ITEM
1. FINANCIAL STATEMENTS
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
millions, except share data)
The
accompanying notes are an integral part of these condensed consolidated financial statements.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(in
millions, except share and per share data)
(Unaudited)
The
accompanying notes are an integral part of these condensed consolidated financial statements.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR
THE PERIOD JANUARY 1, 2022 TO SEPTEMBER 30, 2022
(in
millions, except share data)
(Unaudited)
The
accompanying notes are an integral part of these condensed consolidated financial statements.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR
THE PERIOD JANUARY 1, 2021 TO SEPTEMBER 30, 2021
(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, 2021 | |
| 22,430,475 | | |
$ | — | | |
$ | 324.6 | | |
$ | 31.1 | | |
$ | (457.4 | ) | |
$ | (101.7 | ) |
Foreign currency translation adjustments | |
| — | | |
| — | | |
| — | | |
| (1.1 | ) | |
| — | | |
| (1.1 | ) |
Actuarial gains on pension plan | |
| — | | |
| — | | |
| — | | |
| 4.6 | | |
| — | | |
| 4.6 | |
Change in fair value of hedging instrument | |
| — | | |
| — | | |
| — | | |
| 0.6 | | |
| — | | |
| 0.6 | |
Reclassification of loss on hedging instrument to comprehensive income | |
| — | | |
| — | | |
| — | | |
| 0.5 | | |
| — | | |
| 0.5 | |
Shares issued in settlement of RSUs | |
| 163,732 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock-based compensation expense | |
| — | | |
| — | | |
| 1.4 | | |
| — | | |
| — | | |
| 1.4 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (16.7 | ) | |
| (16.7 | ) |
Balance as of March 31, 2021 | |
| 22,594,207 | | |
$ | — | | |
$ | 326.0 | | |
$ | 35.7 | | |
$ | (474.1 | ) | |
$ | (112.4 | ) |
Foreign currency translation adjustments | |
| — | | |
| — | | |
| — | | |
| 0.1 | | |
| — | | |
| 0.1 | |
Actuarial gains on pension plan | |
| — | | |
| — | | |
| — | | |
| 0.9 | | |
| — | | |
| 0.9 | |
Change in fair value of hedging instrument | |
| — | | |
| — | | |
| — | | |
| (0.3 | ) | |
| — | | |
| (0.3 | ) |
Reclassification of loss on hedging instrument to comprehensive income | |
| — | | |
| — | | |
| — | | |
| 0.5 | | |
| — | | |
| 0.5 | |
Stock-based compensation expense | |
| — | | |
| — | | |
| 3.3 | | |
| — | | |
| — | | |
| 3.3 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (43.8 | ) | |
| (43.8 | ) |
Balance as of June 30, 2021 | |
| 22,594,207 | | |
$ | — | | |
$ | 329.3 | | |
$ | 36.9 | | |
$ | (517.9 | ) | |
$ | (151.7 | ) |
Balance | |
| 22,594,207 | | |
$ | — | | |
$ | 329.3 | | |
$ | 36.9 | | |
$ | (517.9 | ) | |
$ | (151.7 | ) |
Foreign currency translation adjustments | |
| — | | |
| — | | |
| — | | |
| 3.2 | | |
| — | | |
| 3.2 | |
Actuarial gains on pension plan | |
| — | | |
| — | | |
| — | | |
| 0.4 | | |
| — | | |
| 0.4 | |
Reclassification of loss on hedging instrument to comprehensive income | |
| — | | |
| — | | |
| — | | |
| 0.3 | | |
| — | | |
| 0.3 | |
Shares issued in settlement of RSUs | |
| 160,390 | | |
| — | | |
| (1.6 | ) | |
| — | | |
| — | | |
| (1.6 | ) |
Stock-based compensation expense | |
| — | | |
| — | | |
| 3.5 | | |
| — | | |
| — | | |
| 3.5 | |
Net income | |
| — | | |
| — | | |
| — | | |
| — | | |
| 25.0 | | |
| 25.0 | |
Net income (loss) | |
| — | | |
| — | | |
| — | | |
| — | | |
| 25.0 | | |
| 25.0 | |
Balance as of September 30, 2021 | |
| 22,754,597 | | |
$ | — | | |
$ | 331.2 | | |
$ | 40.8 | | |
$ | (492.9 | ) | |
$ | (120.9 | ) |
Balance | |
| 22,754,597 | | |
$ | — | | |
$ | 331.2 | | |
$ | 40.8 | | |
$ | (492.9 | ) | |
$ | (120.9 | ) |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
millions)
(Unaudited)
The
accompanying notes are an integral part of these condensed consolidated financial statements.
1. Nature of Operations, Management’s Plans and Summary of Significant Accounting Policies
Company
Description and Nature of Operations
We
are a global gaming technology company, supplying content, platform, gaming terminals and other products and services to online and land-based
regulated lottery, betting and gaming operators worldwide through a broad range of distribution channels, predominantly on a business-to-business
basis. We provide end-to-end digital gaming solutions (i) on our own proprietary and secure network, which accommodates a wide range
of devices, including land-based gaming machine terminals, mobile devices and online computer applications and (ii) through third party
networks. Our content and other products can be found through the consumer-facing portals of our interactive customers and, through our
land-based customers, in licensed betting offices, adult gaming centers, pubs, bingo halls, airports, motorway service areas and leisure
parks.
Management
Liquidity Plans
As
of September 30, 2022, the Company’s cash on hand was $37.4 million, and the Company had working capital in addition to cash of
$13.4 million. The Company recorded net income of $19.2 million and net losses of $35.5 million for the nine months ended September 30,
2022 and 2021, respectively. Net income/losses include non-cash stock-based compensation of $7.9 million and $8.6 million for the nine
months ended September 30, 2022 and 2021, respectively, excess capital expenditure over depreciation and amortization, excluding the acquisition of subsidiary assets, of $2.1 million
for the nine months ended September 30, 2022, and excess depreciation and amortization over capital expenditure of $18.0 million for
the nine months ended September 30, 2021, non-cash debt fees expensed as part of the repayment of the Company’s prior financing
of $14.4 million for the nine months ended September 30, 2021 and non-cash changes in fair value of warrant liability of $3.8 million
for the nine months ended September 30, 2021. 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 $39.9 million and $7.0 million for the nine months ended September
30, 2022 and 2021, respectively with the change year on year due to land based operations being subject to lockdown restrictions for
part of the nine months ended September 30, 2021. Working capital of $50.8 million includes a non-cash settled item of $4.6 million of
deferred income. Management currently believes that, absent any unanticipated 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 November 2023.
There
have been no COVID-19 restrictions in the United Kingdom since July 2021 and social distancing measures throughout Greece and Italy are
no longer in force as of the second quarter of 2022, however, uncertainty remains as to the continuing impact of COVID-19 on the global
economy. We continue to protect our existing available liquidity by pro-actively managing capital expenditures and working capital as
well as identifying both immediate and longer-term opportunities for cost savings.
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, 2021 and 2020. The financial information as of December 31, 2021
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 31, 2022. The interim results for the nine months ended September 30, 2022 are not necessarily indicative of the results
to be expected for the year ending December 31, 2022 or for any future interim periods.
2. Acquisitions and Disposals
In
January 2022, the Company sold its Italian VLT business, including all terminal and other assets, staff costs and facilities and contracts,
to a non-connected party for total proceeds of €1.1 million ($1.1 million), recognizing a profit on disposal of €0.8 million
($0.8 million). The Company continues to serve these Italian markets in the form of the provision of platform and games.
On
December 31, 2021, the Company acquired 100% of the membership interests of Sportech Lotteries, LLC, which has since been renamed Inspired
Entertainment Lotteries LLC. As part of the transaction, the Company recorded the acquisition of a customer contract as an intangible
asset in the amount of $12.3 million. During the nine months ended September 30, 2022, as a result of revisions made to management’s
preliminary assessments, the Company recognized an additional $0.9 million long-term receivable related to Inspired Entertainment Lotteries,
LLC, and reduced the value of the customer contract intangible asset accordingly.
3. Inventory
Inventory
consists of the following:
Schedule of Inventory
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
(in millions) | |
Component parts | |
$ | 16.7 | | |
$ | 10.8 | |
Work in progress | |
| 1.6 | | |
| 1.6 | |
Finished goods | |
| 6.9 | | |
| 4.5 | |
Total inventories | |
$ | 25.2 | | |
$ | 16.9 | |
Component
parts include parts for gaming terminals. Included in inventory are reserves for excess and slow-moving inventory of $2.1 million and
$2.0 million as of September 30, 2022 and December 31, 2021, respectively. Our finished goods inventory primarily consists of gaming
terminals which are ready for sale.
4. Contract Liabilities and Other Disclosures
The
following table summarizes contract related balances:
Schedule of Contract Related Balances
| |
Accounts Receivable | | |
Unbilled Accounts Receivable | | |
Deferred Income | | |
Customer Prepayments and Deposits | |
| |
(in millions) | |
At September 30, 2022 | |
$ | 31.9 | | |
$ | 13.9 | | |
$ | (8.6 | ) | |
$ | (2.9 | ) |
At December 31, 2021 | |
$ | 36.2 | | |
$ | 17.4 | | |
$ | (14.5 | ) | |
$ | (3.9 | ) |
At December 31, 2020 | |
$ | 30.4 | | |
$ | 8.2 | | |
$ | (22.9 | ) | |
$ | (1.6 | ) |
Revenue
recognized that was included in the deferred income balance at the beginning of the periods amounted to $6.5 million and $10.9 million
for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively.
5.
Derivatives and Hedging Activities
In
connection with the Company’s prior debt facilities, on January 15, 2020, the Company entered into two interest rate swaps with
UBS AG that were 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 previous floating rate debt facilities. The swaps fixed the variable interest rate of the debt facilities
and provided protection over potential interest rate increases by providing a fixed rate of interest payment in return. The interest
rate swaps were for £95.0 million ($106.1 million) at a fixed rate of 0.9255% based on the 6-month LIBOR rate and for €60.0
million ($58.8 million) at a fixed rate of 0.102% based on the 6-month EURIBOR rate.
In
connection with the issuance of Senior Secured Notes and the entry into a Revolving Credit Facility Agreement, on May 19, 2021 (the “RCF
Agreement”), the Company terminated its two interest rate swaps. The termination fees were settled on May 20, 2021, for £1.3
million ($1.9 million) and €0.1 million ($0.2 million), respectively.
Hedges
of Multiple Risks
The
Company’s objectives in using interest rate derivatives were to add stability to interest and to manage its exposure to interest
rate movements. To accomplish this objective, the Company primarily used 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 $0.5 million will be reclassified as an increase to interest expense.
The
Company did not have any derivatives as of September 30, 2022 or as of December 31, 2021. Losses reclassified from accumulated other
comprehensive income into interest expense in the consolidated statements of operations and income for the nine months ended September
30, 2022 amounted to $0.5 million.
