 million ($19.8 million) and 25% of the consolidated pro forma EBITDA of the Company and its subsidiaries for the relevant period (as defined in the SFA, but disregarding, for the purposes of calculating the usage of such cap, any financial indebtedness applied to refinancing other financial indebtedness, together with any related interest, fees, costs and expenses), (vi) increasing the margin applicable to the Facilities (as defined in the SFA) by 1% and adding an additional payment-in-kind margin of 0.75% payable on any principal amounts outstanding under Facility B (as defined in the SFA) after September 24, 2021 (the “Relevant Date”), (vii) adding an exit fee payable by the Company with respect to any repayment or prepayment of Facility B after the Relevant Date at the time of such repayment or prepayment in an amount equal to 0.75% of the principal amount of Facility B being repaid or prepaid, (viii) removing any ability to carry forward or carry back any unused allowance under the capital expenditure financial covenant in the SFA and (ix) granting certain additional information rights to the Lenders under the SFA, including the provision of a budget, and certain board observation rights until December 31, 2022. All other material terms of the SFA remain unchanged in all material respects.

 

In consideration for the amendments listed above, the Company agreed to pay the Lenders an amendment fee equal to 1% of the Total Commitments (as defined in the SFA) after giving effect to the capitalization of the interest payment described above. The amendment fee is payable to the Lenders pro rata to their commitments under the SFA.

 

The modification to the SFA is not considered to be substantial in accordance with Topic 470-50 and has therefore not been treated as a debt extinguishment. The amendment fees, amounting to $3.1 million, are associated with the modified debt instrument and will be amortized along with the existing unamortized debt issuance costs. Fees payable to third parties are expensed as incurred, resulting in $1.0 million charged to interest expense for the three months ended June 30, 2020.

 

There were no breaches of the debt covenants in the periods ended June 30, 2020 and December 31, 2019. 

 

8

 

 

Outstanding Debt and Finance Leases

 

The following reflects outstanding debt as of June 30, 2020:

 

    Principal     Unamortized
deferred
financing charge
    Book value,
June 30,
2020
 
    (in millions)  
Senior bank debt   $ 309.5     $ (16.4 )   $ 293.1  
Finance lease liabilities     1.1             1.1  
Total long-term debt outstanding     310.6       (16.4 )     294.2  
Less: current portion of long-term debt     (25.3 )           (25.3 )
Long-term debt, excluding current portion   $ 285.3     $ (16.4 )   $ 268.9  

 

5. Derivatives and Hedging Activities

 

On January 15, 2020, the Company entered into two interest rate swaps with UBS AG designed to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a portion of the current floating rate debt facilities. The swaps fix the variable interest rate of the current debt facilities and provide protection over potential interest rate increases by providing a fixed rate of interest payment in return. These interest rate swaps are for £95 million at a fixed rate of 0.9255% based on the 6-month LIBOR rate and for €60 million at a fixed rate of 0.102% based on the 6 month EUROLIBOR rate and are effective until maturity on October 1, 2023.

 

Hedges of Multiple Risks

 

The Company’s objectives in using interest rate derivatives are to add stability to interest and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 

 

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $1.5 million will be reclassified as an increase to interest expense.

 

As of June 30, 2020, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

 

Interest Rate Derivative   Number of
Instruments
  Notional
Interest rate swaps   2     £95 million at a fixed rate of 0.9255% based on the 6-month LIBOR rate and €60 million at a fixed rate of 0.102% based on the 6 month EUROLIBOR rate

 

9

 

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheet as of June 30, 2020.

 

    Balance Sheet
Classification
  Asset
Derivatives
Fair Value
    Balance Sheet
Classification
  Liability
Derivatives
Fair Value
 
        (in millions)         (in millions)  
Derivatives designated as hedging instruments:                        
Interest Rate Products   Fair Value of Hedging Instruments   $      —     Other Current Liabilities and long term Derivative Liability   $        (2.1  )
Total derivatives designated as hedging instruments       $         $ (2.1 )

 

The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income for the six months ended June 30, 2020.

 

    Amount of Gain/(Loss)
Recognized in
Other
Comprehensive
Income on
Derivative
        Location of 
Gain/(Loss)
Reclassified
from
Accumulated Other
Comprehensive
Income into
Income
 
    (in millions)         (in millions)  
Interest Rate and Foreign Exchange Products   $ (2.3 )   Interest Expense   $      (0.7 )
Total   $ (2.3 )       $ (0.7 )

 

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the six months ended June 30, 2020.

 

    Interest
Expense
 
    (in millions)  
Total amounts of income and expense line items presented in the statement of operations and comprehensive loss in which the effects of fair value or cash flow hedges are recorded   $ 14.2  
         
Gain/(loss) on cash flow hedging relationships in Subtopic 815-20   $ (0.7 )

  

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheet.

 

The ISDA Master Agreement between Gaming Acquisitions Limited, a wholly-owned subsidiary of the Company, and UBS AG is documented using the 2002 Form and the ISDA standard set-off provision in Section 6(f) of the ISDA Master Agreement apply to both parties and is only modified to include Affiliates of the Payee. There is no CSA and thus there is no collateral posting.

 

Offsetting of Derivative Assets
June 30, 2020                                    
                      Gross Amounts Not Offset in the
Statement of Financial Position
 
    Gross
Amounts
of Recognized
Assets
    Gross
Amounts
Offset in the
Statement of
Financial
Position
    Net Amounts
of Assets
presented
in the
Statement
of Financial
Position
    Financial
Instruments
    Cash
Collateral
Received
    Net
Amount
 
    (in millions)  
Fair value of hedging instrument   $             —     $               —     $              —     $               —     $             —     $            —  

 

10

 

 

Offsetting of Derivative Liabilities
June 30, 2020                                    
                      Gross Amounts Not Offset in the
Statement of Financial Position
 
    Gross
Amounts
of Recognized
Liabilities
    Gross
Amounts
Offset in the
Statement of
Financial
Position
    Net Amounts
of Liabilities
presented
in the
Statement
of Financial
Position
    Financial
Instruments
    Cash
Collateral
Received
    Net
Amount
 
    (in millions)  
Fair value of hedging instrument   $ 2.1     $         —     $ 2.1     $              —     $           —     $            —  

 

Credit-risk-related Contingent Features

 

The Company has entered into an industry standard ISDA Master Agreement, with a negotiated Scheduled thereto (the “ISDA Agreement”), with the counterparty to its derivative transactions and which ISDA Agreement sets forth various provisions which govern the trading relationship between the Company and its counterparty. Such provisions include certain events which, if triggered by either party, may give rise to an acceleration of the ISDA Agreement, thus triggering the exchange of a breakage payment between the parties.

 

The ISDA Agreement with the Company’s derivative counterparty contains a provision where the Company could be declared in default on its derivative obligations if, among others, its repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. The ISDA Agreement can also be accelerated if Lucid Trustee Services Limited requests or requires that the lender terminates or closes-out any Transaction under the ISDA Agreement pursuant to Clause 4.10 of the Intercreditor Agreement between primarily the Company, Lucid Agency Services as Senior Agent and Lucid Trustee Services Limited as Security Agent; in the event of certain refinancing circumstances; and in the event of certain reductions in the principal with respect to amounts loaned under the Senior Facilities Agreement.

 

As of June 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to the ISDA Agreements was $2.1 million. As of June 30, 2020, the Company has not posted any collateral related to the ISDA Agreement, as no collateral is required under the terms of such ISDA Agreement. If the Company had breached any of the provision under the ISDA Agreement which resulted in an acceleration of the ISDA Agreement at June 30, 2020, it could have been required to settle its obligations under the ISDA Agreement at its termination value of $2.5 million 

 

11

 

 

6. Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of our assets and liabilities utilizing an established three-level hierarchy. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:

 

  Level 1: Quoted prices in active markets for identical assets or liabilities.
     
  Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.
     
  Level 3: Unobservable inputs that are supported by little or no market activity that are significant to the fair value of the asset or liability. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that are unable to be corroborated with observable market data.

 

The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments approximates their recorded values.

 

For each period, derivative financial instrument assets and liabilities measured at fair value on a recurring basis are included in the financial statements as per the table below.

 

        June 30,     December 31,  
    Level   2020     2019  
        (in millions)  
Derivative liability (see Note 5)   2   $ 2.1     $  
Long term receivable (included in other assets)   2   $ 1.3     $ 1.5  

 

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s principal financial officer, who reports to the principal executive officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Principal Financial Officer and approved by the Principal Executive Officer.

  

At June 30, 2020 and December 31, 2019, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

 

7. Stock-Based Compensation

 

The Company’s stock-based compensation plans authorize awards of restricted stock units (“RSUs”), stock options and other equity-related awards. In May 2019, in conjunction with the Company’s stockholders approving the 2018 Omnibus Incentive Plan (the “2018 Plan”), which authorizes a total of 2,550,000 shares to be issued pursuant to awards thereunder, the balances available for awards under the Company’s predecessor plans (i.e., the 2016 Long-Term Incentive Plan and the Second Long-Term Incentive Plan) (collectively, the “Prior Plans”) were terminated. Although outstanding awards under the Prior Plans remain governed by the terms of the Prior Plans, no new awards will be granted or become available for grant under the Prior Plans.

 

12

 

 

As of June 30, 2020, there were (i) 2,429,011 shares subject to outstanding awards under the Prior Plans, including 1,092,633 shares subject to market-price vesting conditions, and (ii) 1,139,739 shares subject to outstanding awards under the 2018 Plan, including 100,000 shares subject to performance-based target awards and 241,077 shares subject to awards that were previously subject to performance criteria that were determined to be met in June 2020 (at a level equal to approximately 87% of the target awards) which awards continue to remain subject to a time-based vesting schedule. As of June 30, 2020, there were 1,136,945 shares available for new awards under the 2018 Plan and no shares available for new awards under the Prior Plans. All awards consist of RSUs and Restricted Stock.

 

The Company also has an employee stock purchase plan (“ESPP”) that authorizes the issuance of up to an aggregate of 500,000 shares of common stock pursuant to purchases thereunder by employees. The ESPP, which was approved by stockholders in July 2017, is administered by the Compensation Committee which has discretion to designate the length of offering periods and other terms subject to the requirements of the ESPP. The Company held a twelve-month offering period under the ESPP that began on June 3, 2019 and ended on June 2, 2020. This offering period authorized employees to contribute up to 10% of their base compensation to purchase a maximum of 1,000 shares at a discounted purchase price that would be equal 85% of the lower of: (i) the closing price at the beginning of the offering period and (ii) the closing price at the end of the offering period. A total of 7,649 shares were purchased on the last day of the offering period, June 2, 2020, at a discounted price of $3.2215 per share. As of June 30, 2020, a total of 467,751shares remain available for purchase under the ESPP.

 

A summary of the Company’s RSU activity during the six months ended June 30, 2020 is as follows:

 

    Number of
Shares
 
       
Unvested Outstanding at January 1, 2020     1,571,964  
Granted     247,405  
Forfeited     (47,613 )
Vested     (198,701 )
Unvested Outstanding at June 30, 2020     1,573,055  

 

In addition, the Company issued a total of 166,959 shares during the six months ended June 30, 2020 in connection with the net settlement of RSUs that vested on December 31, 2019.

 

Stock-based compensation is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. For performance awards that are contingent upon the Company achieving certain pre-determined financial performance targets, compensation expense is calculated based on the number of shares expected to vest after assessing the probability that the performance criteria will be met. Determining the probability of achieving a performance target requires estimates and judgment.  

 

The Company recognized stock-based compensation expense for Restricted Stock and RSUs amounting to $1.0 million and $2.3 million for the three months ended June 30, 2020 and 2019, respectively, and $2.0 million and $4.4 million for the six months ended June 30, 2020 and 2019, respectively. Total unrecognized compensation expense related to unvested stock awards and unvested RSUs at June 30, 2020 amounts to $5.9 million and is expected to be recognized over a weighted average period of 1.7 years.

 

13

 

 

8. Accumulated Other Comprehensive Loss (Income)

 

The accumulated balances for each classification of comprehensive loss (income) are presented below:

 

    Foreign Currency Translation Adjustments     Change in Fair Value of Hedging Instrument     Unrecognized Pension Benefit Costs     Accumulated Other Comprehensive (Income)  
    (in millions)  
Balance at January 1, 2020   $ (76.5 )   $ 1.4     $ 30.0     $ (45.1 )
Change during the period     (3.1 )     1.1       (4.4 )     (6.4 )
Balance at March 31, 2020     (79.6 )     2.5       25.6       (51.5 )
Change during the period     (0.4 )     0.5       8.7       8.8  
Balance at June 30, 2020   $ (80.0 )   $ 3.0     $ 34.3     $ (42.7 )

 

    Foreign Currency Translation Adjustments     Change in Fair Value of Hedging Instrument     Unrecognized Pension Benefit Costs     Accumulated Other Comprehensive (Income)  
    (in millions)  
Balance at January 1, 2019   $ (78.9 )   $ (0.1 )   $ 23.1     $ (55.9 )
Change during the period     0.5       0.6       (0.9 )     0.2  
Balance at March 31, 2019     (78.4 )     0.5       22.2       (55.7 )
Change during the period     (0.7 )     0.2       2.0       1.5  
Balance at June 30, 2019   $ (79.1 )   $ 0.7     $ 24.2     $ (54.2 )

 

Included within accumulated other comprehensive income is an amount of $0.9 million relating to the change in fair value of discontinued hedging instruments. This amount will be amortized as a charge to income over the life of the original instrument, to August 2021 in accordance with US GAAP. The remaining $2.1 million relates to currently active hedging instruments.

   

9. Net Loss per Share

 

Basic loss per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period, including stock options, restricted stock, RSUs and warrants, using the treasury stock method, and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.

 

The computation of diluted EPS excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

 

    Three and Six Months Ended
June 30,
 
    2020     2019  
RSUs     2,944,634       3,066,697  
Unvested Restricted Stock     624,116       624,116  
Stock Warrants     9,539,565       9,539,565  
      13,108,315       13,230,378  

 

10. Other Finance Income (Costs)

 

Other finance income (costs) consisted of the following for the three and six months ended June 30, 2020 and 2019:

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
    2020     2019     2020     2019  
    (in millions)     (in millions)  
Pension interest cost   $ (0.5 )   $ (0.7 )   $ (1.1 )   $ (1.4 )
Expected return on pension plan assets     0.7       0.9       1.5       1.8  
Foreign currency translation on senior bank debt     (2.7 )     (3.2 )     (6.6 )     (0.3 )
Foreign currency remeasurement on hedging instrument           2.1             0.2  
    $ (2.5 )   $ (0.9 )   $ (6.2 )   $ 0.3  

 

14

 

 

11. Income Taxes

 

The effective income tax rate for the three months ended June 30, 2020 and 2019 was 0.4% and 0.9%, respectively, resulting in a $0.1 million income tax expense in both periods. The effective income tax rate for the six months ended June 30, 2020 and 2019 was 0.7% and 0.0%, respectively, resulting in a $0.3 million and $0.0 million income tax expense, respectively. The Company’s effective income tax rate has fluctuated primarily as a result of the income mix between jurisdictions. 

 

The income tax expense for the three and six months ended June 30, 2020 and 2019 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to pre-tax losses for which no tax benefit can be recorded, and foreign earnings being taxed at rates different than the US statutory rate.

 

12. Related Parties

 

Macquarie Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK”), is an affiliate of MIHI LLC, the beneficial owner of approximately 16.75% of our common stock. Macquarie UK is one of the lending parties with respect to our senior secured term loans and revolving credit facility under our senior facilities agreement dated September 27, 2019, as amended and restated on June 25, 2020 (the “SFA”) (see Note 4). The portion of the total loans of $309.5 million under these facilities held by Macquarie UK at June 30, 2020 was $27.9 million. Interest expense payable to Macquarie UK for the three months ended June 30, 2020 and 2019 amounted to $0.6 million and $0.0 million, respectively, and for the six months ended June 30, 2020 and 2019 amounted to $1.1 million and $0.0 million, respectively. In addition, $0.5 million of a total $6.0 million of accrued interest payable was due to Macquarie UK at June 30, 2020, and Macquarie UK received $0.3 million of the total $3.1 million of SFA amendment fees paid (see Note 4). MIHI LLC, is also a party to a stockholders agreement with the Company and other stockholders, dated December 23, 2016, pursuant to which, subject to certain conditions, MIHI LLC, jointly with Hydra Industries Sponsor LLC, are permitted to designate two directors to be nominated for election as directors of the Company at any annual or special meeting of stockholders at which directors are to be elected, until such time as MIHI LLC and Hydra Industries Sponsor LLC in the aggregate hold less than 5% of the outstanding shares of the Company. 

 

The Company held a 40% non-controlling equity interest in Innov8 Gaming Limited (“Innov8”) from October 2019 until April 2020 when the Company disposed of its interest. Revenue earned from Innov8 while a related party for the six months ended June 30, 2020 and 2019 amounted to $0.6 million and $0.0 million, respectively and purchases from Innov8 while a related party for the six months ended June 30, 2020 and 2019 amounted to $0.2 million and $0.0 million, respectively. The value of the investment was impaired by $0.7 million to $Nil in March 2020 prior to disposal.

 

13. Leases

 

The Company is party to leases with third parties with respect to various gaming machines. Gaming machine leases typically include a lease (of the machine) and a non-lease (provision of software services) component.

 

The components of lease income were as follows:

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
    2020     2019     2020     2019  
    (in millions)     (in millions)  
Interest receivable from sales type leases   $     $     $     $  
Operating lease income                 1.0        
Variable income from sales type leases                 0.2        
    $     $     $ 1.2     $  

 

14. Commitments and Contingencies

 

Legal Matters

 

From time to time, the Company may become involved in lawsuits and legal matters arising in the ordinary course of business. While the Company believes that, currently, it has no such matters that are material, there can be no assurance that existing or new matters arising in the ordinary course of business will not have a material adverse effect on the Company’s business, financial condition or results of operations.

 

15

 

 

15. Pension Plan

 

We operate both defined benefit and defined contributions pension schemes in the UK. The defined contribution scheme assets are held separately from those of the Company in an independently administered fund. The defined benefit section has been closed to new entrants since April 1, 1999 and closed to future accruals for services rendered to the Company for the entire financial statement periods presented. On March 15, 2019, it was agreed that no further deficit reduction contributions shall be made to the scheme, except in the event that the scheme funding level does not progress as expected, in which case contingent contributions would be made subject to an agreed maximum amount. It was determined that contingent contributions of $1.1 million and expense contributions of $0.4 million would be payable during the year ended December 31, 2020, with agreement reached with the trustees of the scheme to defer $0.4 million of the contingent contributions into the year to December 31, 2021 The funding level of the scheme will next be tested against the expected position at December 31, 2020 to determine whether further contingent contributions are payable over the year to December 31, 2021.

 

The total amount of employer contributions paid during the six months ended June 30, 2020 amounted to $0.1 million.

 

The following table presents the components of our net periodic pension benefit cost:

 

    Six Months Ended
June 30,
 
    2020     2019  
    (in millions)  
Components of net periodic pension benefit cost:            
Interest cost   $ 1.1     $ 1.4  
Expected return on plan assets     (1.5 )     (1.8 )
Net periodic benefit   $ (0.4 )   $ (0.4 )

 

The following table sets forth the estimate of the combined funded status of the pension plans and their reconciliation to the related amounts recognized in our consolidated financial statements at the respective measurement dates:

 

   

June 30,

2020

    December 31,
2019
 
    (in millions)  
Change in benefit obligation:            
Benefit obligation at beginning of period   $ 110.4     $ 94.1  
Interest cost     1.1       2.7  
Prior service cost            
Actuarial loss     7.2       14.1  
Benefits paid     (1.3 )     (4.2 )
Foreign currency translation adjustments     (6.9 )     3.7  
Benefit obligation at end of period   $ 110.5     $ 110.4  
Change in plan assets:                
Fair value of plan assets at beginning of period   $ 107.3     $ 97.4  
Actual gain on plan assets     4.0       10.3  
Employer contributions     0.1       0.2  
Benefits paid     (1.3 )     (4.2 )
Foreign currency translation adjustments     (6.8 )     3.6  
Fair value of assets at end of period   $ 103.3     $ 107.3  
Amount recognized in the consolidated balance sheets:                
Unfunded status (non-current)   $ (7.2 )   $ (3.1 )
Net amount recognized   $ (7.2 )   $ (3.1 )

 

16

 

 

16. Segment Reporting and Geographic Information

 

The Company operates its business along three operating segments, which are segregated based on revenue stream: Service Based Gaming, Virtual Sports (which includes Interactive) and Acquired Businesses. The Company believes this method of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated.

 

The following tables present revenue, cost of sales, excluding depreciation and amortization, selling, general and administrative expenses, depreciation and amortization, stock-based compensation expense and acquisition related transaction expenses, operating profit/(loss), total assets and total capital expenditures for the periods ended June 30, 2020 and 2019, respectively, by business segment. 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. Corporate function costs consist primarily of selling, general and administrative expenses, depreciation and amortization, capital expenditures, cash, prepaid expenses and property and equipment and software development costs relating to corporate/shared functions.

 

Segment Information

 

Three Months Ended June 30, 2020

 

   

Server

Based
Gaming

   

Virtual

Sports

   

Acquired

Businesses

    Intergroup
Eliminations
   

Corporate

Functions

    Total  
    (in millions)  
Revenue:                                    
Service   $ 3.6     $ 9.8     $ 1.8     $     —     $     $ 15.2  
Hardware     0.4                               0.4  
Total revenue     4.0       9.8       1.8                   15.6  
Cost of sales, excluding depreciation and amortization:                                                
Cost of service     (1.0 )     (1.2 )     (0.9 )                 (3.1 )
Cost of hardware     (0.3 )                             (0.3 )
Selling, general and administrative expenses     (2.0 )     (1.1 )     (3.6 )           (3.9 )     (10.6 )
Stock-based compensation expense     (0.1 )     (0.1 )                 (0.8 )     (1.0 )
Acquisition and integration related transaction expenses                             (1.2 )     (1.2 )
Depreciation and amortization     (6.0 )     (1.4 )     (5.6 )           (0.3 )     (13.3 )
Segment operating income (loss)     (5.4 )     6.0       (8.3 )           (6.2 )     (13.9 )
                                                 
Net operating loss                                           $ (13.9 )
                                                 
Total assets at June 30, 2020   $ 64.2     $ 64.7     $ 135.7     $     $ 38.7     $ 303.3  
                                                 
Total goodwill at June 30, 2020   $     $ 43.4     $ 32.0     $     $     $ 75.4  
Total capital expenditures for the three months ended June 30, 2020   $ 0.5     $ 2.0     $ 0.5     $     $ 0.6     $ 3.6  

 

 

17

 

 

Three Months Ended June 30, 2019

 

   

Server

Based
Gaming

   

Virtual

Sports

   

Acquired

Businesses

    Intergroup
Eliminations
   

Corporate

Functions

    Total  
    (in millions)  
Revenue:                                    
Service   $ 16.4     $ 9.2     $     $     $     $ 25.6  
Hardware     1.1                               1.1  
Total revenue     17.5       9.2                         26.7  
Cost of sales, excluding depreciation and amortization:                                            
Cost of service     (4.4 )     (0.9 )                       (5.3 )
Cost of hardware     (1.0 )                             (1.0 )
Selling, general and administrative expenses     (6.0 )     (2.1 )                 (4.7 )     (12.8 )
Stock-based compensation expense     (0.5 )     (0.3 )                 (1.5 )     (2.3 )
Acquisition and integration related transaction expenses                             (0.7 )     (0.7 )
Depreciation and amortization     (7.2 )     (1.4 )                 (0.5 )     (9.1 )
Segment operating income (loss)     (1.6 )     4.5                   (7.4 )     (4.5 )
                                                 
Net operating loss                                           $ (4.5 )
                                                 
Total assets at December 31, 2019   $ 80.8     $ 66.8     $ 156.7     $     $ 23.1     $ 327.4  
                                                 
Total goodwill at December 31, 2019   $     $ 46.4     $ 34.5     $     $     $ 80.9  
Total capital expenditures for the three months ended June 30, 2019   $ 2.1     $ 1.6     $     $     $ 0.5     $ 4.2  

 

18

 

 

Six Months Ended June 30, 2020

 

   

Server

Based
Gaming

   

Virtual

Sports

   