The
table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income for the nine months
ended September 30, 2021.
Schedule of Accumulated Other Comprehensive Income
| |
Amount of Gain/(Loss) Recognized in Other Comprehensive Income on Derivative | | |
| |
Location of Gain Reclassified from Accumulated Other Comprehensive Income into Income | |
| |
| (in millions) | | |
| |
| (in millions) | |
Interest Rate Products | |
$ | 0.3 | | |
Interest Expense | |
$ | (1.3 | ) |
Total | |
$ | 0.3 | | |
| |
$ | (1.3 | ) |
The
table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations
for the nine months ended September 30, 2021.
Schedule of Consolidated Statements of Operations
| |
| | |
| |
Interest Expense, net | |
| |
(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 | |
$ | 37.9 | |
| |
| | |
Gain/(loss) on cash flow hedging relationships in Subtopic 815-20 | |
$ | (1.3 | ) |
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.
Schedule of Derivative Financial Instrument Assets and Liabilities Measured at Fair Value on Recurring Basis
| |
| | | |
| | | |
| | |
| |
| | |
September 30, | | |
December 31, | |
| |
Level | | |
2022 | | |
2021 | |
| |
| | |
(in millions) | |
Long term receivable (included in other assets) | |
| 2 | | |
$ | 3.1 | | |
$ | 3.5 | |
| |
| | | |
| | | |
| | |
The
fair value of our long-term senior debt as of September 30, 2022, was $242.5 million, based upon quoted prices in the marketplace, which
are considered Level 2 inputs.
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
September 30, 2022 and December 31, 2021, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
7.
Stock-Based Compensation
A
summary of the Company’s Restricted Stock Unit (“RSU”) activity during the nine months ended September 30, 2022 is
as follows:
Schedule of Restricted Stock Unit Activity
| |
Number of Shares | |
| |
| |
Unvested Outstanding at January 1, 2022 | |
| 2,039,254 | |
Granted | |
| 507,228 | |
Forfeited | |
| (47,687 | ) |
Vested | |
| (97,551 | ) |
Unvested Outstanding at September 30, 2022 | |
| 2,401,244 | |
The
Company issued a total of 496,814 shares during the nine months ended September 30, 2022 in net settlement of RSUs which included an
aggregate of 442,817 shares in settlement of RSUs that vested during the prior year on December 31, 2021.
8.
Accumulated Other Comprehensive Loss (Income)
The
accumulated balances for each classification of comprehensive loss (income) are presented below:
Schedule of Accumulated Other Comprehensive Loss (Income)
| |
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, 2022 | |
$ | (71.5 | ) | |
$ | 1.0 | | |
$ | 26.7 | | |
$ | (43.8 | ) |
Change during the period | |
| (2.4 | ) | |
| (0.2 | ) | |
| (0.7 | ) | |
| (3.3 | ) |
Balance at March 31, 2022 | |
| (73.9 | ) | |
| 0.8 | | |
| 26.0 | | |
| (47.1 | ) |
Change during the period | |
| (5.8 | ) | |
| (0.2 | ) | |
| (2.6 | ) | |
| (8.6 | ) |
Balance at June 30, 2022 | |
| (79.7 | ) | |
| 0.6 | | |
| 23.4 | | |
| (55.7 | ) |
Change during the period | |
| (4.8 | ) | |
| (0.1 | ) | |
| 6.2 | | |
| 1.3 | |
Balance at September 30, 2022 | |
$ | (84.5 | ) | |
$ | 0.5 | | |
$ | 29.6 | | |
$ | (54.4 | ) |
| |
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, 2021 | |
$ | (71.1 | ) | |
$ | 2.8 | | |
$ | 37.2 | | |
$ | (31.1 | ) |
Change during the period | |
| 1.1 | | |
| (1.1 | ) | |
| (4.6 | ) | |
| (4.6 | ) |
Balance at March 31, 2021 | |
| (70.0 | ) | |
| 1.7 | | |
| 32.6 | | |
| (35.7 | ) |
Change during the period | |
| (0.1 | ) | |
| (0.2 | ) | |
| (0.9 | ) | |
| (1.2 | ) |
Balance at June 30, 2021 | |
| (70.1 | ) | |
| 1.5 | | |
| 31.7 | | |
| (36.9 | ) |
Change during the period | |
| (3.2 | ) | |
| (0.3 | ) | |
| (0.4 | ) | |
| (3.9 | ) |
Balance at September 30, 2021 | |
$ | (73.3 | ) | |
$ | 1.2 | | |
$ | 31.3 | | |
$ | (40.8 | ) |
Included
within accumulated other comprehensive income is an amount of $0.5 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 instruments, in accordance with US GAAP.
9.
Net Income (Loss) per Share
Basic
income/loss per share (“EPS”) is computed by dividing net income/loss attributable 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, unless the inclusion would be anti-dilutive.
The
computation of diluted EPS excludes the common stock equivalents of the following potentially dilutive securities because they were either
contingently issuable shares or because their inclusion would be anti-dilutive:
Schedule of Anti-dilutive Securities Excluded from Computation of Earnings per Share
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| |
RSUs | |
| 688,854 | | |
| 938,517 | | |
| 688,854 | | |
| 4,880,110 | |
Unvested Restricted Stock | |
| — | | |
| 624,116 | | |
| — | | |
| 624,116 | |
Stock Warrants | |
| — | | |
| — | | |
| — | | |
| 9,539,565 | |
Anti-dilutive
securities | |
| 688,854 | | |
| 1,562,633 | | |
| 688,854 | | |
| 15,043,791 | |
10. Repurchase of Common Stock
On
May 10, 2022, the Board of Directors authorized the Company to use up to $25.0 million to repurchase Inspired common shares (such amount
being exclusive of any fees, commissions or other expenses), subject to repurchases being effected on or before May 10, 2025 (the “Share
Repurchase Program”). Management has discretion as to whether to repurchase shares of the Company.
During
the nine months ended September 30, 2022, the Company repurchased 1,027,871 shares under the Share Repurchase Program for gross payments
of approximately $10.1 million, the bulk of which (1,017,595 shares) were canceled and retired during the nine months ended September
30, 2022, and the remainder (10,276 shares) during the subsequent quarter. As of September 30, 2022, approximately $14.9 million remained
available for future repurchases under the Share Repurchase Program.
Refer
Part II, Item 2 of this report for further details regarding shares repurchased during the three months ended September 30, 2022.
11.
Other Finance Income (Expense)
Other
finance income (expense) consisted of the following for the three and nine months ended September 30, 2022 and 2021:
Schedule of Other Finance Income (expense)
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(in millions) | | |
(in millions) | |
Pension interest cost | |
$ | (0.5 | ) | |
$ | (0.4 | ) | |
$ | (1.6 | ) | |
$ | (1.2 | ) |
Expected return on pension plan assets | |
| 0.8 | | |
| 0.7 | | |
| 2.5 | | |
| 2.1 | |
Foreign currency translation on senior debt | |
| — | | |
| — | | |
| — | | |
| 4.6 | |
Other finance income (Costs) | |
$ | 0.3 | | |
$ | 0.3 | | |
$ | 0.9 | | |
$ | 5.5 | |
12.
Income Taxes
The
effective income tax rate for the three months ended September 30, 2022 and 2021 was 1.3% and 1.1%, respectively, resulting in a $0.1
million and a $0.3 million income tax expense, respectively. The effective income tax rate for the nine months ended September 30, 2022
and 2021 was 2.3% and 0.3%, respectively, resulting in a $0.4 million income tax expense and a $0.1 million income tax benefit, 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 nine months ended September 30, 2022 and 2021 differs from the amount that would be expected after
applying the statutory U.S. federal income tax rate primarily due to changes in tax attributes in jurisdictions where realization of
benefits is not expected to occur.
13.
Related Parties
Macquarie
Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK”) (an arranger and lending party under our RCF Agreement), and
Macquarie Capital (Europe) Limited (“Macquarie EUR”) (an arranger and initial purchaser of our Senior Secured Notes), are
affiliates of MIHI LLC, which beneficially owned approximately 11.7% of our common stock as of September 30, 2022. Macquarie UK was also
one of the lending parties with respect to our prior financing. Macquarie UK did not hold any of the Company’s aggregate senior
debt at September 30, 2022 or December 31, 2021. Interest expense payable to Macquarie UK for the three months ended September 30, 2022
and 2021 amounted to $0.0 million and $0.0 million, respectively, and for the nine months ended September 30, 2022 and 2021 amounted
to $0.0 million and $0.9 million, respectively. Macquarie EUR received $0.6 million of $5.5 million of fees paid in connection with the
issuance of the Senior Secured Notes and the RCF in the three and nine months ended September 30, 2021. 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.
HG
Vora Special Opportunities Master Fund Limited (“HG Vora”) (a purchaser of our Senior Secured Notes issued on May 20, 2021)
was a significant stockholder until October 12, 2021. Interest expense payable to HG Vora for the three months ended September 30, 2021
amounted to $1.1 million and for the nine months ended September 30, 2021 amounted to $1.6 million.
On
December 31, 2021, the Company entered into a consultancy agreement with Richard Weil, the brother of A. Lorne Weil, our Executive Chairman,
under which he received a success fee in the amount of $0.1 million for services he provided in connection with our acquisition of Sportech
Lotteries, LLC. The success fee was paid during the nine months ended September 30, 2022. Under the agreement, he will provide consulting
services relating to the lottery in the Dominican Republic for a period of twelve months at a rate of $10,000 per month and, with respect
to such services, the aggregate amount incurred by the Company in consulting fees for the nine months ended September 30, 2022 was $90,000.
We
incurred certain offering expenses in connection with an underwritten public offering of shares held by a significant stockholder, the
Landgame Trust, which closed on June 1, 2021, as to which our expenses were reimbursed by the stockholder. For the nine months ended
September 30, 2021, the aggregate amount invoiced for reimbursement was $0.2 million. The stockholder sold an aggregate of 6,217,628
shares in the offering (including 810,995 shares subject to an over-allotment option that was exercised in full) at an offering price
of $9.25 per share, less underwriting discounts and commissions of $0.4625 per share. One of the participating underwriters in the offering
was Macquarie Capital (USA) Inc., an affiliate of MIHI LLC (see paragraph above), pursuant to which it purchased 870,468 of the shares
including 113,539 shares subject to the over-allotment option.
14.
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:
Schedule of Lease Income
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(in millions) | | |
(in millions) | |
Interest receivable from sales type leases | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Operating lease income | |
| 1.9 | | |
| 1.3 | | |
| 5.6 | | |
| 1.8 | |
Variable income from sales type leases | |
| — | | |
| — | | |
| — | | |
| 0.1 | |
Total
lease income | |
$ | 1.9 | | |
$ | 1.3 | | |
$ | 5.6 | | |
$ | 1.9 | |
15.
Commitments and Contingencies
Employment
Agreements
We
are party to employment agreements with our executive officers and other employees of the Company and our subsidiaries which contain,
among other terms, provisions relating to severance and notice requirements.