Acquired

Businesses

    Intergroup
Eliminations
   

Corporate

Functions

    Total  
    (in millions)  
Revenue:                                    
Service   $ 17.0     $ 18.8     $ 23.2     $ (0.6 )   $     $ 58.4  
Hardware     3.7             6.0       (0.2 )           9.5  
Total revenue     20.7       18.8       29.1       (0.8 )           67.9  
Cost of sales, excluding depreciation and amortization:                                                
Cost of service     (4.6 )     (2.1 )     (3.6 )     0.6             (9.7 )
Cost of hardware     (2.1 )           (5.2 )                 (7.3 )
Selling, general and administrative expenses     (7.0 )     (2.8 )     (20.5 )           (9.4 )     (39.7 )
Stock-based compensation expense     (0.3 )     (0.2 )                 (1.5 )     (2.0 )
Acquisition and integration related transaction expenses                             (4.4 )     (4.4 )
Depreciation and amortization     (12.2 )     (2.8 )     (10.4 )           (0.5 )     (25.9 )
Segment operating income (loss)     (5.5 )     10.9       (10.5 )     (0.2 )     (15.8 )     (21.1 )
                                                 
Net operating loss                                           $ (21.1 )
                                                 
Total capital expenditures for the six months ended June 30, 2020   $ 1.6     $ 3.6     $ 7.3     $     $ 2.9     $ 15.4  

 

Six Months Ended June 30, 2019

 

   

Server

Based
Gaming

   

Virtual

Sports

   

Acquired

Businesses

    Intergroup
Eliminations
   

Corporate

Functions

    Total  
    (in millions)  
Revenue:                                    
Service   $ 37.2     $ 19.2     $     $     $     $ 56.4  
Hardware     4.0                               4.0  
Total revenue     41.2       19.2                         60.4  
Cost of sales, excluding depreciation and amortization:                                                
Cost of service     (8.8 )     (1.9 )                       (10.7 )
Cost of hardware     (2.6 )                             (2.6 )
Selling, general and administrative expenses     (12.6 )     (4.3 )                 (10.6 )     (27.5 )
Stock-based compensation expense     (0.9 )     (0.6 )                 (2.9 )     (4.4 )
Acquisition and integration related transaction expenses                             (1.6 )     (1.6 )
Depreciation and amortization     (14.9 )     (2.9 )                 (1.0 )     (18.8 )
Segment operating income (loss)     1.4       9.5                   (16.1 )     (5.2 )
                                                 
Net operating loss                                           $ (5.2 )
                                                 
Total capital expenditures for the six months ended June 30, 2019   $ 5.0     $ 3.0     $     $     $ 0.7     $ 8.7  

 

19

 

 

Geographic Information

 

Geographic information for revenue is set forth below:

 

    Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
    2020     2019     2020     2019  
    (in millions)     (in millions)  
Total revenue                        
UK   $ 9.2     $ 15.5     $ 47.6     $ 37.7  
Greece     2.6       4.8       7.4       9.6  
Italy     1.4       4.2       3.6       8.4  
Rest of world     2.4       2.2       9.3       4.7  
Total   $ 15.6     $ 26.7     $ 67.9     $ 60.4  

 

Geographic information of our non-current assets excluding goodwill is set forth below:

 

   

June 30,

2020

    December 31,
2019
 
    (in millions)  
UK   $ 101.9     $ 116.1  
Greece     21.4       26.5  
Italy     2.2       2.3  
Rest of world     7.9       6.3  
Total   $ 133.4     $ 151.2  

 

Software development costs are included as attributable to the market in which they are utilized.

 

17. Customer Concentration

 

During the three months ended June 30, 2020, two customers represented at least 10% of the Company’s revenues, accounting for 25% and 18% of the Company’s revenues. The customer that accounted for 25% of the Company’s revenues was served by the Virtual Sports segment, the customer that accounted for 10% of the Company’s revenues was served by both the Server Based Gaming and Virtual Sports segments. During the three months ended June 30, 2019, three customers represented at least 10% of revenues, accounting for 19%, 16% and 10% of the Company’s revenues. All three customers were served by both the Server Based Gaming and Virtual Sports segments. 

 

During the six months ended June 30, 2020, one customer represented at least 10% of the Company’s revenues, accounting for 10% of the Company’s revenues. During the six months ended June 30, 2019, three customers represented at least 10% of revenues, accounting for 21%, 15% and 11% of the Company’s revenues. All these customers were served by both the Server Based Gaming and Virtual Sports segments. 

 

At June 30, 2020 and December 31, 2019, there were no customers that represented at least 10% of accounts receivable.

 

18. Subsequent Events

 

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued. Based upon this review, the Company did not identify subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

 

20

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual future results could differ materially from the historical results discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included herein and in our annual report on Form 10-K. 

 

COVID-19 Update

 

Investors and potential investors are advised to review this Form 10Q in light of ongoing events. As with other businesses worldwide, we are experiencing severe disruption to our business as a result of the COVID-19 pandemic and the far-reaching actions of the governments of various countries where we do, and hope to do, business, as well as countries sourcing our supply chain.

 

The World Health Organization declared COVID-19 to be a global pandemic. There were a number of government-imposed emergency measures in many of the jurisdictions in which we operate in response to the pandemic. Since the closure of all retail venues (including pubs, bookmakers, holiday parks, and adult gaming centers), restrictions on all non-essential travel, social distancing, bans on public mobility and shelter in place measures, there has been some easing of these measures during mid-May onwards but some retail venues remain closed, specifically in Scotland as well as bowling alleys and casinos in the UK.

 

Our business is being and will continue to be adversely affected by the rapidly expanding nature of the coronavirus (COVID-19) pandemic. Due to the speed and fluidity with which the situation continues to develop and the uncertainty on whether a “second wave” of the COVID-19 pandemic will occur later in calendar year 2020, we are not able at this time to estimate the extent of the impact of the COVID-19 pandemic on our financial results and operations in future periods. The risk of there being a “second wave” or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which we operate which could see the government re-impose restrictions on or changes to our operations up to and including complete or partial closures of retail venues and the long-term impacts of the pandemic on the global economy, trade relations, consumer behavior, our industry and our business operation remains.

 

While the situation is fluid, we have already experienced adverse effects on our business, which we are currently working to mitigate. Since mid-March, we have drawn down the full amount of GBP20.0 million (equivalent to $24.8 million at current exchange rates) on our revolving credit facility to provide additional near-term liquidity and cancelled or delayed material capital expenditures. Reduced compensation levels remain in place and during the period of this Report, a number of staff remained on furlough.

 

Due to the closure of land-based revenues we saw a significant increase in our online revenues from slots and virtual sports and following the success of this area of the business and the successful re-opening of various revenue streams, the Company repaid GBP10.0 million (equivalent to $12.4 million at current exchange rates) of the revolving credit facility subsequent to the end of the reporting period.

        

On June 15, 2020, the British government re-opened betting shops and on July 4, 2020 re-opened pubs, arcades and holiday parks. Bowling alleys and casinos remain closed. On June 15, 2020, the Italian government re-opened all bricks and mortar gaming halls. On June 8, 2020, the Greek government re-opened all bricks and mortar gaming halls following closures to prevent the spread of COVID-19.

 

Our ability to execute our strategy is necessarily affected by the ongoing COVID-19 pandemic and it is as yet unknown effects on our business. We continue to be highly focused on managing our cash flow and liquidity, as well as focusing on the phased opening up of our businesses.

 

21

 

 

However, the dynamic nature of the pandemic and government restrictions, as well as evolving potential for relevant, government sponsored business stimuli and creditor relief plans are neither quantifiable nor predictable as of this Report.

 

Forward-Looking Statements

 

We make forward-looking statements in this Quarterly Report on Form 10-Q. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business, and the timing and ability for us to complete currently contemplated or future acquisitions. Specifically, forward-looking statements may include statements relating to:

 

  the future financial performance of the Company;

 

  restrictions in our existing borrowings, including covenants set forth in our existing debt facilities (and the recent amendment thereto), or any other indebtedness we may incur in the future, could adversely affect our business, financial condition, or results of operations, and our ability to make distributions to stockholders and the value of our common stock;

 

  the market for the Company’s products and services;

 

  expansion plans and opportunities, including currently contemplated or future acquisitions or additional business combinations; and

 

  other statements preceded by, followed by or that include words such as “anticipate”, “believe”, “can”, “continue”, “could”, “estimate”, “expect”, “forecast”, “intend”, “may”, “might”, “plan”, “possible”, “potential”, “predict”, “project”, “proposed”, “scheduled”, “seek”, “should”, “target”, “would” or similar expressions, among others.

 

22

 

 

These forward-looking statements are based on information available as of the date hereof, and current expectations, forecasts and assumptions that involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause our actual results or performance to differ include:

 

  the effect and impact of the ongoing global coronavirus (COVID-19) pandemic on our business including whether there is a “second wave” or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which we operate; the duration, degree and effectiveness of governmental, business or other actions in response to the pandemic, including but not limited to quarantine, shelter-in-place and social distancing measures; restrictions on or changes to our operations up to and including complete or partial closures of retail venues; the long-term impacts of the pandemic on the global economy, trade relations, consumer behavior, our industry and our business operations;

 

  our ability to compete effectively in our industries;

 

  the effect of evolving technology on our business;

 

  our ability to renew long-term contracts and retain customers, and secure new contracts and customers;

 

  our ability to maintain relationships with suppliers;

 

  our ability to protect our intellectual property;

 

  our ability to protect our business against cybersecurity threats;
     
  government regulation of our industries;

 

  our ability to successfully grow by acquisition as well as organically;

 

  fluctuations due to seasonality;

 

  our ability to attract and retain key members of our management team;

 

  our need for working capital;

 

  our ability to secure capital for growth and expansion;

 

  changing consumer, technology and other trends in our industries;

 

  our ability to successfully operate across multiple jurisdictions and markets around the world;

 

  changes in local, regional and global economic and political conditions; and

 

  other factors.

 

23

 

 

Overview

 

We are a global business-to-business gaming technology company, supplying Server Based Gaming (“SBG”) and Virtual Sports (which includes Interactive) systems to regulated lottery, betting and gaming operators worldwide through an “omni-channel” distribution strategy. We provide end-to-end digital gaming solutions on our proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices such as smartphones and tablets and online computer and social applications. Our products can be found in licensed betting offices, adult gaming centers, bingo halls, and through our Acquired Businesses, in UK pubs, airports, motorway service areas, and leisure parks.

 

Our key strategic priorities are to:

 

  Extend our strong positions in each of Virtual Sports, Interactive and SBG by developing new omni-channel products;

 

  Continue to invest in games and technology in order to grow our existing customers’ revenues;

 

  Add new customers by expanding into underpenetrated markets and newly regulated jurisdictions; and

 

  Pursue targeted mergers and acquisitions to expand our product portfolio and/or distribution footprint.

 

On October 1, 2019, the Company completed the acquisition of the Gaming Technology Group (“NTG”) of Novomatic UK Ltd., a division of Novomatic Group, a leading international supplier of gaming equipment and solutions, and heretofore denoted as “Acquired Businesses.”

 

Business Segments

 

We report our operations in three business segments, SBG, Virtual Sports (which includes Interactive, an operating segment which does not exceed the quantitative thresholds in Accounting Standards Committee (“ASC” 280-10-50-12), and Acquired Businesses (which is comprised of the aforementioned NTG business, acquired on October 1, 2019), representing our different products and services. We evaluate our business performance, resource allocation and capital spending on an operating segment level, where possible. We use our operating results and identified assets of each of our operating segments in order to make prospective operating decisions. Although our revenue and cost of sales (excluding depreciation and amortization) are reported exclusively by segment, we do include unallocated items in our consolidated financial statements for certain expenses including depreciation and amortization as well as selling, general and administrative expenses. Unallocated balance sheet line items include items that are a shared resource and therefore not allocated between operating segments.

 

Our SBG business segment designs, develops, markets and distributes a broad portfolio of games through our digital network architecture. Our SBG customers include UK licensed betting offices (“LBOs”), casinos, gaming hall operators, bingo operators and regulated operators of lotteries, as well as government-affiliated operators.