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.
16.
Pension Plan
We
operate a defined contribution plan in the US, and both defined benefit and defined contribution pension schemes in the UK. The defined
contribution scheme assets are held separately from those of the Company in independently administered funds.
Defined
Benefit Pension Scheme
The
defined benefit scheme 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. The Actuarial Valuation of the scheme as at March 31, 2021, determined
that the statutory funding objective was not met, i.e., there were insufficient assets to cover the scheme’s technical provisions
and there was a funding shortfall.
In
June 2022, a recovery plan was put in place to eliminate the funding shortfall. The plan expects the shortfall to be eliminated by October
31, 2026. Deficit reduction contributions of $1.0 million and expense contributions of $0.5 million will be payable during the year ending
December 31, 2022.
The
total amount of employer contributions paid during the nine months ended September 30, 2022 amounted to $1.1 million.
The
following table presents the components of our net periodic pension benefit cost:
Schedule of Defined Benefit Plans
| |
| | |
| |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
(in millions) | |
Components of net periodic pension benefit cost: | |
| | | |
| | |
Interest cost | |
$ | 1.6 | | |
$ | 1.2 | |
Expected return on plan assets | |
| (2.5 | ) | |
| (2.1 | ) |
Net periodic benefit | |
$ | (0.9 | ) | |
$ | (0.9 | ) |
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:
Schedule of Pension Plans and their Reconciliation
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
(in millions) | |
Change in benefit obligation: | |
| | | |
| | |
Benefit obligation at beginning of period | |
$ | 114.7 | | |
$ | 127.8 | |
Prior service cost | |
| 0.9 | | |
| — | |
Interest cost | |
| 1.6 | | |
| 1.6 | |
Actuarial gain | |
| (40.5 | ) | |
| (9.8 | ) |
Benefits paid | |
| (2.6 | ) | |
| (3.5 | ) |
Foreign currency translation adjustments | |
| (15.2 | ) | |
| (1.4 | ) |
Benefit obligation at end of period | |
$ | 58.9 | | |
$ | 114.7 | |
Change in plan assets: | |
| | | |
| | |
Fair value of plan assets at beginning of period | |
$ | 117.7 | | |
$ | 118.7 | |
Actual (loss) gain on plan assets | |
| (40.4 | ) | |
| 2.5 | |
Employer contributions | |
| 1.1 | | |
| 1.5 | |
Benefits paid | |
| (2.6 | ) | |
| (3.5 | ) |
Foreign currency translation adjustments | |
| (16.1 | ) | |
| (1.5 | ) |
Fair value of assets at end of period | |
$ | 59.7 | | |
$ | 117.7 | |
Amount recognized in the consolidated balance sheets: | |
| | | |
| | |
Overfunded status (non-current) | |
$ | 0.8 | | |
$ | 3.0 | |
Net amount recognized | |
$ | 0.8 | | |
$ | 3.0 | |
17.
Segment Reporting and Geographic Information
The
Company operates its business along four operating segments, which are segregated on the basis of revenue stream: Gaming, Virtual Sports,
Interactive and Leisure. 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)
and total capital expenditures for the periods ended September 30, 2022 and September 30, 2021, 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, right of use assets, cash, prepaid expenses and property and equipment
and software development costs relating to corporate/shared functions.
Segment
Information
Schedule of Segment Reporting Information by Segment
Three
Months Ended September 30, 2022
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
|
Gaming |
|
|
Virtual
Sports |
|
|
Interactive |
|
|
Leisure |
|
|
Corporate
Functions |
|
|
Total |
|
|
|
(in
millions) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
|
$ |
19.0 |
|
|
$ |
14.6 |
|
|
$ |
5.7 |
|
|
$ |
29.9 |
|
|
$ |
— |
|
|
$ |
69.2 |
|
Product
sales |
|
|
5.1 |
|
|
|
— |
|
|
|
— |
|
|
|
0.6 |
|
|
|
— |
|
|
|
5.7 |
|
Total
revenue |
|
|
24.1 |
|
|
|
14.6 |
|
|
|
5.7 |
|
|
|
30.5 |
|
|
|
— |
|
|
|
74.9 |
|
Cost
of sales, excluding depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of service |
|
|
(4.4 |
) |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
|
(8.5 |
) |
|
|
— |
|
|
|
(14.2 |
) |
Cost
of product sales |
|
|
(3.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
(3.9 |
) |
Selling,
general and administrative expenses |
|
|
(7.4 |
) |
|
|
(1.6 |
) |
|
|
(1.8 |
) |
|
|
(11.9 |
) |
|
|
(6.5 |
) |
|
|
(29.2 |
) |
Stock-based
compensation expense |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(1.7 |
) |
|
|
(2.5 |
) |
Acquisition
and integration related transaction expenses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
)
|
|
|
(0.1 |
)
|
Depreciation
and amortization |
|
|
(3.9 |
) |
|
|
(0.7 |
) |
|
|
(0.7 |
) |
|
|
(3.1 |
) |
|
|
(0.4 |
) |
|
|
(8.8 |
) |
Segment
operating income (loss) |
|
|
4.5 |
|
|
|
11.6 |
|
|
|
2.3 |
|
|
|
6.5 |
|
|
|
(8.7 |
) |
|
|
16.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures for the three months ended September 30, 2022 |
|
$ |
2.0 |
|
|
$ |
1.1 |
|
|
$ |
1.2 |
|
|
$ |
4.3 |
|
|
$ |
0.8 |
|
|
$ |
9.4 |
|
Three
Months Ended September 30, 2021
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate Functions | | |
Total | |
| |
(in millions) | |
Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Service | |
$ | 19.7 | | |
$ | 10.5 | | |
$ | 6.1 | | |
$ | 32.4 | | |
$ | — | | |
$ | 68.7 | |
Product sales | |
| 7.9 | | |
| — | | |
| — | | |
| 1.0 | | |
| — | | |
| 8.9 | |
Total revenue | |
| 27.6 | | |
| 10.5 | | |
| 6.1 | | |
| 33.4 | | |
| — | | |
| 77.6 | |
Cost of sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of service | |
| (4.1 | ) | |
| (0.5 | ) | |
| (1.0 | ) | |
| (8.2 | ) | |
| — | | |
| (13.8 | ) |
Cost of product sales | |
| (4.2 | ) | |
| — | | |
| — | | |
| (0.5 | ) | |
| — | | |
| (4.7 | ) |
Selling, general and administrative expenses | |
| (8.4 | ) | |
| (1.4 | ) | |
| (1.7 | ) | |
| (11.7 | ) | |
| (6.0 | ) | |
| (29.2 | ) |
Stock-based compensation expense | |
| (0.5 | ) | |
| (0.3 | ) | |
| (0.2 | ) | |
| (0.1 | ) | |
| (2.7 | ) | |
| (3.8 | ) |
Acquisition and integration related transaction expenses | |
| | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Depreciation and amortization | |
| (5.3 | ) | |
| (0.7 | ) | |
| (0.9 | ) | |
| (3.9 | ) | |
| (0.4 | ) | |
| (11.2 | ) |
Segment operating income (loss) | |
| 5.1 | | |
| 7.6 | | |
| 2.3 | | |
| 9.0 | | |
| (9.1 | ) | |
| 14.9 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net operating income | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 14.9 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total capital expenditures for the three months ended September 30, 2021 | |
$ | 2.4 | | |
$ | 0.6 | | |
$ | 0.9 | | |
$ | 1.5 | | |
$ | 0.3 | | |
$ | 5.7 | |
Nine
Months Ended September 30, 2022
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming |
|
|
Virtual
Sports |
|
|
Interactive |
|
|
Leisure |
|
|
Corporate
Functions |
|
|
Total |
|
|
|
(in
millions) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
|
$ |
59.7 |
|
|
$ |
40.2 |
|
|
$ |
16.8 |
|
|
$ |
74.3 |
|
|
$ |
— |
|
|
$ |
191.0 |
|
Product
sales |
|
|
14.0 |
|
|
|
— |
|
|
|
— |
|
|
|
1.8 |
|
|
|
— |
|
|
|
15.8 |
|
Total
revenue |
|
|
73.7 |
|
|
|
40.2 |
|
|
|
16.8 |
|
|
|
76.1 |
|
|
|
— |
|
|
|
206.8 |
|
Cost
of sales, excluding depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of service |
|
|
(13.5 |
) |
|
|
(1.7 |
) |
|
|
(2.6 |
) |
|
|
(19.9 |
) |
|
|
— |
|
|
|
(37.7 |
) |
Cost
of product sales |
|
|
(9.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1.1 |
) |
|
|
— |
|
|
|
(10.4 |
) |
Selling,
general and administrative expenses |
|
|
(21.9 |
) |
|
|
(4.6 |
) |
|
|
(5.1 |
) |
|
|
(35.2 |
) |
|
|
(18.5 |
) |
|
|
(85.3 |
) |
Stock-based
compensation expense |
|
|
(1.0 |
) |
|
|
(0.5 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
(5.6 |
) |
|
|
(7.9 |
) |
Acquisition
and integration related transaction expenses |
|
|
(0.1 |
)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.2 |
) |
|
|
(0.3 |
) |
Depreciation
and amortization |
|
|
(12.8 |
) |
|
|
(2.0 |
) |
|
|
(2.1 |
) |
|
|
(10.3 |
) |
|
|
(1.5 |
) |
|
|
(28.7 |
) |
Segment
operating income (loss) |
|
|
15.1 |
|
|
|
31.4 |
|
|
|
6.6 |
|
|
|
9.2 |
|
|
|
(25.8 |
) |
|
|
36.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures for the nine months ended September 30, 2022 |
|
$ |
11.2 |
|
|
$ |
3.3 |
|
|
$ |
3.7 |
|
|
$ |
10.3 |
|
|
$ |
2.7 |
|
|
$ |
31.2 |
|
Nine
Months Ended September 30, 2021
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate Functions | | |
Total | |
| |
(in millions) | |
Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Service | |
$ | 38.1 | | |
$ | 25.0 | | |
$ | 17.1 | | |
$ | 43.1 | | |
$ | — | | |
$ | 123.3 | |
Product sales | |
| 16.5 | | |
| — | | |
| — | | |
| 2.1 | | |
| — | | |
| 18.6 | |
Total revenue | |
| 54.6 | | |
| 25.0 | | |
| 17.1 | | |
| 45.2 | | |
| — | | |
| 141.9 | |
Cost of sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of service | |
| (8.3 | ) | |
| (1.3 | ) | |
| (2.7 | ) | |
| (11.6 | ) | |
| — | | |
| (23.9 | ) |
Cost of product sales | |
| (9.5 | ) | |
| — | | |
| — | | |
| (1.1 | ) | |
| — | | |
| (10.6 | ) |
Selling, general and administrative expenses | |
| (19.2 | ) | |
| (5.2 | ) | |
| (4.0 | ) | |
| (23.1 | ) | |
| (16.6 | ) | |
| (68.1 | ) |
Stock-based compensation expense | |
| (1.1 | ) | |
| (0.5 | ) | |
| (0.4 | ) | |
| (0.3 | ) | |
| (6.3 | ) | |
| (8.6 | ) |
Acquisition and integration related transaction expenses | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1.5 | ) | |
| (1.5 | ) |
Depreciation and amortization | |
| (17.7 | ) | |
| (2.5 | ) | |
| (2.5 | ) | |
| (12.2 | ) | |
| (1.3 | ) | |
| (36.2 | ) |
Segment operating income (loss) | |
| (1.2 | ) | |
| 15.5 | | |
| 7.5 | | |
| (3.1 | ) | |
| (25.7 | ) | |
| (7.0 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net operating loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | (7.0 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total capital expenditures for the nine months ended September 30, 2021 | |
$ | 6.6 | | |
$ | 2.5 | | |
$ | 2.7 | | |
$ | 6.3 | | |
$ | 1.1 | | |
$ | 19.2 | |
Geographic
Information
Geographic
information for revenue is set forth below:
Schedule of Geographic Information
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(in millions) | | |
(in millions) | |
Total revenue | |
| | | |
| | | |
| | | |
| | |
UK | |
$ | 59.2 | | |
$ | 58.6 | | |
$ | 160.6 | | |
$ | 99.4 | |
Greece | |
| 5.6 | | |
| 6.2 | | |
| 16.8 | | |
| 12.4 | |
Rest of world | |
| 10.1 | | |
| 12.8 | | |
| 29.4 | | |
| 30.1 | |
Total | |
$ | 74.9 | | |
$ | 77.6 | | |
$ | 206.8 | | |
$ | 141.9 | |
Total revenue | |
$ | 74.9 | | |
$ | 77.6 | | |
$ | 206.8 | | |
$ | 141.9 | |
UK
revenue includes revenue from customers headquartered in the UK, but whose revenue is generated globally.
Software
development costs are included as attributable to the market in which they are utilized.
18.
Customer Concentration
During
the three months ended September 30, 2022, one customer represented at least 10% of the Company’s revenues, accounting for 14%
of the Company’s revenues. This customer was served by the Virtual Sports and Interactive segments. During the three months ended
September 30, 2021, no single customer represented at least 10% of the Company’s revenues.
During
the nine months ended September 30, 2022, one customer represented at least 10% of the Company’s revenues, accounting for 13% of
the Company’s revenues. This customer was served by the Virtual Sports and Interactive segments. During the nine months ended September
30, 2021, no single customer represented at least 10% of the Company’s revenues.
At
September 30, 2022 and December 31, 2021, there were no customers that represented at least 10% of accounts receivable.
19.
Subsequent Events
The Company amended its Employee Stock Purchase Plan
(the “ESPP”) to add a subplan applicable to the Company’s U.K. based employees (the “Subplan”) and approved
an offering under the Subplan for 2022 commencing October 2022. The Subplan, which is intended to meet the requirements of a sharesave scheme under
UK law, enables participants to save specified amounts through payroll
deductions over a fixed period of years, at the end of which they can choose to purchase shares in the Company at a pre-determined discounted
exercise price set in advance of the period or to receive a refund of their accumulated contributions. For the Subplan’s 2022
offering, the savings period was set at three years, the monthly savings amount at a maximum amount of £350
and the option exercise price at $9.80, reflecting a 15% discount. Pursuant to enrollments in the Subplan’s 2022 offering, options
covering an aggregate of approximately 72,000 shares were approved for participants which would become exercisable at the end of the
three-year savings period.
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 referenced in the section
titled “Risk Factors” included elsewhere in this report.
Forward-Looking
Statements
We
make forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
For definitions of the term Forward-Looking Statements, see the definitions provided in the Cautionary Note Regarding Forward-Looking
Statements at the start of this Quarterly Report on Form 10-Q for the period ended September 30, 2022.
Seasonality
Our
results of operations can fluctuate due to seasonal trends and other factors. Sales of our gaming machines can vary quarter on quarter
due to both supply and demand factors. Player activity for our Holiday parks is generally higher in the second and third quarters of
the year, particularly during the summer months and slower during the first and fourth quarters of the year. Historical seasonality has
been impacted by COVID-19 business disruptions and could continue to be impacted in future periods.
COVID-19
Update
During
the nine-month period ended September 30, 2021, all land-based operations were either subject to lockdown or social distancing
restriction were in place. These social distancing measures continued throughout Greece and Italy until the second quarter of 2022,
however, were no longer in place in the United Kingdom from July 2021, and therefore year on year comparisons may not be meaningful
due to the COVID-19 impacts.
However,
uncertainty remains as to the continuing impact of COVID-19 on the global economy. We continue to protect our existing available liquidity
by pro-actively managing capital expenditures and working capital as well as identifying both immediate and longer-term opportunities
for cost savings.
Revenue
We
generate revenue in four principal ways: i) on a participation basis, ii) on a fixed rental fee basis, iii) through product sales and
iv) through software license fees. Participation revenue generally includes a right to receive a share of our customers’ gaming
revenue, typically as a share of net win but sometimes as a share of the handle or “coin in” which represents the total amount
wagered.
Geographic
Range
Geographically,
a majority of our revenue is derived from, and majority of our non-current assets are attributable to, our UK operations. The remainder
of our revenue is derived from, and non-current assets attributable to, Greece and the rest of the world (including North America).
For
the three and nine months ended September 30, 2022, we derived approximately 79% and 78% of our revenue from the UK (including customers
headquartered in the UK but whose revenue is generated globally), respectively, 7% and 8% from Greece, respectively, and the remaining
14% across the rest of the world in both time periods. During the three and nine months ended September 30, 2021, we derived approximately
76% and 70%, 8% and 9%, 16% and 21% of our revenue from those regions, respectively.
As
of September 30, 2022, our non-current assets (excluding goodwill) were attributable as follows: 77% to the UK, 7% to Greece and 16%
across the rest of the world.
Foreign
Exchange
Our
results are affected by changes in foreign currency exchange rates as a result of the translation of foreign functional currencies into
our reporting currency and the re-measurement of foreign currency transactions and balances. The impact of foreign currency exchange
rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. The geographic
region in which the largest portion of our business is operated is the UK and the British pound (“GBP”) is considered to
be our functional currency. Our reporting currency is the U.S. dollar (“USD”). Our results are translated from our functional
currency of GBP into the reporting currency of USD using average rates for profit and loss transactions and applicable spot rates for
period-end balances. The effect of translating our functional currency into our reporting currency, as well as translating the results
of foreign subsidiaries that have a different functional currency into our functional currency, is reported separately in Accumulated
Other Comprehensive Income.
During
the three and nine months ended September 30, 2022, we derived approximately 21% and 22% of our revenue from sales to customers outside
the UK, respectively, compared to 24% and 30% during the three and nine months ended September 30, 2021, respectively.
In
the section “Results of Operations” below, currency impacts shown have been calculated as the current-period average GBP:USD
rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP).
The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency,
multiplied by the prior-period average GBP:USD rate. This is not a U.S. GAAP measure, but is one which management believes gives a clearer
indication of results. In the tables below, variances in particular line items from period to period exclude currency translation movements,
and currency translation impacts are shown independently.
Non-GAAP
Financial Measures
We
use certain financial measures that are not compliant with U.S. GAAP (“Non-GAAP financial measures”), including EBITDA and
Adjusted EBITDA, to analyze our operating performance. In this discussion and analysis, we present certain non-GAAP financial measures,
define and explain these measures and provide reconciliations to the most comparable U.S. GAAP measures. See “Non-GAAP Financial
Measures” below.
Results
of Operations
Our
results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting
currency (USD). During the periods ended September 30, 2022 and September 30, 2021, the average GBP:USD rates were for the three-month
period 1.18 and 1.38, respectively, and for the nine-month period 1.25 and 1.38, respectively.
The
following discussion and analysis of our results of operations has been organized in the following manner:
|
● |
a
discussion and analysis of the Company’s results of operations for the three and nine-month periods ended September 30, 2022,
compared to the same period in 2021; and |
|
|
|
|
● |
a
discussion and analysis of the results of operations for each of the Company’s segments (Gaming, Virtual Sports, Interactive
and Leisure) for the three and nine-month periods ended September 30, 2022, compared to the same period in 2021, including KPI analysis. |
In
the discussion and analysis below, certain data may vary from the amounts presented in our consolidated financial statements due to rounding.
Year-on-year comparisons may not be meaningful due to COVID-19 impacts in prior period, as noted above.
For
all reported variances, refer to the overall company and segment tables shown below. All variances discussed in the overall company and
segment results are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange
rates.