 

24

 

 

Our Virtual Sports business segment designs, develops, markets and distributes ultra-high-definition games that create an always-on sports wagering experience. Our Virtual Sports customers include virtual sports retail and digital operators, including regulated betting operators, lotteries, casinos, online and social gaming operators and other gaming and lottery operators in the UK, continental Europe, Africa, Asia and North America. Our Interactive business segment (reported as part of Virtual Sports) comprises the offering of our SBG and Virtual Sports content via our remote gaming servers.

 

Our Acquired Businesses designs, develops, markets and distributes a broad portfolio of games through our digital network architecture. In addition, it operates analog gaming and amusement machines for certain customers, including UK pubs, adult gaming centers, motorway service stations and holiday resorts.

 

Revenue

 

We generate revenue in three principal ways: on a participation basis, on a fixed rental fee basis and through product sales and software license fees. Participation revenue includes a right to receive a share of revenue generated from (i) our Virtual Sports products placed with operators; (ii) our SBG terminals placed in gaming and lottery venues; (iii) licensing our game content and intellectual property to third parties; and (iv) our games on third-party online gaming platforms that are interoperable with our game servers.

 

Geographic Range

 

Geographically, more than half of our revenue is derived from, and more than half of our non-current assets are attributed to, our UK operations, with the remainder of our revenue derived from, and non-current assets attributed to, Italy, Greece and the rest of the world.

  

For the three months ended June 30, 2020, we earned approximately 59.0% of our revenue in the UK, 18.2% in Greece, 8.7% in Italy and the remaining 14.0% across the rest of the world. During the three months ended June 30, 2019, we earned approximately 57.8%, 18.1%, 15.7% and 8.4% of our revenue in those regions, respectively.

 

For the six months ended June 30, 2020, we earned approximately 70.1% of our revenue in the UK, 11.3% in Greece, 5.2% in Italy and the remaining 13.7% across the rest of the world. During the six months ended June 30, 2019, we earned approximately 62.3%, 16.0%, 14.0% and 7.7% of our revenue in those regions, respectively.

 

Foreign Exchange

 

Our results are affected by changes in foreign currency exchange rates as a result of the translation of foreign functional currencies into our reporting currency and the re-measurement of foreign currency transactions and balances. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. The largest geographic region in which we operate is the UK and the British pound (“GBP”) is considered to be our functional currency. Our reporting currency is the U.S. dollar (“USD”). Our results are translated from our functional currency of GBP into the reporting currency of USD using average rates for profit and loss transactions and applicable spot rates for period-end balances. The effect of translating our functional currency into our reporting currency, as well as translating the results of foreign subsidiaries that have a different functional currency into our functional currency, is reported separately in Accumulated Other Comprehensive Income.

 

During the three months ended June 30, 2020, we derived approximately 41% of our revenue from sales to customers outside the UK, compared to 42% during the three months ended June 30, 2019.

 

During the six months ended June 30, 2020, we derived approximately 30% of our revenue from sales to customers outside the UK, compared to 38% during the six months ended June 30, 2019.

 

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.

 

25

 

 

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

 

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 June 30, 2020, compared to the same period in 2019; and

 

  a discussion and analysis of the results of operations of our SBG and Virtual Sports business segments for the three-month period ended June 30, 2020, compared to the same period in 2019, including KPI analysis; and

 

  a discussion and analysis of the results of operations of our Acquired Businesses segments for the three-month period ended June 30, 2020, including KPI analysis; and
     
 

a discussion and analysis of the Company’s results of operations for the six-month period ended June 30, 2020, compared to the same period in 2019; and

     
 

a discussion and analysis of the results of operations of our SBG and Virtual Sports business segments for the six-month period ended June 30, 2020, compared to the same period in 2019, including KPI analysis; and

     
 

a discussion and analysis of the results of operations of our Acquired Businesses segments for the six-month period ended June 30, 2020, including KPI analysis.

 

Our fiscal year begins on January 1 and ends on December 31 of each calendar year. The results for the three months ended June 30, 2020 are unaudited.

 

Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). In the three-month periods ended June 30, 2020 and June 30, 2019, the average GBP:USD rates were 1.24 and 1.29, respectively. In the six-month periods ended June 30, 2020 and 2019, the average GBP:USD rates were 1.27 and 1.30, respectively.

 

26

 

 

Our results for the quarter ended June 30, 2020 have been impacted by the temporary closure of most non-essential businesses around the world due to the outbreak of COVID-19. The ongoing COVID-19 pandemic is expected to have far reaching impact on global commerce, with governments discouraging non-essential movement and/or ordering social distancing and sheltering-in-place in an effort to help control the transmission of COVID-19, which in some cases include the mandatory closure of spaces where the public congregates. With respect to the jurisdictions in which the Company operates, the UK, Italy, Greece, and US (Illinois) each mandated the above shutdown measures in response to COVID-19 on March 20, 2020, March 10, 2020, March 14, 2020, and March 21, 2020, respectively. These jurisdictions reopened for business, with certain limitations, on June 15, 2020, June 15, 2020, June 8, 2020, and July 1, 2020, respectively. However, due to the changing nature of the COVID-19 pandemic, there continues to be the risk of shutdowns in jurisdictions in which the Company operates. The financial results discussed herein reflect the impact of these shutdowns through June 30, 2020.

 

In the discussion and analysis below, certain data may vary from the amounts presented in our consolidated financial statements due to rounding.

 

Three Months ended June 30, 2020 compared to Three Months ended June 30, 2019

 

    For the Three-Month                                
    Period ended           Variance  
    Unaudited     Unaudited           Functional        
    June 30,     June 30,     Variance     Currency at     Functional     Currency  
(In millions)   2020     2019     2020 vs 2019     Constant rate     Currency     Movement  
Revenue:                                          
Service   $ 15.2     $ 25.6     $ (10.4 )     (40.6 )%   $ (9.9 )     (38.5 )%   $ (0.5 )
Hardware     0.4       1.1       (0.7 )     (67.5 )%     (0.7 )     (66.8 )%     (0.0 )
Total revenue     15.6       26.7       (11.1 )     (41.7 )%     (10.6 )     (39.6 )%     (0.5 )
Cost of sales, excluding depreciation and amortization:                                                        
Cost of service     (3.1 )     (5.3 )     2.3       (42.4 )%     2.1       (40.3 )%     0.1  
Cost of hardware     (0.3 )     (1.0 )     0.6       (65.0 )%     0.6       (62.3 )%     0.0  
Selling, general and administrative expenses     (10.6 )     (12.8 )     2.2       (17.3 )%     1.9       (14.5 )%     0.4  
Stock-based compensation     (1.0 )     (2.3 )     1.3       (58.4 )%     1.3       (56.9 )%     0.0  
Acquisition and integration related transaction expenses     (1.2 )     (0.7 )     (0.5 )     69.0 %     (0.6 )     74.0 %     0.0  
Depreciation and amortization     (13.3 )     (9.1 )     (4.2 )     46.8 %     (4.7 )     52.3 %     0.5  
Net operating Income (Loss)     (13.9 )     (4.5 )     (9.4 )     210.2 %     (9.9 )     221.8 %     0.5  
Other income (expense)                                                        
Interest income     0.1       0.1       (0.0 )     (11.6 )%     (0.0 )     (8.2 )%     (0.0 )
Interest expense     (8.1 )     (4.0 )     (4.1 )     100.6 %     (4.4 )     107.9 %     0.3  
Change in fair value of derivative liability     -       (1.3 )     1.3       (100.0 )%     1.3       (100.0 )%     (0.0 )
Other finance income (expense)     (2.5 )     (0.9 )     (1.6 )     192.3 %     (1.8 )     203.5 %     0.1  
Loss from equity method investee     -       -       -       N/A       -       N/A       -  
Total other income (expense), net     (10.5 )     (6.1 )     (4.4 )     71.7 %     (4.8 )     76.9 %     0.4  
Net loss from continuing operations before income
taxes
    (24.4 )     (10.6 )     (13.8 )     130.1 %     (14.7 )     137.7 %     0.9  
                                                         
Income tax expense     (0.1 )     (0.1 )     0.0       (31.6 )%     0.0       (31.4 )%     (0.0 )
Net loss   $ (24.5 )   $ (10.7 )   $ (13.8 )     128.7 %   $ (14.7 )     136.3 %   $ 0.9  
Exchange Rate - $ to £     1.24       1.29                                          

 

Revenue

 

Total reported revenue for the three months ended June 30, 2020 decreased by $11.1 million, or 41.7%, to $15.6 million on a reported basis. Revenue was significantly impacted by the shutdown of non-essential businesses most of the second quarter in all of the jurisdictions in which the Company operates, due to the ongoing COVID-19 pandemic. Adverse currency movements accounted for a $0.5 million impact. On a functional currency at constant rate basis, revenue decreased by $10.6 million, or 39.6%, with service revenue decreasing by $9.9 million and hardware revenue decreasing by $0.7 million. The change in total reported revenue was comprised of a decrease of $13.5 million in SBG revenue, offset by an increase of $0.6 million in Virtual Sports revenue and an increase in revenue of $1.8 million from the Acquired Businesses segment.

 

SBG revenue, which is included in total reported revenue above, decreased by $13.5 million on a functional currency at constant rate basis, or 77.1%, comprised of a reduction in service revenue of $12.6 million, and a $0.7 million decrease in hardware sales.

 

27

 

 

SBG service revenue decreased by $12.7 million on a reported basis, of which $0.1 million was attributable to adverse currency movements. On a functional currency at constant rate basis, SBG service revenue decreased by $12.6 million, or 77.1%, to $3.6 million.

  

SBG hardware revenue decreased by $0.7 million to $0.4 million on a reported basis. On a functional currency at constant rate basis, the revenue decrease was $0.7 million or 67.8% with a de minimis currency impact.

 

Virtual Sports reported revenue increased by $0.6 million, or 6.4%, on a reported basis. This increase includes the impact of adverse currency movements of $0.4 million. On a functional currency at constant rate basis, Virtual Sports revenue increased by $1.0 million, or 10.5%. This increase included a $3.6 million decline in retail recurring revenue from the COVID-19 national shutdowns, predominantly driven by Italy which locked down earlier than other territories. Declines were offset by growth in Scheduled Online Virtuals of $2.9 million and Interactive of $1.3 million.

 

Acquired Businesses revenue accounted for $1.8 million in service revenue and nil hardware revenue. As with the Company’s other businesses in the UK, the general shutdown due to COVID-19 resulted in a cessation of gaming operations for most of the second quarter.

 

Cost of sales, excluding depreciation and amortization

 

Cost of sales, excluding depreciation and amortization, decreased by $2.9 million, or 45.9%, on a reported basis, to $3.4 million, including the impact of $0.1 million from favorable currency movements. On a functional currency at constant rate basis, cost of sales decreased by $2.8 million, or 43.8%. 

 

Of this decrease, $4.1 million was attributable to decreased SBG service costs due to reduced consumable usage in line with the reduced machine estate due to the Triennial, and COVID-19 impact. This was offset by $0.9 million of service costs attributable to the acquisition of the Acquired Businesses.

 

Selling, general and administrative expenses

 

SG&A expenses decreased by $2.2 million, or 17.3%, on a reported basis, to $10.6 million. This included $0.4 million of favorable currency movements. On a functional currency at constant rate basis, SG&A decreased by $1.9 million, or 14.5%. The reported decrease was driven by incremental SG&A expenses of $3.6 million from the Acquired Businesses, offset by a $4.6 million decrease in selling, general and administrative expenses in SBG and Virtual Sports due to staff furloughs attributable to the COVID-19 pandemic.  

 

Stock-based compensation

 

During the three months ended June 30, 2020, the Company recorded an expense of $1.0 million with respect to outstanding awards. Of this expense, $0.1 million related to costs from awards made under the 2016 Long Term Incentive Plan and $0.9 million from awards made under the 2018 Plan. The entirety of this cost related to recurring costs. During the three months ended June 30, 2019, the charge for stock-based compensation was $2.3 million. Of this expense, $1.5 million related to costs from awards made under the 2016 Long Term Incentive Plan and $0.8 million from awards made under the 2018 Plan with some of the 2018 Plan awards impacted by movements in the stock price between the award granting date and May 14, 2019, the date the scheme was formally approved by stockholders. Following approval, the cost was no longer impacted by stock price movements being charged by the same method as all other award plans.

 

Acquisition and integration related transaction expenses

 

Acquisition related transaction expenses increased by $0.5 million to $1.2 million, on a reported basis. The entirety of the 2020 and 2019 period expenses were related to work in respect of potential acquisitions with the 2019 expenses relating to the acquisition and third party integration fees linked exclusively to the acquisition and integration of Novomatic UK’s Gaming Technology Group and the 2020 expenses relating to the group integration costs following the acquisition. 

 

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Depreciation and amortization

 

Depreciation and amortization increased by $4.2 million, or 46.8% to $13.3 million on a reported basis. This included the impact of favorable currency movements of $0.5 million.

  

On a functional currency at constant rate basis, depreciation and amortization increased by $4.7 million, or 52.3%. This increase was driven by incremental depreciation and amortization of $5.6 million from the Acquired Businesses. This was partially offset by a $1.0 million decrease of depreciation and amortization in SBG and Virtual Sports, due primarily to UK and Italy machine estates reaching full depreciation status.

 

Net operating loss

 

During the period, net operating loss increased by $9.4 million from a loss of $4.5 million to a loss of $13.9 million on a reported basis. On a functional currency at constant rate basis, net operating loss increased by $9.9 million, as the decline in revenue related to COVID-19 was impacted by the addition of SG&A associated with the Acquired Businesses, only partially offset by the declines in cost of sales, SG&A, and depreciation.

 

Interest expense

 

Interest expense increased by $4.1 million in the period, to $8.1 million, on a reported basis. Of this variance $0.3 million was due to an adverse currency movement. On a functional currency at a constant rate basis, interest expense was $4.4 million (107.9%) higher than the prior year due to an increase of $2.9 million of cash interest due to a higher debt balance amount after the acquisition of Novomatic UK’s Gaming Technology Group in October 2019, a $1.0 million charge for debt fees relating to the debt restructure and an increase of $0.4 million of cash interest due to a higher revolver draw as a result of the COVID-19 pandemic.

  

Change in fair value of derivative liability

 

Following the termination of the cross-currency swaps on October 1, 2019, there was no change in the fair values of derivative liabilities in the three months ended June 30, 2020. For the three months ended June 30, 2019, the change in fair value of derivative liability was a $1.3 million charge.

 

Other finance income

 

Other finance income for the three months ended June 30, 2020 was a charge of $2.5 million compared to a $0.9 million charge in the three months ended June 30, 2019. The $2.5 million charge for the three months ended June 30, 2020 related to a $2.7m retranslation of senior debt offset by a $0.2m pension credit. The $0.9 million charge in the prior year related to a $3.2m retranslation of senior debt offset by a $0.2m pension credit and a $2.2 million benefit from the GBP:USD cross-currency swap which was terminated on October 1, 2019.

 

Income tax expense

 

Our effective tax rate for the period ended June 30, 2020 was 0.3% and our effective tax rate for the period ended June 30, 2019 was (0.8)%.

 

Net loss

 

On a reported basis, net loss increased by $13.8 million, from a loss of $10.7 million to a loss of $24.5 million in the three months ended June 30, 2020. On a functional currency at constant rate basis, net loss increased by $14.7 million, mainly due to the shutdowns associated with COVID-19, as well as increases in operating expenses attributable to the Acquired Businesses, in addition to increases in interest expense and other finance costs, offset by a reduction in earnout liability.

 

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Three Months ended June 30, 2020 compared to Three Months ended June 30, 2019 – Server Based Gaming Segment

 

Revenue growth for our SBG business is principally driven by the number of operator customers we have, the number of SBG 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.

 

SBG Segment, Key Performance Indicators

 

    For the Three-Month
Period ended
       
    Unaudited     Unaudited              
    June 30,     June 30,     Variance  
SBG   2020     2019     2020 vs 2019  
                      %  
End of period installed base (# of terminals)     32,972       35,077       (2,105 )     (6.0 )%
Average installed base (# of terminals)     32,961       35,241       (2,280 )     (6.5 )%
Customer Gross Win per unit per day (1)(2)   £ 11.18     £ 72.57     £ (61.38 )     (84.6 )%
Customer Net Win per unit per day (1)(2)   £ 8.16     £ 51.68     £ (43.52 )     (84.2 )%
Inspired Blended Participation Rate     6.6 %     6.4 %     0.3 %        

 

(1) Includes all SBG terminals in which the company takes a participation revenue share across all territories 
   
(2) Includes all days of the quarter, including the days during which the SBG terminals were not operating due to COVID-19.  As a result, performance reflects this complete shutdown for the bulk of the period.

 

In the table above:

 

“End of Period Installed Base” is equal to the number of deployed SBG terminals at the end of each period that have been placed on a participation basis. SBG participation revenue, which comprises the majority of SBG service revenue, is directly related to the terminal installed base. This is the medium by which 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 will be for that period. Management gives careful consideration to this KPI in terms of driving growth across the segment.

 

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. 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.

 

“Average Installed Base” is the average number of deployed SBG terminals during the period. Therefore, it is more closely aligned to revenue in the period. This measure is particularly useful for assessing existing customers or markets to provide comparisons of historical size and performance.

 

“Customer Gross Win per unit per day” is a KPI used by our internal decision makers to (i) assess impact on the Company’s revenue, (ii) determine changes in the strength of the overall market and (iii) evaluate the impacts of regulatory change and our new content releases on our customers. Customer Gross Win per unit per day is the average per unit cash generated across all SBG 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.

 

SBG revenue share income 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.

 

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Our internal decision makers believe 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 terminals where revenue is earned on a participation basis, weighted by Customer Net Win per unit per day.

 

Our overall SBG revenue from terminals placed on a participation basis can therefore be described as the product of the Average Installed Base, the Customer Net Win per unit per day, the number of days in the period, and the Inspired Blended Participation Rate, to give “participation revenue”.

 

SBG Segment, key events that affected results for the Three Months ended June 30, 2020

 

During the period Customer Gross Win per unit per day in the total UK market (including non-LBO markets) decreased by 84.1%. This was due mainly to the impact of COVID-19, with retail venues closed through April, May, and approximately half of June 2020. A significant number of retail venues reopened on or around June 15, 2020, with over 80% of shops (based on pre-COVID-19 shop count) open at the end of June 2020 and showing strong performance. Due to the shutdown period in the second quarter of 2020, Triennial impact was minimal, with improved Customer Gross Win per unit per day in 2020, versus the comparable period last year, being offset by 700 shop closures by a major customer.

 

In Italy, Customer Net Win per unit per day (in EUR) decreased by 93.5% due mainly to the shutdown of retail venues throughout April, May and part of June 2020 as a result of COVID-19. Approximately 50% of venues reopened on or around June 15, 2020.

 

Greece Customer Gross Win per unit per day (in EUR) decreased by 73.2%, due solely to the closure of retail venues throughout April, May and part of June 2020 due to COVID-19. All retail venues reopened on June 8, 2020 and performance through the end of the quarter was strong.

 

Customer Gross Win per unit per day (in our functional currency, GBP) decreased by £61 or 84.6% across the entire estate due to the impact of COVID-19 (as described by market above). The blended participation rate increased from 6.4% to 6.6%.

 

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SBG Segment, Three Months ended June 30, 2020 compared to Three Months ended June 30, 2019

 

Server Based Gaming

 

  For the Three-Month                                
    Period ended           Variance  
    Unaudited     Unaudited           Functional        
    June 30,     June 30,     Variance     Currency at     Functional     Currency  
(In millions)   2020     2019     2020 vs 2019     Constant rate     Currency     Movement  
Revenue:                                    
Service   $ 3.6     $ 16.4     $ (12.7 )     (77.8 )%   $ (12.6 )     (77.1 )%   $ (0.1 )
Hardware     0.4       1.1       (0.7 )     (66.7 )%     (0.7 )     (67.8 )%     (0.0 )
Total revenue     4.0       17.5       (13.5 )     (77.1 )%     (13.4 )     (76.5 )%     (0.1 )
                                                         
Cost of sales, excluding depreciation and amortization:                                                
Cost of service     (1.0 )     (4.4 )     3.4       (76.8 )%     3.4       (76.1 )%     0.0  
Cost of hardware     (0.3 )     (1.0 )     0.7       (71.2 )%     0.7       (70.0 )%     0.0  
Total cost of sales     (1.3 )     (5.4 )     4.1       (75.8 )%     4.1       (75.0 )%     0.0  
                                                         
Selling, general and administrative expenses     (2.0 )     (6.0 )     4.0       (67.5 )%     3.8       (65.4 )%     0.2  
                                                         
Stock-based compensation     (0.1 )     (0.5 )     0.4       (70.1 )%     0.3       (61.8 )%     0.1  
                                                         
Depreciation and amortization     (6.0 )     (7.2 )     1.2       (17.3 )%     1.1       (15.0 )%     0.2  
                                                         
Net operating Income (Loss)   $ (5.4 )   $ (1.6 )   $ (3.7 )     224.8 %   $ (4.1 )     278.3 %   $ 0.4  
                                                         
Exchange Rate - $ to £     1.25       1.29                                          

 

Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.

 

SBG Segment Revenue

 

In the period revenue, decreased by $13.5 million, to $4.0 million, on a reported basis. A small part of this decrease was due to adverse currency movements of $0.1 million. On a functional currency at constant rate basis, SBG revenue decreased by $13.4 million, or 76.5%.

 

Service revenue decreased by $12.7 million on a reported basis, and adverse currency movements accounted for $0.1 million of the decrease. On a functional currency at constant rate basis, SBG service revenue decreased by $12.6 million, or 77.1%, to $3.6 million. This was primarily due to the impact of COVID-19. The decrease by region showed $8.9 million in the UK, $1.7 million in Greece and $1.6 million in Italy. Further adverse movements came in Italy from a one-off software license sale of $0.3 million during 2019. 

  

Hardware revenue decreased by $0.7 million to $0.4 million on a reported basis. On a functional currency at constant rate basis, the revenue decrease was $0.7 million or 67.8% with a small amount accounting for adverse currency movements. The decrease was due to the sale of 60 SSBTs (Self Service Betting Terminals) in the UK LBO market for $0.3 million and 90 “Flex Cabinets” in the UK Leisure market for $0.7 million in 2019. These were partly offset by spares sales in Italy of $0.3 million during 2020.

 

SBG Segment Operating Income

 

Cost of sales (excluding depreciation and amortization) decreased by $4.1 million or 75% to $1.3 million, on both a reported and functional currency at constant rate basis.

 

Service cost of sales decreased by $3.4 million or 76.8% to $1.0 million on both a reported basis and functional currency basis. This reduction was due mainly to the impact of retail venue closures attributable to COVID-19. UK LBO retail shops accounted for $2.0 million of the decrease with significant savings on consumable and third party content costs, a further $1.0 million was attributable to Greece and $0.4 million from Italy on the same basis.

 

Hardware cost of sales decreased by $0.7 million to $0.3 million on a reported basis and functional currency basis, decreasing on a similar basis as hardware sales.

 

SBG SG&A expense declined by $4.0 million on a reported basis. This decrease includes the impact of favorable currency movements of $0.2 million. On a functional currency at constant rate basis, SG&A decreased by $3.8 million, reflecting ongoing restructuring, as well as synergies associated with the acquisition of the Acquired Businesses. Of this reduction, $3.2 million is attributable to reduced staffing costs, of which $1.7 million is related to furloughs arising from the COVID-19 pandemic.

 

32

 

 

Depreciation declined by $1.2 million on a reported basis, or 17.3%. On a functional currency basis, depreciation declined by $1.1 million, reflecting $0.2 million in favorable currency impact. The decrease in depreciation expense was due to the machines in the UK estate becoming fully depreciated, offset by additional depreciation from new machines in the Greek estate.

 

Operating income declined by $3.7 million year over year, from a $1.6 million reported operating loss to a $5.4 million operating loss year over year, as the impact of COVID-19 significantly reduced gross profit beyond savings in SG&A and depreciation and amortization.

 

SBG Segment, Recurring Revenue

 

Set forth below is a breakdown of our SBG recurring revenue. SBG recurring revenue consists principally of SBG participation revenue.