Overall
Company Results
Three
and Nine Months ended September 30, 2022, compared to Three and Nine Months ended September 30, 2021
| |
For
the Three-Month | | |
Variance | | |
For
the Nine-Month | | |
Variance | |
| |
Period
ended | | |
2022
vs 2021 | | |
Period
ended | | |
2022
vs 2021 | |
(In
millions) | |
Sept 30, 2022 | | |
Sept 30, 2021 | | |
Variance Attributable
to Currency Movement | | |
Variance
on a Functional currency
basis | | |
Total Functional Currency Variance
% | | |
Total Reported Variance
% | | |
Sept 30, 2022 | | |
Sept 30, 2021 | | |
Variance Attributable
to Currency Movement | | |
Variance
on a Functional currency
basis | | |
Total Functional Currency Variance
% | | |
Total Reported Variance % | |
Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Service | |
$ | 69.2 | | |
$ | 68.7 | | |
$ | (11.7 | ) | |
$ | 12.3 | | |
| 17.9 | % | |
| 0.8 | % | |
$ | 191.0 | | |
$ | 123.3 | | |
$ | (20.6 | ) | |
$ | 88.3 | | |
| 71.6 | % | |
| 54.9 | % |
Product | |
| 5.7 | | |
| 8.9 | | |
| (1.0 | ) | |
| (2.2 | ) | |
| (24.5 | )% | |
| (35.7 | )% | |
| 15.8 | | |
| 18.6 | | |
| (1.8 | ) | |
| (1.0 | ) | |
| (5.4 | )% | |
| 14.9 | % |
Total
revenue | |
| 74.9 | | |
| 77.6 | | |
| (12.7 | ) | |
| 10.1 | | |
| 13.0 | % | |
| (3.4 | )% | |
| 206.8 | | |
| 141.9 | | |
| (22.4 | ) | |
| 87.3 | | |
| 61.5 | % | |
| 45.8 | % |
Cost
of Sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost
of Service | |
| (14.2 | ) | |
| (13.8 | ) | |
| 2.5 | | |
| (3.0 | ) | |
| 21.6 | % | |
| 3.2 | % | |
| (37.7 | ) | |
| (23.9 | ) | |
| 4.2 | | |
| (18.0 | ) | |
| 75.3 | % | |
| 57.8 | % |
Cost
of Product | |
| (3.9 | ) | |
| (4.7 | ) | |
| 0.6 | | |
| 0.2 | | |
| (4.0 | )% | |
| (17.6 | )% | |
| (10.4 | ) | |
| (10.6 | ) | |
| 1.2 | | |
| (0.9 | ) | |
| 8.9 | % | |
| (2.1 | )% |
Selling,
general and administrative expenses | |
| (29.2 | ) | |
| (29.2 | ) | |
| 5.0 | | |
| (5.0 | ) | |
| 17.2 | % | |
| 0.1 | % | |
| (85.3 | ) | |
| (68.1 | ) | |
| 9.2 | | |
| (26.4 | ) | |
| 38.8 | % | |
| 25.2 | % |
Stock-based
compensation | |
| (2.5 | ) | |
| (3.8 | ) | |
| 0.4 | | |
| 0.9 | | |
| (23.4 | )% | |
| (34.6 | )% | |
| (7.9 | ) | |
| (8.6 | ) | |
| 0.8 | | |
| (0.1 | ) | |
| 1.3 | % | |
| (8.2 | )% |
Acquisition
and integration related transaction expenses | |
| (0.1 | ) | |
| - | | |
| 0.0 | | |
| (0.1 | ) | |
| N/A | | |
| N/A | | |
| (0.3 | ) | |
| (1.5 | ) | |
| 0.1 | | |
| 1.1 | | |
| (75.5 | )% | |
| (79.0 | )% |
Depreciation
and amortization | |
| (8.8 | ) | |
| (11.2 | ) | |
| 1.5 | | |
| 0.9 | | |
| (8.1 | )% | |
| (21.4 | )% | |
| (28.7 | ) | |
| (36.2 | ) | |
| 2.9 | | |
| 4.7 | | |
| (12.9 | )% | |
| (20.9 | )% |
Net
operating Income (Loss) | |
| 16.2 | | |
| 14.9 | | |
| (2.6 | ) | |
| 4.0 | | |
| (26.6 | )% | |
| (8.9 | )% | |
| 36.5 | | |
| (7.0 | ) | |
| (4.1 | ) | |
| 47.6 | | |
| (701.4 | )% | |
| (620.2 | )% |
Other
income (expense) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
expense, net | |
| (6.2 | ) | |
| (7.2 | ) | |
| 1.0 | | |
| 0.0 | | |
| (0.5 | )% | |
| (14.1 | )% | |
| (18.7 | ) | |
| (37.9 | ) | |
| 2.1 | | |
| 17.2 | | |
| (45.5 | )% | |
| (50.7 | )% |
Change
in fair value of warrant liability | |
| - | | |
| 17.3 | | |
| (0.0 | ) | |
| (17.3 | ) | |
| (100.0 | )% | |
| (100.0 | )% | |
| - | | |
| 3.8 | | |
| 0.3 | | |
| (4.1 | ) | |
| (100.0 | )% | |
| (100.0 | )% |
Profit
on disposal of trade & assets | |
| - | | |
| - | | |
| - | | |
| - | | |
| N/A | | |
| N/A | | |
| 0.9 | | |
| - | | |
| (0.0 | ) | |
| 0.9 | | |
| N/A | | |
| N/A | |
Other
finance income (expense) | |
| 0.3 | | |
| 0.3 | | |
| (0.0 | ) | |
| 0.0 | | |
| 18.1 | % | |
| 0.8 | % | |
| 0.9 | | |
| 5.5 | | |
| (0.1 | ) | |
| (4.6 | ) | |
| (82.7 | )% | |
| (84.2 | )% |
Total
other income (expense), net | |
| (5.9 | ) | |
| (10.4 | ) | |
| 0.9 | | |
| (17.2 | ) | |
| (166.7 | )% | |
| (156.6 | )% | |
| (16.9 | ) | |
| (28.6 | ) | |
| 2.2 | | |
| 9.5 | | |
| (33.6 | )% | |
| (40.9 | )% |
Net
Income (loss) from continuing operations before income taxes | |
| 10.3 | | |
| 25.3 | | |
| (1.7 | ) | |
| (13.2 | ) | |
| (52.6 | )% | |
| (59.2 | )% | |
| 19.6 | | |
| (35.6 | ) | |
| (1.8 | ) | |
| 57.1 | | |
| (163.5 | )% | |
| (155.1 | )% |
Income
tax expense | |
| (0.1 | ) | |
| (0.3 | ) | |
| 0.1 | | |
| 0.1 | | |
| (28.9 | )% | |
| (59.9 | )% | |
| (0.4 | ) | |
| 0.1 | | |
| 0.1 | | |
| (0.6 | ) | |
| (995.9 | )% | |
| (500.0 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
Income (Loss) | |
$ | 10.2 | | |
$ | 25.0 | | |
$ | (1.6 | ) | |
$ | (13.2 | ) | |
| (52.9 | )% | |
| (59.2 | )% | |
$ | 19.2 | | |
$ | (35.5 | ) | |
$ | (1.8 | ) | |
$ | 56.4 | | |
| (162.0 | )% | |
| (154.0 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange
Rate - $ to £ | |
| 1.18 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | | |
| 1.25 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | |
See
“Segments Results” below for a more detailed explanation of the significant changes in our components of revenue within the
individual segment results of operations.
Revenue
Consolidated
Reported Revenue by Segment
![](https://content.edgar-online.com/edgar_conv_img/2022/11/09/0001493152-22-031094_form10-q_001.jpg)
|
● |
There
was zero VAT-related revenue for the three-months ended September 30, 2022, and 2021. |
|
|
|
|
● |
VAT-related
revenue for the nine-months ended September 30, 2022 was $1.0 million, and for the nine-months ended September 30, 2021 was $3.1 million. |
“VAT-related
revenue” are payments from UK customers related to our contractual revenue share of their value-added tax rebate.
For
the three and nine months ended September 30, 2022, revenue on a functional currency (at constant rate) basis increased by $10.1 million,
or 13%, and $87.3 million, or 62%, respectively.
For
the three-month period, Virtual Sports and Interactive grew by $6.6 million and $0.6 million, respectively, with the Virtuals Sports
increase driven by Online. Leisure and Gaming revenue grew by $2.1 million and $0.8 million, respectively, primarily due to Holiday Park
performance and the addition of the new Lotteries market.
For
the nine-month period, Leisure and Gaming revenue grew by $39.3 million and $26.8 million, respectively, due to COVID-19 related closures
and restrictions in the first six months of the prior year. Virtual Sports and Interactive grew by $19.6 million and $1.5 million, respectively,
with $16.3 million of the Virtuals Sports increase from Online and $3.3 million from Retail.
Cost
of Sales, excluding depreciation and amortization
Cost
of sales, excluding depreciation and amortization, for the three and nine months ended September 30, 2022, increased by $2.8 million,
or 15%, and $18.9 million, or 55%, respectively. For the three-month period, the increase was attributable to Cost of Service of $3.0
million due to the increases in Leisure and Gaming ($1.8 million and $1.2 million, respectively), partly offset by a $0.2 million decrease
in Cost of Product. For the nine-month period, the increase was driven by Cost of Service of $18.0 million due to COVID-19 related closures
in the prior period, and a $0.9 million increase in Cost of Product.
Selling,
general and administrative expenses
Selling,
general and administrative (“SG&A”) expenses for the three and nine months ended September 30, 2022 increased by $5.0
million, or 17%, and $26.4 million, or 39%, respectively.
The
three and nine-month increase was driven primarily by the increase in staff cost of $3.9 million and $25.9 million, respectively, due
to the return of furloughed staff and return to full pay for the current period as well as wage inflation particularly increases in the
‘UK’s national living wage’ (The National Living Wage is an obligatory minimum wage
payable to workers in the United Kingdom).
Stock-based
compensation
During
the three and nine months ended September 30, 2022, the Company recorded expenses of $2.5 million and $7.9 million, respectively, compared
to expenses of $3.8 million and $8.6 million, respectively, for the three and nine months ended September 30, 2021. All expenses related
to outstanding awards, but the nine months ended September 30, 2021, included $1.4 million of shares that fully vested on date of grant.
Acquisition
and integration related transaction expenses
During
the three and nine months ended September 30, 2022, the Company recorded expenses of $0.1 million and $0.3 million, respectively, compared
to nil and an expense of $1.5 million, respectively, for the three and nine months ended September 30, 2021.
Expenses
in the current year related to integration costs in relation to the Sportech Lotteries, LLC acquisition and costs relating to potential
acquisitions. All expenses in the previous year were integration costs in relation to the Company’s acquisition of Gaming Technology
Group of Novomatic UK Ltd., a division of Novomatic Group.
Depreciation
and amortization
Depreciation
and amortization decreased for the three and nine-month period by $0.9 million and $4.7 million, respectively. This is mostly driven
by Gaming $0.8 million and $3.6 million, respectively, which is due to a decrease in machine depreciation, as machines in Greece become
fully depreciated, and software amortization, as software becomes fully amortized.
Net
operating income/(loss)
During
the three-month period, net operating income was $16.2 million, an increase of $4.0 million. For the nine-month period, net operating
income was $36.5 million, an increase of $47.6 million. These increases were attributable primarily to the increases in revenue driven
by the COVID-19 closures and restrictions in 2021, as well as growth in online revenue and the decrease in depreciation.
Interest
expense, net
Interest
expense, net remained consistent year-over-year for the three-month period ended September 30, 2022.
Interest
expense, net decreased by $17.2 million in the nine-month period ended September 30, 2022 which was due to the refinancing in the previous
year with savings due to lower debt interest of $0.6 million, lower debt fee amortization of $1.0 million and the $14.4 million write
off of debt fees relating to the previous debt. Savings were also seen on bank interest of $0.2 million and currency movements of $0.4
million.
Change
in fair value of warrant liability
With
the expiration of the warrants on December 23, 2021, the liability and the requirement to restate to fair value ceased to exist. For
the three and nine months ended September 30, 2021, the change in fair value of the warrant liability resulted in income of $17.3 million
and $3.8 million, respectively.
Gain
on disposal of business
For
the nine-months ended September 30, 2022, gain on disposal of business was $0.9 million due to the sale of part of our Italian Gaming
operations (see Gaming key events for more information).
Other
finance income
Other
finance income for the three and nine months ended September 30, 2022, were credits of $0.3 million and $0.9 million, respectively. This
compares to a $0.3 million credit and a $5.5 million credit for the three and nine months ended September 30, 2021. The year-on-year
movements relate solely to the retranslation of the principal balance of our senior debt facilities in place in the previous year.
Income
tax expense
Our
effective tax rate for the three and nine months ended September 30, 2022 was 1.0% and 2.0%, respectively, compared to 1.1% and
0.3% for the three and nine months ended September 30, 2021, respectively.