 

    For the Three-Month
Period ended
             
    Unaudited     Unaudited              
    June 30,     June 30,     Variance        
(In £ millions)   2020     2019     2020 vs 2019     %  
SBG Recurring Revenue                        
Total SBG Revenue   £ 3.2     £ 13.6     £ (10.4 )     (76.5 )%
SBG Participation Revenue   £ 1.6     £ 10.6     £ (9.0 )     (84.6 )%
SBG Other Fixed Fee Recurring Revenue   £ 0.0     £ 0.3     £ (0.1 )     (94.1 )%
Total SBG Recurring Revenue   £ 1.6     £ 10.9     £ (9.3 )     (84.9 )%
SBG Recurring Revenue as a % of Total SBG Revenue     51.7 %     80.4 %     (28.7 )%        

 

In the table above:

 

“SBG Participation Revenue” includes our share of revenue generated from (i) our SBG terminals placed in gaming and lottery venues; and (ii) licensing of our game content and intellectual property to third parties.

 

“SBG Other Fixed Fee Recurring Revenue” includes service revenue in which the Company earns a periodic fixed fee on a contracted basis.

 

“Total SBG Recurring Revenue” is equal to SBG Participation Revenue plus SBG Other Fixed Fee Recurring Revenue.

 

SBG Segment, Service Revenue by Region

 

Set forth below is a breakdown of our SBG service revenue by geographic region. SBG service revenue consists principally of SBG participation revenue.

 

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Server Based Gaming Service Revenue by Region

 

  For the Three-Month
Period ended
          Variance  
    Unaudited     Unaudited           Functional        
    June 30,     June 30,     Variance     Currency at     Functional     Currency  
(In millions)   2020     2019     2020 vs 2019     Constant rate     Currency     Movement  
Service Revenue:                                          
UK LBO   $ 1.0     $ 8.7     $ (7.6 )     (87.9 )%   $ (7.6 )     (87.6 )%   $ (0.0 )
UK Other   $ 0.0     $ 1.3       (1.3 )     (98.1 )%     (1.3 )     (98.1 )%     (0.0 )
Italy   $ 0.2     $ 2.3       (2.1 )     (92.1 )%     (2.1 )     (91.8 )%     (0.0 )
Greece   $ 2.3     $ 4.0       (1.7 )     (41.5 )%     (1.6 )     (39.6 )%     (0.0 )
Rest of the World   $ 0.1     $ 0.2       (0.1 )     (67.6 )%     (0.1 )     (66.5 )%     (0.0 )
                                                         
Total service revenue   $ 3.6     $ 16.4     $ (12.7 )     (77.8 )%   $ (12.6 )     (77.1 )%   $ (0.1 )
                                                         
Exchange Rate - $ to £     1.24       1.29                                          

 

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.

 

Virtual Sports Segment, Three Months ended June 30, 2020 compared to Three Months ended June 30, 2019

 

Virtual Sports Segment, Key Performance Indicators

 

    For the Three-Month
Period ended
       
    Unaudited     Unaudited              
    June 30,     June 30,     Variance  
Virtuals   2020     2019     2020 vs 2019  
                      %  
No. of Live Customers at the end of the period     125       105       20       19.0 %
Average No. of Live Customers     125       105       20       19.0 %
Total Revenue (£‘m)   £ 8.0     £ 7.2     £ 0.8       10.5 %
                                 
Total Virtual Sports Recurring Revenue (£‘m)   £ 7.0     £ 6.5     £ 0.5       7.6 %
Total Revenue £‘m - Retail   £ 1.0     £ 4.0     £ (3.1 )     (76.0 )%
Total Revenue £‘m - Scheduled Online Virtuals   £ 5.2     £ 2.4     £ 2.8       114.4 %
Total Revenue £‘m - Interactive   £ 1.8     £ 0.7     £ 1.1       145.1 %
Average Revenue Per Customer per day (£)   £ 699     £ 753     £ (54 )     (7.2 )%

 

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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) – Scheduled Online Virtuals,” which consists of revenue earned through players wagering on Virtual Sports online, and “Total Revenue (£m) – Interactive,” which consists of revenue earned through our Interactive product.

 

“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.

 

“Average Revenue per Customer per day” represents total revenue for the Virtual Sports segment in the period, divided by the Average No. of Live Customers, divided by the number of days in the period.

 

Virtual Sports Segment, Recurring Revenue

 

    For the Three-Month
Period ended
       
    Unaudited     Unaudited              
    June 30,     June 30,     Variance  
(In £ millions)   2020     2019     2020 vs 2019  
                      %  
Virtual Sports Recurring Revenue                        
Total Virtual Sports Revenue   £ 8.0     £ 7.2     £ 0.8       10.5 %
                                 
Recurring Revenue - Retail Virtuals   £ 0.8     £ 3.7     £ (2.9 )     (79.3 )%
Recurring Revenue - Scheduled Online Virtuals   £ 4.5     £ 2.2     £ 2.4       109.5 %
Recurring Revenue - Interactive   £ 1.7     £ 0.7     £ 1.0       152.7 %
Total Virtual Sports Recurring Revenue   £ 7.0     £ 6.5     £ 0.5       7.6 %
Virtual Sports Recurring Revenue as a Percentage of Total     88.1 %     90.5 %     (2.4 )%        
Virtual Sports Revenue                                

 

35

 

 

For definitions of the terms used in the table above, see the definitions provided above.

 

Virtual Sports Segment, key events that affected results for the Three Months ended June 30, 2020

 

During the quarter most retail territories were fully offline for April and May with a partial month return for part of June. The exceptions to this were Greece, which reopened in mid-May and Ireland, which reopened at the beginning of July. As a result, Retail Virtuals revenues have declined significantly but both Scheduled Online Virtuals and Interactive revenues have seen significant growth. There was a $3.6 million decline in Retail recurring revenue in the quarter offset by $2.9 million growth in Online Scheduled Virtuals and $1.3 million growth in Interactive revenues.

 

The Virtual Grand National was broadcast on prime-time UK television to replace the live race due to the COVID-19 pandemic. Over four million viewers tuned in to watch Potters Corner win the Virtual race. The event was run as a charity event, ultimately generating over $3.0 million for the National Health Service (“NHS”) COVID-19 charity from various operators.

 

The Virtual Kentucky Derby all-time winner race aired on the May 2, 2020 on NBC in the U.S. The race featured the 13 all-time great Triple Crown winners, with Secretariat winning the virtual race. The event was held to raise money for the COVID-19 relief effort.

 

During the period, OPAP in Greece launched with our brand-new proprietary V-Play soccer product with significantly improved graphics, betting markets and overall design. Performance to date has been strong, with Greece revenues hitting pre-COVID-19 levels shortly after lockdown was lifted.

 

Our Virtual Interactive division launched V-Play Basketball and our NFL Alumni V-Play Football product with Bet365 New Jersey, both of which have performed well to date. After the end of the period, we launched V-Play Plug & PlayTM, which provides operators with end-to-end online and mobile sportsbook functionality, on social gaming platform FendOff Sports.

 

The Interactive division launched with eleven new customers in the quarter including Boylesports, Lottoland, Casumo and Harrah’s New Jersey. There were also major new content releases, including Reel King MegawaysTM and Centurion MegawaysTM. Both titles have seen strong performance since launch.

 

The Average Number of Live Customers during the period increased by twenty, from 105 to 125. Including the launch of new Interactive customers in the quarter, our Average Number of Live Interactive Customers for the period increased to 67.

 

Our average revenue per customer declined during the quarter primarily due to the timing of the addition of several Interactive customers that have not fully ramped up volume during the quarter. 

 

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Virtual Sports Segment, Three Months ended June 30, 2020 compared to Three Months ended June 30, 2019

 

Virtual Sports

 

  For the Three-Month
Period ended
          Variance  
    Unaudited     Unaudited           Functional        
    June 30,     June 30,     Variance     Currency at     Functional     Currency  
(In millions)   2020     2019     2020 vs 2019     Constant rate     Currency     Movement  
Service Revenue   $ 9.8     $ 9.2     $ 0.6       6.7 %   $ 1.0       10.5 %   $ (0.4 )
Cost of Service     (1.2 )     (0.9 )     (0.3 )     33.6 %     (0.3 )     38.5 %     0.0  
Selling, general and administrative expenses     (1.1 )     (2.1 )     1.0       (48.3 )%     0.7       (39.2 )%     0.3  
Stock-based compensation     (0.1 )     (0.3 )     0.2       (64.2 )%     0.2       (69.1 )%     0.1  
Depreciation and amortization     (1.4 )     (1.4 )     0.0       2.9 %     (0.1 )     6.6 %     0.1  
Net operating Income   $ 6.0     $ 4.5     $ 1.5       32.6 %   $ 1.5       31.8 %   $ (0.0 )
Exchange Rate - $ to £     1.24       1.29                                          

 

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. 

 

Virtual Sports Segment revenue. In the period revenue increased by $0.6 million, or 6.7%, on a reported basis. This increase includes the impact of adverse currency movements of $0.4 million. On a functional currency at constant rate basis, Virtual Sports revenue increased by $1.0 million, or 10.5%. This increase included a $3.6 million decline in retail recurring revenue from the COVID-19 national shutdowns. Declines were offset by growth in Scheduled Online Virtuals of $2.9 million and Interactive of $1.3 million.

 

Virtual Sports Segment operating income. Cost of service increased by $0.3 million to $1.2 million on a reported basis.

 

SG&A expenses decreased by $1.0 million on a reported basis. This decrease includes the impact of favorable currency movements of $0.3 million. On a functional currency at constant rate basis, SG&A decreased by $0.7 million, driven by staff-related cost savings.

 

Depreciation and amortization remained substantially unchanged on a reported basis. There was de minimis impact from currency movements.

 

Operating profit increased by $1.5 million on a reported and functional currency at constant rate basis, to $6.0 million. This was primarily due to an increase in revenues and reduced SG&A expenses.  

 

Acquired Businesses segment, key events that affected results for the Three Months ended June 30, 2020

 

We generate revenue from our Acquired Businesses segment through the manufacturing, marketing, and rental of our gaming machines and gaming software. We manufacture gaming machines for rental to UK pubs, adult gaming centers, bowling alleys, motorway service stations, and leisure parks, as well as for sale. We receive rental fees for machines, typically on a long-term contract basis, on both a participation and fixed fee basis, with our newer digital pub machines typically contracted on a fixed fee basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming terminals placed in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.

 

Revenue growth for our Acquired Businesses is principally driven by the number of operator customers we have, the number of gaming machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.

 

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Acquired Businesses segment, Key Performance Indicators

 

    For the Three-Month
Period ended
     
    Unaudited
June 30,
    Unaudited
June 30,
    Variance  
Acquired Businesses   2020     2019     2020 vs 2019  
                      %  
Pub Digital Cat C Gaming Machines - Average installed base (# of terminals)     5,773       4,633       1,140       24.6 %
                                 
Inspired Pubs Revenue per Digital Cat C Gaming Machine per week   £ 0.00     £ 65.49     £ (65.49 )     (100.0 )%
                                 
Pub Analogue Digital Cat C Gaming Machines - Average installed base (# of terminals)     2,690       3,744       (1,054 )     (28.2 )%
                                 
Inspired Pubs Revenue per Analogue Cat C Gaming Machine per week   £ 0.00     £ 43.44     £ (43.44 )     (100.0 )%
                                 
End of Period % of Digital Cat C Gaming Machines in Pub Market     68.2 %     57.2 %     11.0 %        
                                 
Total Leisure Parks Revenue (Gaming and Non Gaming) (£‘m)   £ 0.0     £ 8.2     £ (8.2 )     (100.0 )%
                                 
AGC and MSA Gaming Machines - Average installed base (# of terminals)(1)     5,170       5,773       (603 )     (10.4 )%
                                 
Inspired AGC and MSA Revenue per Gaming Machine per week   £ 0.00     £ 66.39     £ 66.39       (100.0 )%

 

(1) Adult Gaming Centers and Motorway Service Area machines

 

In the table above:

 

End of period installed base and Average installed base represent the number of gaming machines installed 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.

 

The % Digital Cat C represents the percentage of the Company’s UK pub gaming machine estate located with that is digital.

 

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Acquired Businesses segment, key events that affected results for the Three Months ended June 30, 2020

 

On October 1, 2019, the Company completed the acquisition of the Gaming Technology Group (“NTG”) of Novomatic UK Ltd., a division of Novomatic Group, a leading international supplier of gaming equipment and solutions. As per ASC 280, the Company reports the results of this acquisition as a business segment denoted as “Acquired Businesses.” Because the Company completed the transaction on October 1, 2019, it can only report the results since that date.

 

Acquired Businesses segment, Three Months ended June 30, 2020

 

Acquired Business

 

    For the Three-  
  Month Period  
    ended  
    Unaudited  
    June 30,  
(In millions)   2020  
Revenue:      
Service   $ 1.8  
Hardware     -  
Total revenue     1.8  
         
Cost of sales, excluding depreciation and amortization:        
Cost of service     (0.9 )
Cost of hardware     -  
Total cost of sales     (0.9 )
         
Selling, general and administrative expenses     (3.6 )
Depreciation and amortization     (5.6 )
Net operating Income (Loss)   $ (8.3 )
         
Exchange Rate - $ to £     1.24  

 

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.
 

Acquired Businesses Segment Revenue

 

Acquired Businesses service revenue was $1.8 million in the first quarter. The shutdown of the UK market because of the COVID-19 pandemic led to revenues in the pub sector reducing to zero during the period. As a result, revenue was comprised primarily of $1.2 million in online revenue and $0.2 million from servicing self-service betting terminals (“SSBTs”).

 

The Company’s average installed base within the Pub business included 8,463 Category C gaming machines. Digital gaming machines accounted for 68.2% of the total Category C gaming machines at the end of the period, which was an increase from 57.2% at the end of the comparable period in 2019.This represents a 24.6% increase over the prior year’s installed base of digital Category C gaming machines.

 

In addition, Acquired Businesses includes services to Leisure Parks, motorway service areas (“MSAs”), adult gaming centers (“AGCs”) and bowling alleys as well as software license fees associated with one-time hardware sales. The shutdown of the UK market because of the COVID-19 pandemic led to all leisure parks, MSAs, AGCs and bowling alleys being closed for the whole period and associated revenue reducing to zero during the period.

 

Acquired Businesses Segment Operating Income

 

Acquired Businesses operating income reflects cost of sales of $0.9 million (comprised of manufacturing costs, content royalties, spare parts, distribution costs, and certain gaming taxes), SG&A expenses of $3.6 million including service network costs, facilities, and staffing, and depreciation and amortization of $5.6 million, reflecting capitalized game development and machine deployment levels. SG&A expenses for the quarter were impacted by furloughs of all operations staff, effected to reflect the cessation of revenue from gaming operations.

 

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Six Months ended June 30, 2020 compared to Six Months ended June 30, 2019

 

    For the Six-Month
Period ended
          Variance  
    Unaudited     Unaudited           Functional      
    June 30,     June 30,     Variance     Currency at     Functional     Currency  
(In millions)   2020     2019     2020 vs 2019     Constant rate     Currency     Movement  
Revenue:                                          
Service   $ 58.4     $ 56.4     $ 2.0       3.5 %   $ 3.0       5.3 %   $ (1.0 )
Hardware     9.5       4.0       5.5       139.8 %     5.7       146.0 %     (0.2 )
Total revenue     67.9       60.4       7.5       12.4 %     8.7       14.4 %     (1.2 )
Cost of sales, excluding depreciation and amortization:                                                        
Cost of service     (9.7 )     (10.7 )     1.0       (9.2 )%     0.8       (7.4 )%     0.2  
Cost of hardware     (7.3 )     (2.6 )     (4.7 )     175.7 %     (4.8 )     183.1 %     0.2  
Selling, general and administrative expenses     (39.7 )     (27.5 )     (12.2 )     44.2 %     (12.8 )     46.5 %     0.7  
Stock-based compensation     (2.0 )     (4.4 )     2.4       (54.8 )%     2.4       (53.8 )%     0.0  
Acquisition and integration related transaction expenses     (4.4 )     (1.6 )     (2.8 )     177.8 %     (3.0 )     189.6 %     0.2  
Depreciation and amortization     (25.9 )     (18.8 )     (7.1 )     37.9 %     (7.9 )     41.9 %     0.8  
Net operating Income (Loss)     (21.1 )     (5.2 )     (15.8 )     305.3 %     (16.6 )     319.1 %     0.8  
Other income (expense)                                                        
Interest income     0.4       0.1       0.3       477.8 %     0.3       500.4 %     0.0  
Interest expense     (14.2 )     (8.5 )     (5.7 )     66.9 %     (6.1 )     71.6 %     0.4  
Change in fair value of earnout liability     -       (2.3 )     2.3       (100.0 )%     2.3       (100.0 )%     (0.0 )
Change in fair value of derivative liability     -       (0.1 )     0.1       (100.0 )%     0.1       (100.0 )%     (0.0 )
Other finance income (expense)     (6.2 )     0.3       (6.5 )     (2120.4 )%     (6.8 )     (2132.7 )%     0.3  
Loss from equity method investee     (0.5 )     -       (0.5 )     N/A       (0.5 )     N/A       0.0  
Total other income (expense), net     (20.5 )     (10.5 )     (10.0 )     95.2 %     (10.7 )     100.6 %     0.6  
Net loss from continuing operations before income taxes     (41.6 )     (15.7 )     (25.8 )     164.5 %     (27.3 )     172.7 %     1.4  
Income tax expense     (0.3 )     0.0       (0.3 )     N/A       (0.3 )     N/A       0.0  
                                                         
Net loss   $ (41.9 )   $ (15.7 )   $ (26.1 )     166.3 %   $ (27.6 )     174.6 %   $ 1.4  
                                                         
Exchange Rate - $ to £     1.27       1.30                                          

 

Revenue

 

Total reported revenue for the six months ended June 30, 2020 increased by $7.5 million, or 12.4%, to $67.9 million on a reported basis. Revenue was significantly impacted by the shutdown of non-essential businesses most of the second quarter in all of the jurisdictions in which the Company operates, due to the ongoing COVID-19 pandemic. Adverse currency movements accounted for a $1.2 million impact. On a functional currency at constant rate basis, revenue increased by $8.7 million, or 14.4%, with service revenue increasing by $3.0 million and hardware revenue increasing by $5.7 million. The change in total reported revenue was comprised of a decrease of $20.5 million in SBG revenue, a decrease of $0.4 million in Virtual Sports revenue, offset by an increase in revenue of $29.2 million from the Acquired Businesses segment. This was offset by $0.8 million in intercompany eliminations.

 

40

 

 

SBG revenue, which is included in total reported revenue, above, decreased by $20.5 million, to $20.7 million, on a reported basis. A small part of this decrease was due to adverse currency movements of $0.3 million. On a functional currency at constant rate basis, SBG revenue decreased by $20.2 million, or 49.0%. 

 

SBG service revenue decreased by $20.2 million on a reported basis, and adverse currency movements accounted for $0.2 million of the decrease. On a functional currency at constant rate basis, SBG service revenue decreased by $20.0 million, or 53.7%, to $17.0 million. The major driver for the decrease was the impact of COVID-19.

 

SBG hardware revenue decreased by $0.3 million to $3.7 million on a reported basis. On a functional currency at constant rate basis, the revenue decrease was $0.2 million with adverse currency movements accounting for decreased revenue of $0.1 million.

 

Virtual Sports reported revenue decreased by $0.4 million, or 2.0%, on a reported basis. This decrease includes the impact of adverse currency movements of $0.5 million. On a functional currency at constant rate basis, Virtual Sports revenue increased by $0.1 million, or 0.8%. This increase included a $4.6 million decline in retail recurring revenue from the COVID-19 national shutdowns. Declines were offset by growth in Scheduled Online Virtuals of $2.8 million and Interactive of $1.7 million.

 

Acquired Businesses revenue accounted for $23.2 million in service revenue and $6.0 million in hardware revenue. $9.7 million was generated from UK Pub gaming machines and other rental products, including 8,483 Category C gaming machines. An additional $1.9 million in revenue was generated through the UK leisure parks business, with $5.8 million generated from machine rentals to UK motorway services and adult gaming centers. $2.1 million was generated from online gaming and $1.8 million from self-service betting terminals.

 

Cost of sales, excluding depreciation and amortization

 

Cost of sales, excluding depreciation and amortization, increased by $3.7 million, or 27.5%, to $17.0 million on a reported basis, including the impact of $0.4 million from favorable currency movements. On a functional currency at constant rate basis, cost of sales increased by $4.0 million, or 30.2%.

 

Of this increase, $8.8 million was attributable the Acquired Businesses, comprised of $3.6 million in service costs and $5.2 million in hardware costs. This was offset by a $4.8 million decrease in SBG costs of sales due to reduced consumable usage in line with reduced machine estate due to Triennial and COVID-19 impacts.

 

Selling, general and administrative expenses

 

SG&A expenses increased by $12.2 million, or 44.2%, on a reported basis, to $39.7 million. This included $0.7 million of favorable currency movements. On a functional currency at constant rate basis, SG&A increased by $12.8 million, or 46.5%. The reported increase was driven by incremental SG&A expenses of $20.5 million from the Acquired Businesses, offset by a $6.1 million decrease in selling, general and administrative expenses in SBG and Virtual Sports, due to staff furloughs attributable to the COVID-19 pandemic.

 

Stock-based compensation

 

During the six months ended June 30, 2020, the Company recorded an expense of $2.0 million with respect to outstanding awards. Of this expense, $0.2 million related to costs from awards made under the 2016 Long Term Incentive Plan and $1.8 million from awards made under the 2018 Plan. The entirety of this cost related to recurring costs. During the six months ended June 30, 2019, the charge for stock-based compensation was $4.4 million. Of this expense, $3.0 million related to costs from awards made under the 2016 Long Term Incentive Plan and $1.4 million from awards made under the 2018 Plan with some of the 2018 Plan awards impacted by movements in the stock price between the award granting date and May 14, 2019, the date the scheme was formally approved by stockholders. Following approval, the cost was no longer impacted by stock price movements being charged by the same method as all other award plans.

 

41

 

 

Acquisition and integration related transaction expenses

 

Acquisition related transaction expenses increased by $2.8 million to $4.4 million, on a reported basis. The entirety of the 2020 and 2019 period expenses were related to work in respect of potential acquisitions with the 2019 expenses relating to the acquisition and third party integration fees linked exclusively to the acquisition and integration of Novomatic UK’s Gaming Technology Group and the 2020 expenses relating to the group reorganization and integration costs following the acquisition.

 

Depreciation and amortization

 

Depreciation and amortization increased by $7.1 million, or 37.9%, to $25.9 million on a reported basis. This included the impact of favorable currency movements of $0.8 million.

  

On a functional currency at constant rate basis, depreciation and amortization increased by $7.9 million, or 41.9%. This increase was driven by incremental depreciation and amortization of $10.4 million from the Acquired Businesses. This was partially offset by a $2.8 million decrease of depreciation and amortization in SBG and Virtual Sports, due primarily to UK and Italy machine estates reaching full depreciation status.

 

Net operating loss

 

During the period on a reported basis, net operating loss increased by $15.8 million from a loss of $5.2 million to a loss of $21.1 million. On a functional currency at constant rate basis, net operating loss increased by $16.6 million, mainly due to the impact of shutdowns related to COVID-19, increased SG&A expenses attributable to the Acquired Businesses, as well as a $0.8 million adverse currency movement, partly offset by higher revenues attributable to the Acquired Businesses.

 

Interest expense

 

Interest expense increased by $5.4 million in the period, to $13.9 million, on a reported basis. Of this variance $0.4 million was due to an adverse currency movement. On a functional currency at a constant rate basis, interest expense was $5.8 million (68.3%) higher than the prior year due to increases of $4.7 million of cash interest due to a higher debt balance amount after the acquisition of Novomatic UK’s Gaming Technology Group in October 2019, $0.7 million being the corresponding increase in the amortization of debt fees, $1.0 million relating to fees incurred for the debt restructure and $0.5 million due to a higher revolver draw as a result of the COVID-19 pandemic. These were partly offset by higher levels of interest receivable of $0.5 million.

 

Change in fair value of earnout liability

 

Due solely to changes in the share price ($6.51 at March 25, 2019 and $4.80 at December 31, 2018) the charge in the six months ended June 30, 2019 from a change in the fair value of earnout liability was $2.3 million. On March 25, 2019, the shares relating to the earnout liability were issued. There were no such liabilities in the six months ended June 30, 2020.