Net
Income/ (loss)
During
the three-month period, net income was $10.2 million, a decrease of $13.2 million year-over-year, primarily due to a decrease in change
in fair value of the warrant liability ($17.3 million), partly offset by the increase in net operating income ($4.0 million).
During
the nine-month period, net income was $19.2 million, an increase of $56.4 million year-over-year, primarily due to an increase in net
operating income ($47.6 million), a decrease in interest expense, net ($17.2 million), the change in fair value of warrant liability
($4.1 million) and a decrease in other finance income ($4.6 million).
Segment
Results (for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021)
Gaming
We
generate revenue from our Gaming segment through the sales and rentals of our gaming machines. We receive rental fees for machines, typically
in conjunction with long-term contracts, on both a participation and fixed fee basis. Our participation contracts are typically structured
to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays
and any relevant regulatory levies) from gaming terminals placed in our customers’ facilities. Typically, we recognize revenue
from these arrangements on a daily basis over the term of the contract.
Revenue
growth for our Gaming business is principally driven by changes in (i) the number of operator customers we have, (ii) the number of Gaming
machines in operation, (iii) the net win performance of the machines and (iv) the net win percentage that we receive pursuant to our
contracts with our customers.
Gaming,
Key Performance Indicators
| |
For the Three-Month Period ended | | |
Variance | | |
For the Ninth-Month Period ended | | |
Variance | |
| |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | |
Gaming | |
2022 | | |
2021 | | |
| | |
% | | |
2022 | | |
2021 | | |
| | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
End of period installed base (# of terminals) (3) | |
| 34,737 | | |
| 32,236 | | |
| 2,501 | | |
| 7.8 | % | |
| 34,737 | | |
| 32,236 | | |
| 2,501 | | |
| 7.8 | % |
Total Gaming - Average installed base (# of terminals) (3) | |
| 34,636 | | |
| 32,204 | | |
| 2,432 | | |
| 7.6 | % | |
| 34,701 | | |
| 31,860 | | |
| 2,841 | | |
| 8.9 | % |
Participation - Average installed base (# of terminals) (3) | |
| 31,192 | | |
| 29,140 | | |
| 2,052 | | |
| 7.0 | % | |
| 31,287 | | |
| 29,295 | | |
| 1,992 | | |
| 6.8 | % |
Fixed Rental - Average installed base (# of terminals) | |
| 3,444 | | |
| 3,064 | | |
| 380 | | |
| 12.4 | % | |
| 3,414 | | |
| 2,565 | | |
| 848 | | |
| 33.1 | % |
Service Only - Average installed base (# of terminals) | |
| 16,832 | | |
| 21,439 | | |
| (4,607 | ) | |
| (21.5 | )% | |
| 17,620 | | |
| 21,564 | | |
| (3,944 | ) | |
| (18.3 | )% |
Customer Gross Win per unit per day (1) (2) (3) | |
£ | 90.9 | | |
£ | 76.5 | | |
£ | 14.4 | | |
| 18.9 | % | |
£ | 89.5 | | |
£ | 41.5 | | |
£ | 48.0 | | |
| 115.6 | % |
Customer Net Win per unit per day (1) (2) (3) | |
£ | 66.3 | | |
£ | 56.3 | | |
£ | 10.0 | | |
| 17.7 | % | |
£ | 65.5 | | |
£ | 31.2 | | |
£ | 34.2 | | |
| 109.7 | % |
Inspired Blended Participation Rate | |
| 5.6 | % | |
| 6.5 | % | |
| (0.8 | )% | |
| (12.9 | )% | |
| 5.6 | % | |
| 6.3 | % | |
| (0.6 | )% | |
| (10.0 | )% |
Inspired Fixed Rental Revenue per Gaming Machine per week (2) | |
£ | 50.8 | | |
£ | 37.7 | | |
£ | 13.1 | | |
| 34.8 | % | |
£ | 47.7 | | |
£ | 21.0 | | |
£ | 26.8 | | |
| 127.7 | % |
Inspired Service Rental Revenue per Gaming Machine per week (2) | |
£ | 4.7 | | |
£ | 4.5 | | |
£ | 0.3 | | |
| 6.0 | % | |
£ | 4.6 | | |
£ | 3.1 | | |
£ | 1.5 | | |
| 48.9 | % |
Gaming Long term license amortization (£’m) | |
£ | 1.1 | | |
£ | 1.3 | | |
£ | (0.2 | ) | |
| (16.2 | )% | |
£ | 3.4 | | |
£ | 3.8 | | |
£ | (0.4 | ) | |
| (9.4 | )% |
Number of Machine sales | |
| 783 | | |
| 1,747 | | |
| (964 | ) | |
| (55.2 | )% | |
| 1,661 | | |
| 2,625 | | |
| (964 | ) | |
| (36.7 | )% |
Average selling price per terminal | |
£ | 5,503 | | |
£ | 3,071 | | |
£ | 2,432 | | |
| 79.2 | % | |
£ | 6,674 | | |
£ | 4,141 | | |
£ | 2,533 | | |
| 61.2 | % |
(1) |
Includes
all SBG terminals in which the Company takes a participation revenue share across all territories. |
|
|
(2) |
Includes
all days of the year, including the days during which the Gaming terminals were not operating due to COVID-19 closures. |
|
|
(3)
|
Includes
circa 2,500 of lottery terminals (zero in the prior year) where the share is on handle instead of net win. |
In
the table above:
“End
of Period Installed Base” is equal to the number of deployed Gaming terminals at the end of each period that have been placed on
a participation or fixed rental basis. Gaming participation revenue, which comprises the majority of Gaming Service revenue, is directly
related to the participation terminal installed base. This is the medium by which our customers generate revenue and distribute a revenue
share to the Company. To the extent all other KPIs and certain other factors remain constant, the larger the installed base, the higher
the Company’s revenue would be for a given period. Management gives careful consideration to this KPI in terms of driving growth
across the segment. This does not include Service Only terminals.
Revenue
is derived from the performance of the installed base as described by the Gross and Net Win KPIs.
If
the End of Period Installed Base is materially different from the Average Installed Base (described below), we believe this gives an
indication as to potential future performance. We believe the End of Period Installed Base is particularly useful for assessing new customers
or markets, to indicate the progress being made with respect to entering new territories or jurisdictions.
“Total
Gaming - Average Installed Base” is the average number of deployed Gaming terminals during the period split by Participation terminals
and Fixed Rental terminals. Therefore, it is more closely aligned to revenue in the period. We believe this measure is particularly useful
for assessing existing customers or markets to provide comparisons of historical size and performance. This does not include Service
Only terminals.
“Participation
- Average Installed Base” is the average number of deployed Gaming terminals that generated revenue on a participation basis.
“Fixed
Rental - Average Installed Base” is the average number of deployed Gaming terminals that generated revenue on a fixed rental basis.
“Service
Only - Average Installed Base” is the average number of terminals that generated revenue on a Service only basis.
“Customer
Gross Win per unit per day” is a KPI used by our management to (i) assess impact on the Company’s revenue, (ii) determine
changes in the performance of the overall market and (iii) evaluate the impacts of regulatory change and our new content releases on
our customers. Customer Gross Win per unit per day is the average per unit cash generated across all Gaming terminals in which the Company
takes a participation revenue share across all territories in the period, defined as the difference between the amounts staked less winnings
to players divided by the Average Installed Base in the period, then divided by the number of days in the period.
Gaming
revenue accrued in the period is derived from Customer Gross Win accrued in the period after deducting gaming taxes (defined as a regulatory
levy paid by the Customer to government bodies) and applying the Company’s contractual revenue share percentage.
Our
management believes Customer Gross Win measures are meaningful because they represent a view of customer operating performance that is
unaffected by our revenue share percentage and allow management to (1) readily view operating trends, (2) perform analytical comparisons
and benchmarking between customers and (3) identify strategies to improve operating performance in the different markets in which we
operate.
“Customer
Net Win per unit per day” is Customer Gross Win per unit per day after giving effect to the deduction of gaming taxes.
“Inspired
Blended Participation Rate” is the Company’s average revenue share percentage across all participation terminals where revenue
is earned on a participation basis, weighted by Customer Net Win per unit per day.
“Inspired
Fixed Rental Revenue per Gaming Machine per week” is the Company’s average fixed rental amount across all fixed rental terminals
where revenue is generated on a fixed fee basis, per unit per week.
“Inspired
Service Rental Revenue per Gaming Machine per week” is the Company’s average service rental amount across all service only
rental terminals where revenue is generated on a service only fixed fee basis, per unit per week.
“Gaming
Long term license amortization” is the upfront license fee per terminal which is typically spread over the life of the terminal.
Our
overall Gaming revenue from terminals placed on a participation basis can therefore be calculated as the product of the Participation
- Average Installed Base, the Customer Net Win per unit per day, the number of days in the period, and the Inspired Blended Participation
Rate, which is equal to “Participation Revenue”.
“Number
of Machine sales” is the number of terminals sold during the period.
“Average
selling price per terminal” is the total revenue in GBP of the Gaming terminals sold divided by the “number of Machine sales”.
Gaming,
Recurring Revenue
Set
forth below is a breakdown of our Gaming recurring revenue. Gaming recurring revenue principally consists of Gaming participation revenue
and fixed rental revenue.
| |
For the Three-Month Period ended | | |
Variance | | |
For the Nine-Month Period ended | | |
Variance | |
| |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | |
(In £ millions) | |
2022 | | |
2021 | | |
| | |
% | | |
2022 | | |
2021 | | |
| | |
% | |
Gaming Recurring Revenue | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Gaming Revenue | |
£ | 20.5 | | |
£ | 20.0 | | |
£ | 0.5 | | |
| 2.7 | % | |
£ | 58.8 | | |
£ | 39.4 | | |
£ | 19.4 | | |
| 49.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Gaming Participation Revenue | |
£ | 10.8 | | |
£ | 10.0 | | |
£ | 0.8 | | |
| 7.6 | % | |
£ | 31.7 | | |
£ | 16.2 | | |
£ | 15.5 | | |
| 96.0 | % |
Gaming Other Fixed Fee Recurring Revenue | |
£ | 3.3 | | |
£ | 2.8 | | |
£ | 0.5 | | |
| 17.3 | % | |
£ | 9.6 | | |
£ | 4.6 | | |
£ | 5.0 | | |
| 108.9 | % |
Gaming Long-term license amortization | |
£ | 1.1 | | |
£ | 1.3 | | |
(£ | 0.2 | ) | |
| (18.6 | )% | |
£ | 3.4 | | |
£ | 3.8 | | |
(£ | 0.4 | ) | |
| (10.3 | )% |
Total Gaming Recurring Revenue * | |
£ | 15.1 | | |
£ | 14.1 | | |
£ | 1.0 | | |
| 7.1 | % | |
£ | 44.8 | | |
£ | 24.6 | | |
£ | 20.2 | | |
| 81.9 | % |
Gaming Recurring Revenue as a % of Total Gaming Revenue † | |
| 73.5 | % | |
| 70.5 | % | |
| 3.0 | % | |
| | | |
| 76.2 | % | |
| 62.5 | % | |
| 13.7 | % | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Gaming excluding VAT-related revenue | |
£ | 20.5 | | |
£ | 20.0 | | |
| | | |
| | | |
£ | 58.0 | | |
£ | 37.1 | | |
| | | |
| | |
Gaming Recurring Revenue as a % of Total Gaming Revenue (excluding VAT-related revenue) | |
| 73.5 | % | |
| 70.5 | % | |
| | | |
| | | |
| 77.2 | % | |
| 66.4 | % | |
| | | |
| | |
* |
Does
not reflect VAT-related revenue. |
|
|
† |
Total
Gaming Revenue for the nine-month period ended September 30, 2022 and 2021, includes £0.8 million and £2.3 million, respectively
of VAT-related revenue, which is not reflected in Gaming Recurring Revenue for that period. Excluding VAT-related revenue, Gaming
Recurring Revenue was 77% and 63%, respectively of Total Gaming Revenue for such period. For the three-month period, there was no
VAT-related revenue. |
|
|
|
Note
– For the nine-months ending September 30, 2022, there has been some recharacterization between Gaming Participation Revenue
and Other Fixed fee revenue to ensure consistency with similar items across the Group. No changes to prior year. |
In
the table above:
“Gaming
Participation Revenue” includes our share of revenue generated from (i) our Gaming terminals placed in gaming and lottery venues;
and (ii) licensing of our game content and intellectual property to third parties.
“Gaming
Other Fixed Fee Recurring Revenue” includes service revenue in which the Company earns a periodic fixed fee on a contracted basis.
“Gaming
Long term license amortization” – see the definition provided above.
“Total
Gaming Recurring Revenue” is equal to Gaming Participation Revenue plus Gaming Other Fixed Fee Recurring Revenue.
Gaming,
Service Revenue by Region
Set
forth below is a breakdown of our Gaming service revenue by geographic region. Gaming Service revenue consists principally of Gaming
participation revenue, Gaming other fixed fee revenue, Gaming long-term license amortization and Gaming other non-recurring revenue.
See “Gaming Segment Revenue” below for a discussion of gaming service revenue between the periods under review.
| |
For the Three-Month Period ended | | |
| | |
| | |
| | |
For the Nine-Month Period ended | | |
| | |
| | |
| |
| |
Sept 30, | | |
Sept 30, | | |
Variance | | |
Sept 30, | | |
Sept 30, | | |
Variance | |
(In millions) | |
2022 | | |
2021 | | |
2022 vs 2021 | | |
Total Functional Currency % | | |
2022 | | |
2021 | | |
2022 vs 2021 | | |
Total Functional Currency % | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Service Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
UK LBO | |
$ | 9.7 | | |
$ | 10.5 | | |
$ | (0.8 | ) | |
| (7.9 | )% | |
| 7.6 | % | |
$ | 29.8 | | |
$ | 19.4 | | |
$ | 10.5 | | |
| 54.0 | % | |
| 70.3 | % |
UK VAT - Related Income | |
| - | | |
| - | | |
| - | | |
| NA | | |
| NA | | |
| 1.0 | | |
| 3.1 | | |
$ | (2.1 | ) | |
| (66.9 | )% | |
| (65.5 | )% |
UK Other | |
| 3.0 | | |
| 3.0 | | |
| (0.0 | ) | |
| (0.7 | )% | |
| 16.3 | % | |
| 9.1 | | |
| 4.4 | | |
| 4.7 | | |
| 108.1 | % | |
| 129.6 | % |
Italy | |
| 0.6 | | |
| 0.9 | | |
| (0.3 | ) | |
| (32.9 | )% | |
| (21.3 | )% | |
| 1.9 | | |
| 1.2 | | |
| 0.7 | | |
| 61.8 | % | |
| 77.6 | % |
Greece | |
| 4.3 | | |
| 5.1 | | |
| (0.8 | ) | |
| (15.5 | )% | |
| (1.0 | )% | |
| 13.5 | | |
| 9.9 | | |
| 3.6 | | |
| 36.2 | % | |
| 50.1 | % |
Rest of the World | |
| 0.1 | | |
| 0.1 | | |
| (0.0 | ) | |
| (31.0 | )% | |
| (18.5 | )% | |
| 0.5 | | |
| 0.2 | | |
| 0.3 | | |
| 188.5 | % | |
| 209.8 | % |
Lotteries | |
| 1.3 | | |
| - | | |
| 1.3 | | |
| NA | | |
| NA | | |
| 3.9 | | |
| - | | |
| 3.9 | | |
| NA | | |
| NA | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Service revenue | |
$ | 19.0 | | |
$ | 19.7 | | |
$ | (0.7 | ) | |
| (3.4 | )% | |
| 13.0 | % | |
$ | 59.7 | | |
$ | 38.1 | | |
$ | 21.6 | | |
| 56.7 | % | |
| 72.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ | |
| 1.18 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| 1.26 | | |
| 1.38 | | |
| | | |
| | | |
| | |
Note:
Exchange rate in the table is calculated by dividing the USD total service revenue by the GBP total service revenue, therefore this could
be slightly different from the average rate during the period depending on timing of transactions.
Gaming,
key events
Total
Gaming Customer Gross Win per unit per day (in our functional currency, GBP) for the three-months ended September 30, 2022, increased
by £14.4, or 19%, to £90.9, and for the nine-months ended September 30, 2022, there was an increase of £48.0, or 116%,
to £89.5. The majority of the increase is driven by retail venues being closed fully during the first quarter of 2021 and part
of the second quarter as a result of COVID-19 restrictions. Another factor was our first three quarters recognizing the newly acquired
Lottery business, which includes just under 2,500 lottery terminals (zero in the prior year) where the share is on handle instead of
net win and achieves Gross Win per unit per day figures above the average of the remaining Gaming sector.
The
overall participation rate for our installed base decreased from 6.5% in the quarter ended September 30, 2021, to 5.6% in 2022. For the
nine-months ended September 30, there was a decrease of 0.6% from 6.3% in 2021 to 5.6% in 2022. The decrease was due mainly to the new
Lottery business, which delivers high gross win values at lower participation terms than the average of the remaining Gaming sector.
The Lottery business operates close to 2,500 terminals in various locations and has an agreement for the supply of these terminals until
March 9, 2035. The nine months of trading delivered $3.9 million of participation revenue split evenly over the first three quarters.
Inspired
rolled out new content across the UK LBO estate during the months of April and May 2022, which resulted in Gaming Customer Gross Win
per unit per day increasing by 2.0% from the third quarter 2021 to the third quarter 2022.
At
the end of the second quarter of 2022, Inspired secured a five-year contract extension for service and content fees with one of its three
largest UK LBO customers.
During
the three-month (nine-month) period, Inspired upgraded its Non-LBO UK gaming estate with the installation of 180 (over 380) “Flex”
and 240 (over 540) “Prismatic” terminals through a combination of outright sales and lease agreements. In the Dutch gaming
market, Inspired continued its strong relationship with a major customer, delivering outright sales of over 200 digital terminals, which
included 100 in the third quarter.
In
the UK Casino market, Inspired installed 183 “Sabre Hydra” terminals into venues which completed the full machine order of
over 200 machines with a major customer. These were split 55 in the quarter ending March 31, 2022, and 128 in the quarter ending June
30, 2022.
In
the North America market, Inspired sold 148 “Valor” terminals across a number of customers in Illinois. There has been a
consecutive increase in sales volume each quarter with the quarter ending September 30, 2022, recording 60 terminal sales. The total
sales since launch in December 2019 is now over 850 terminals.
Inspired
secured its second machine order from Western Canada Lottery Corporation (WCLC), our second jurisdiction in North America. Inspired is
in the process of delivering 820 “Valor Clamshell” terminals in the fourth quarter 2022. As part of the agreement, Inspired
will take back the original 100 “Valor” terminals to redeploy in another North American territory.
During
the first half of 2022, Inspired delivered the final 308 “Valor” terminals of a total 500-terminal award to OPAP (Greece)
which include an upfront license fee. The terminals continue to be deployed throughout the year and take Inspired’s total contracted
number of machines to 9,440. Inspired rolled out new content during the third quarter, which has resulted in double-digit growth in Gaming
Customer Gross Win per unit per day when compared to the second quarter.
In
the Italian market, Inspired has transitioned to a content and platform supplier only model beginning January 1, 2022, driving significant
operating expense savings. Inspired sold a large portion of its business to a major machine operator, including customer contracts and
“in country” staff.