 

Change in fair value of derivative liability

 

Following the termination of the cross-currency swaps on October 1, 2019, there was no change in the fair values of derivative liabilities in the six months ended June 30, 2020. For the six months ended June 30, 2019, the change in fair value of derivative liability was a $0.1 million charge.

 

Other finance income

 

Other finance income for the six months ended June 30, 2020 was a charge of $6.2 million compared to a $0.3 million credit in the six months ended June 30, 2019. This was primarily due to an adverse foreign exchange impact of $6.2 million in retranslating the debt balance and a $0.2 million gain in the six months ended June 30, 2019 from the GBP:USD cross-currency swap which was terminated on October 1, 2019.

 

42

 

 

Income tax expense

 

Our effective tax rate for the period ended June 30, 2020 was 0.7% and our effective tax rate for the period ended March 31, 2019 was 0.0%.

 

Net loss

 

On a reported basis, net loss increased by $26.1 million, from a loss of $15.7 million to a loss of $41.9 million in the six months ended June 30, 2020. On a functional currency at constant rate basis, net loss increased by $27.6 million, mainly due to the impact of the Triennial Implementation and the shutdowns associated with COVID-19, as well as increases in operating expenses attributable to the Acquired Businesses, in addition to increases in interest expense and other finance costs, offset by a reduction in earnout liability.

 

Six Months ended June 30, 2020 compared to Six Months ended June 30, 2019 – Server Based Gaming Segment

 

Revenue growth for our SBG business is principally driven by the number of operator customers we have, the number of SBG 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.

 

SBG Segment, Key Performance Indicators

 

    For the Six-Month
Period ended
       
    Unaudited     Unaudited              
    June 30,     June 30,     Variance  
SBG   2020     2019     2020 vs 2019  
                      %  
End of period installed base (# of terminals)     32,972       35,077       (2,105 )     (6.0 )%
Average installed base (# of terminals)     32,971       35.099       (2,128 )     (6.1 )%
Customer Gross Win per unit per day (1)   £ 37.97     £ 88.61     £ (50.64 )     (57.1 )%
Customer Net Win per unit per day (1)   £ 28.17     £ 62.36     £ (34.18 )     (54.8 )%
Inspired Blended Participation Rate     6.1 %     6.2 %     (0.1 )%        

 

(1) Includes all SBG terminals in which the company takes a participation revenue share across all territories

  

SBG Segment, key events that affected results for the Six Months ended June 30, 2020

 

During the period Customer Gross Win per unit per day in the total UK market (including non-LBO markets) decreased by 50.0%. This was due to both the Triennial Implementation outcome in the UK and COVID-19 impact, with retail venues closing from March 21, 2020 through to June 15, 2020, with over 80% of venues reopened at June 30, 2020.

 

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During the period, an additional 94 SSBTs (Self Service Betting Terminals) were sold and deployed in the UK LBO market. These are part of a confirmed 170 terminal order due to be completed in July and August 2020 now that retail venues have reopened. In addition to hardware sale margin, these terminals also generate a recurring service fee.

 

During the period, new market sales continued in North America, which we entered in December 2019. Hardware sales of a further 161 “Valor” terminals were sold to multiple customers in Illinois.

 

In Italy, Customer Net Win per unit per day decreased by 77.1% (in EUR), due to the closure of retail venues due to COVID-19 from March 9, 2020 through to June 15, 2020, when 50% of venues reopened, as well as an increase in the average revenue tax of 0.9% from 8.4% in 2019 to 9.3% in 2020, and the impact of card reader implementation on January 1, 2020.

 

Greece Customer Gross Win per unit per day (in EUR) decreased by 73.2%, due solely to the closure of retail venues as a result of COVID-19, from March 14 through to June 8, 2020 when all venues reopened.

 

Customer Gross Win per unit per day (in our functional currency, GBP) decreased by £51 or 57.1% across the entire estate, driven mainly by the impact of COVID-19 with the mandated shutdown of retail venues during March, April, May and part of June 2020. The overall decrease was further effected by the reduction in maximum permitted bets on B2 gaming machines in the UK in accordance with the Triennial Implementation, These impacts, along with the reduced tax in the UK LBO market post Triennial, partly offset by a 0.9% average increase in the Italy tax rate, resulted in a Net Win per unit per day decrease on total SBG of £34 or 54.8%. Our blended participation rate reduced by 0.1% to 6.1%.

 

SBG Segment, Six Months ended June 30, 2020 compared to Six Months ended June 30, 2019

 

Server Based Gaming

 

  For the Six-Month
Period ended
          Variance  
    Unaudited     Unaudited           Functional        
    June 30,     June 30,     Variance     Currency at     Functional     Currency  
(In millions)   2020     2019     2020 vs 2019     Constant rate     Currency     Movement  
Revenue:                                          
Service   $ 17.0     $ 37.2     $ (20.2 )     (54.3 )%   $ (20.0 )     (53.7 )%   $ (0.2 )
Hardware     3.7       4.0       (0.3 )     (6.8 )%     (0.2 )     (4.5 )%     (0.1 )
Total revenue     20.7       41.2       (20.5 )     (49.7 )%     (20.2 )     (49.0 )%     (0.3 )
                                                         
Cost of sales, excluding depreciation and amortization:                                            
Cost of service     (4.6 )     (8.8 )     4.1       (47.4 )%     4.2       (47.0 )%     (0.0 )
Cost of hardware     (2.1 )     (2.6 )     0.6       (21.8 )%     0.5       (20.2 )%     0.0  
Total cost of sales     (6.7 )     (11.4 )     4.7       (41.4 )%     4.7       (40.9 )%     0.0  
                                                         
Selling, general and administrative expenses     (7.0 )     (12.6 )     5.6       (44.7 )%     5.5       (43.6 )%     0.2  
                                                         
Stock-based compensation     (0.3 )     (0.9 )     0.6       (64.2 )%     0.5       (60.7 )%     0.1  
                                                         
Depreciation and amortization     (12.2 )     (14.9 )     2.7       (18.1 )%     2.4       (16.1 )%     0.3  
                                                         
Net operating Income (Loss)   $ (5.5 )   $ 1.4     $ (6.8 )     (506.3 )%   $ (7.1 )     (546.7 )%   $ 0.2  
                                                         
Exchange Rate - $ to £     1.28       1.30                                          

 

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.

 

SBG Segment Revenue

 

During the period, revenue decreased by $20.5 million, to $20.7 million, on a reported basis. A small part of this decrease was due to adverse currency movements of $0.3 million. On a functional currency at constant rate basis, SBG revenue decreased by $20.2 million, or 49.0%.

 

44

 

 

The major driver for the decrease was the impact of COVID-19. Retail shop closures during the period of March 2020 through to June 2020 drove a reduction in service revenue of $14.3 million, with revenue by region decreasing $10.0 million in the UK, $2.3 million in Greece and $1.9 million in Italy. Further declines came from the UK LBO market with $4.4 million as a result of the Triennial Implementation, increased Italy taxes of $0.4 million, the adverse impact of the introduction in Italy of player cards of $0.5 million, 2019 one-off Italy sales of $0.4 million and intercompany UK other revenue of $0.6 million. These negative impacts were partly offset by growth in the Greek market of $0.8 million because of the continued rollout of contracted VLTs.

 

UK LBO Customer Gross Win per unit per day decreased by approximately 50.0%. The impact of COVID-19 and the shutdown of retail venues between March and June 2020 accounted for 46.5% of the decline, the remaining 3.5% stems from the Triennial Implementation, a negative position in the first quarter 2020 due to the April 1, 2019 implementation from and a recovery in the second quarter due to content releases and closure of low performing venues.

 

Hardware revenue decreased by $0.3 million to $3.7 million on a reported basis. On a functional currency at constant rate basis, the revenue decrease was $0.2 million with adverse currency movements accounting for decreased revenue of $0.1 million.

 

SBG Segment Operating Income

 

Cost of sales (excluding depreciation and amortization) decreased by $4.7 million, or 41.4%, to $6.7 million, on a reported basis. There was de minimis impact from currency movements.

 

Service cost of sales decreased by $4.1 million on both a reported and functional currency basis. This reduction was due mainly to the impact of retail venue closures due to COVID-19. UK LBO retail shops accounted for $2.2 million with significant savings on consumable and 3rd party content costs, a further $1.2 million came from Greece and $0.4 million from Italy for the same reasons. The remaining $0.4 million decrease was mainly from lower consumables spend during the three months ended March 31, 2020 on the UK LBO estate due to the Triennial Implementation.

 

Hardware cost of sales decreased by $0.6 million to $2.1 million on a reported basis. On a functional currency at constant rate basis, hardware cost of sales decreased by $0.5 million with some small favorable currency movements.

 

SBG SG&A expense declined by $5.6 million, reflecting significant staff furloughs due to COVID-19, ongoing restructuring and synergies associated with the acquisition of the Acquired Businesses. Of this reduction, $1.8 million was attributable to furloughs related to the COVID-19 pandemic and $1.9 million was related to other staff savings.

 

Depreciation and amortization declined by $2.7 million or 18.1%, on a reported basis. On a functional currency basis, depreciation declined by $2.4 million, reflecting $0.3 million in favorable currency impact. The decrease in depreciation expense was due to the machines in the UK estate becoming fully depreciated, offset by additional depreciation from new machines in the Greek estate.

 

Operating income declined by $6.8 million, declining from a $1.4 million reported operating profit to a $5.5 million operating loss year over year, as the decline in revenue related to COVID-19 was only partially offset by the declines in cost of sales, SG&A, and depreciation.

 

45

 

 

SBG Segment, Recurring Revenue

 

Set forth below is a breakdown of our SBG recurring revenue. SBG recurring revenue consists principally of SBG participation revenue.

 

    For the Six-Month
Period ended
             
    Unaudited     Unaudited              
    June 30,     June 30,     Variance        
(In £ millions)   2020     2019     2020 vs 2019     %  
SBG Recurring Revenue                        
Total SBG Revenue   £ 16.2     £ 31.7     £ (15.6 )     (49.0 )%
SBG Participation Revenue   £ 10.3     £ 24.6     £ (14.3 )     (58.2 )%
SBG Other Fixed Fee Recurring Revenue   £ 0.2     £ 0.7     £ (0.4 )     (67.4 )%
Total SBG Recurring Revenue   £ 10.5     £ 25.2     £ (14.7 )     (58.4 )%
SBG Recurring Revenue as a % of Total SBG Revenue     64.8 %     79.4 %     (14.6 )%        

  

SBG Segment, Service Revenue by Region

 

Set forth below is a breakdown of our SBG service revenue by geographic region. SBG service revenue consists principally of SBG participation revenue.

 

Server Based Gaming Service Revenue by Region

 

  For the Six-Month
Period ended
    Variance     Variance  
(In millions)  

Unaudited

June 30,

2020

   

Unaudited

June 30,

2019

    2020 vs 2019     Functional
Currency at
Constant rate
    Functional
Currency
    Currency
Movement
 
Service Revenue:                                          
UK LBO   $ 8.4     $ 21.9     $ (13.5 )     (61.6 )%   $ (13.4 )     (61.2 )%   $ (0.1 )
UK Other   $ 1.0     $ 2.6       (1.6 )     (61.6 )%     (1.6 )     (61.4 )%     (0.0 )
Italy   $ 0.9     $ 4.3       (3.4 )     (78.0 )%     (3.4 )     (77.9 )%     (0.0 )
Greece   $ 6.5     $ 8.0       (1.5 )     (19.1 )%     (1.4 )     (17.7 )%     (0.1 )
Rest of the World   $ 0.2     $ 0.4       (0.2 )     (54.1 )%     (0.2 )     (53.0 )%     (0.0 )
Total service revenue   $ 17.0     $ 37.2     $ (20.2 )     (54.3 )%   $ (20.0 )     (53.7 )%   $ (0.2 )
                                                         
Exchange Rate - $ to £     1.28       1.29                                          

 

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.

 

46

 

 

Virtual Sports Segment, Six Months ended June 30, 2020 compared to Six Months ended June 30, 2019

 

Virtual Sports Segment, Key Performance Indicators

 

    For the Six-Month
Period ended
    Variance  
Virtuals  

Unaudited

June 30,

2020

   

Unaudited

June 30,

2019

    2020 vs 2019  
                              %  
No. of Live Customers at the end of the period     125       105       20       19.0 %
Average No. of Live Customers     121