Gaming,
Results of Operations
| |
For
the Three-Month Period ended | | |
Variance | | |
For
the Nine-Month Period ended | | |
Variance | |
(In millions) | |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | |
| |
2022 | | |
2021 | | |
Variance
Attributable to Currency Movement | | |
Variance
on a Functional currency basis | | |
Total
Functional Currency Variance % | | |
Total
Reported Variance % | | |
2022 | | |
2021 | | |
Variance
Attributable to Currency Movement | | |
Variance
on a Functional currency basis | | |
Total
Functional Currency Variance % | | |
Total
Reported Variance % | |
Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Service | |
$ | 19.0 | | |
$ | 19.7 | | |
$ | (3.3 | ) | |
$ | 2.6 | | |
| 13.0 | % | |
| (3.4 | )% | |
$ | 59.7 | | |
$ | 38.1 | | |
$ | (6.1 | ) | |
$ | 27.7 | | |
| 72.6 | % | |
| 56.7 | % |
Product | |
| 5.1 | | |
| 7.9 | | |
$ | (0.9 | ) | |
$ | (1.8 | ) | |
| (23.1 | )% | |
| (34.8 | )% | |
| 14.0 | | |
| 16.5 | | |
$ | (1.6 | ) | |
| (0.9 | ) | |
| (5.2 | )% | |
| (14.8 | )% |
Total revenue | |
| 24.1 | | |
| 27.6 | | |
| (4.2 | ) | |
| 0.8 | | |
| 2.7 | % | |
| (12.4 | )% | |
| 73.7 | | |
| 54.6 | | |
| (7.6 | ) | |
| 26.8 | | |
| 49.1 | % | |
| 35.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Service | |
| (4.4 | ) | |
| (4.1 | ) | |
$ | 0.9 | | |
| (1.2 | ) | |
| 29.1 | % | |
| 8.3 | % | |
| (13.5 | ) | |
| (8.3 | ) | |
$ | 1.5 | | |
| (6.7 | ) | |
| 80.4 | % | |
| 62.6 | % |
Cost of Product | |
| (3.5 | ) | |
| (4.2 | ) | |
$ | 0.5 | | |
| 0.1 | | |
| (2.9 | )% | |
| (16.1 | )% | |
| (9.3 | ) | |
| (9.5 | ) | |
$ | 1.1 | | |
| (0.9 | ) | |
| 9.1 | % | |
| (2.4 | )% |
Total cost of sales | |
| (7.9 | ) | |
| (8.3 | ) | |
| 1.4 | | |
| (1.1 | ) | |
| 13.0 | % | |
| (4.0 | )% | |
| (22.8 | ) | |
| (17.8 | ) | |
| 2.6 | | |
| (7.6 | ) | |
| 42.3 | % | |
| 28.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| (7.4 | ) | |
| (8.4 | ) | |
$ | 1.3 | | |
| (0.3 | ) | |
| 3.5 | % | |
| (11.5 | )% | |
| (21.9 | ) | |
| (19.2 | ) | |
$ | 2.4 | | |
| (5.1 | ) | |
| 26.4 | % | |
| 14.5 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| (0.4 | ) | |
| (0.5 | ) | |
$ | 0.1 | | |
| (0.0 | ) | |
| 1.8 | % | |
| (13.2 | )% | |
| (1.0 | ) | |
| (1.1 | ) | |
$ | 0.1 | | |
| (0.0 | ) | |
| 4.1 | % | |
| (5.7 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Acquisition and integration related transaction expenses | |
| - | | |
| - | | |
| - | | |
| - | | |
| N/A | | |
| N/A | | |
| (0.1 | ) | |
| - | | |
$ | 0.0 | | |
| (0.1 | ) | |
| N/A | | |
| N/A | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| (3.9 | ) | |
| (5.3 | ) | |
$ | 0.6 | | |
| 0.8 | | |
| (14.2 | )% | |
| (26.4 | )% | |
| (12.8 | ) | |
| (17.7 | ) | |
$ | 1.3 | | |
| 3.6 | | |
| (20.5 | )% | |
| (27.7 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net operating Income (Loss) | |
$ | 4.5 | | |
$ | 5.1 | | |
$ | (0.8 | ) | |
$ | 0.1 | | |
| 2.3 | % | |
| (13.0 | )% | |
$ | 15.1 | | |
$ | (1.2 | ) | |
$ | (1.2 | ) | |
$ | 17.6 | | |
| (1515.2 | )% | |
| (1412.6 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Profit on disposal of trade & assets | |
| - | | |
| - | | |
| - | | |
| - | | |
| N/A | | |
| N/A | | |
| 0.9 | | |
| - | | |
$ | (0.1 | ) | |
| 0.9 | | |
| N/A | | |
| N/A | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income (Loss) | |
$ | 4.5 | | |
$ | 5.1 | | |
$ | (0.8 | ) | |
$ | 0.1 | | |
| 2.3 | % | |
| (13.0 | )% | |
$ | 16.0 | | |
$ | (1.2 | ) | |
$ | (1.3 | ) | |
$ | 18.5 | | |
| (1595.8 | )% | |
| (1486.6 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ | |
| 1.18 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | | |
| 1.25 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | |
Note:
Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly
different from the average rate during the period depending on timing of transactions.
All
variances discussed in the Gaming results below are on a functional currency (at constant rate) basis, which excludes the impact of any
changes in foreign currency exchange rates.
Gaming
Revenue
During
the three and nine-month period, Gaming revenue increased by $0.8 million, or 2.7%, and $26.8 million, or 49%, respectively. For the
three-month period, $2.6 million was driven by Service revenue, offset by the $1.8 million decrease in Product revenue. For the nine-month
period, $27.7 million was driven by Service revenue, offset by $0.9 million decrease in Product revenue.
For
the three-month period, the increase in Gaming Service revenue was driven by $1.3 million from the UK market and $1.5 million from
the addition of the new Lotteries market. Greece recurring revenue increased by $0.2 million, but this was offset by $0.2 million
reduction in license amortization.
For
the nine-month period, the increase in Gaming Service revenue was driven by $19.2 million from the UK market, $5.0 million from the Greek
market and $0.9 million from the Italian market, as all venues were open for the entire period compared to the prior period when the
majority of the UK estate, all Greece retail venues and all Italy retail venues were shut for some of the period and had restrictions
for the remaining. $4.3 million of the increase was due to the addition of the new Lotteries market and $0.3 million from the Rest of
the World. This was offset by lower VAT-related revenue of $2.1 million.
Product
revenue decreased in the three-month period by $1.8 million; $1.2 million of this decrease was due to the Italy sale in the prior period
and $0.6 million was due to lower North American sales.
Product
revenue decreased in the nine-month period by $0.9 million. This decrease was primarily driven by lower Product sales of $1.7 million
in Italy and lower Product sales in North America of $2.6 million, partly offset by $3.6 million of UK sales.
Gaming
Operating Income
Operating
income decreased during the three-month period by $0.1 million and increased for the nine-month period by $17.6 million.
For
the three-month period, the decrease in Operating income was primarily due to an increase in Cost of sales of $1.1 million, $0.5
million driven by new Lottery market, and an increase of $0.3 million in SG&A driven by additional headcount costs. This was
partially offset by the increase in revenues of $0.8 million, and a decrease in depreciation of $0.8 million primarily due to the
decrease in machine depreciation as machines become fully depreciated and software amortization, as software was fully
amortized.
The
increase in Operating income in the nine-month period was primarily due to the increase in revenues of $26.8 million and decrease in
depreciation of $3.6 million, primarily due to the decrease in software amortization as software became fully amortized. This was partially
offset by an increase of Cost of sales of $7.6 million and increase of $5.1 million in SG&A, as staff returned from furlough or to
full salary.
Gaming
Net Income
In
the quarter ending September 30, 2022, Net income and net Operating income were the same.
For
the nine-month period, Net income increased by $18.5 million, from a loss of $1.2 million to an income of $16.0 million. This was due
to the increase in Operating income and a $0.9 million profit from the disposal of trade and assets from the sale of part of the Italian
VLT operations (see Gaming key events for more information).
Virtual
Sports
We
generate revenue from our Virtual Sports segment through the licensing of our products. We receive fees in exchange for the licensing
of our products, typically on a long-term contract basis, on a participation basis. Our participation contracts are typically structured
to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays
and other promotional costs and any relevant regulatory levies) from Virtual Sports content placed on our customers’ websites or
in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue
growth for our Virtual Sports segment is principally driven by the number of customers we have, the net win performance of the games
and the net win percentage that we receive pursuant to our contracts with our customers.
Virtual
Sports, Key Performance Indicators
| |
For the Three-Month Period ended | | |
Variance | | |
For the Nine-Month Period ended | | |
Variance | |
| |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | |
Virtuals | |
2022 | | |
2021 | | |
| | |
% | | |
2022 | | |
2021 | | |
| | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
No. of Live Customers at the end of the period | |
| 64 | | |
| 61 | | |
| 3 | | |
| 4.9 | % | |
| 64 | | |
| 61 | | |
| 3 | | |
| 4.9 | % |
Average No. of Live Customers | |
| 63 | | |
| 60 | | |
| 3 | | |
| 5.6 | % | |
| 62 | | |
| 60 | | |
| 3 | | |
| 4.6 | % |
Total Revenue (£’m) | |
£ | 12.5 | | |
£ | 7.6 | | |
£ | 4.8 | | |
| 63.0 | % | |
£ | 32.3 | | |
£ | 18.1 | | |
£ | 14.2 | | |
| 78.5 | % |
Total Revenue £’m - Retail | |
£ | 2.2 | | |
£ | 2.6 | | |
(£ | 0.4 | ) | |
| (13.7 | )% | |
£ | 7.0 | | |
£ | 4.7 | | |
£ | 2.4 | | |
| 50.4 | % |
Total Revenue £’m - Online Virtuals | |
£ | 10.2 | | |
£ | 5.1 | | |
£ | 5.2 | | |
| 102.1 | % | |
£ | 25.2 | | |
£ | 13.4 | | |
£ | 11.8 | | |
| 88.3 | % |
In
the table above:
“No.
of Live Customers at the end of the period” and “Average No. of Live Customers” represent the number of customers from
which there is Virtual Sports revenue at the end of the period and the average number of customers from which there is Virtual Sports
revenue during the period, respectively.
“Total
Revenue (£m)” represents total revenue for the Virtual Sports segment, including recurring and upfront service revenue. Total
revenue is also divided between “Total Revenue (£m) – Retail,” which consists of revenue earned through players
wagering at Virtual Sports venues, “Total Revenue (£m) – Online Virtuals,” which consists of revenue earned through
players wagering on Virtual Sports online.
Virtual
Sports, Recurring Revenue
Set
forth below is a breakdown of our Virtual Sports recurring revenue, which consists of Retail Virtuals and Online Virtuals recurring revenue
as well as long-term license amortization. See “Virtual Sports Segment Revenue” below for a discussion of Virtual Sports
Service revenue between the periods under review.
|
|
For the Three-Month Period ended |
|
|
Variance |
|
|
For the Nine-Month Period ended |
|
|
Variance |
|
|
|
Sept 30, |
|
|
Sept 30, |
|
|
2022 vs 2021 |
|
|
Sept 30, |
|
|
Sept 30, |
|
|
2022 vs 2021 |
|
(In £ millions) |
|
2022 |
|
|
2021 |
|
|
|
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
|
|
|
% |
|
Virtual Sports Recurring Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Virtual Sports Revenue |
|
£ |
12.5 |
|
|
£ |
7.6 |
|
|
£ |
4.8 |
|
|
|
63.0 |
% |
|
£ |
32.3 |
|
|
£ |
18.1 |
|
|
£ |
14.2 |
|
|
|
78.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Revenue - Retail Virtuals |
|
£ |
2.1 |
|
|
£ |
2.4 |
|
|
(£ |
0.3 |
) |
|
|
(12.0 |
)% |
|
£ |
6.7 |
|
|
£ |
4.3 |
|
|
£ |
2.3 |
|
|
|
53.7 |
% |
Recurring Revenue - Online Virtuals |
|
£ |
10.1 |
|
|
£ |
4.7 |
|
|
£ |
5.3 |
|
|
|
11236 |
% |
|
£ |
25.0 |
|
|
£ |
12.9 |
|
|
£ |
12.2 |
|
|
|
94.6 |
% |
Total Virtual Sports Long-term license amortization |
|
£ |
0.1 |
|
|
£ |
0.2 |
|
|
(£ |
0.1 |
) |
|
|
(4315 |
)% |
|
£ |
0.4 |
|
|
£ |
0.5 |
|
|
(£ |
0.1 |
) |
|
|
(23.0 |
)% |
Total Virtual Sports Recurring Revenue |
|
£ |
12.3 |
|
|
£ |
7.4 |
|
|
£ |
4.9 |
|
|
|
66.8 |
% |
|
£ |
32.1 |
|
|
£ |
17.8 |
|
|
£ |
14.3 |
|
|
|
80.7 |
% |
Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue |
|
|
99.0 |
% |
|
|
96.7 |
% |
|
|
2.3 |
% |
|
|
|
|
|
|
99.6 |
% |
|
|
98.3 |
% |
|
|
1.2 |
% |
|
|
|
|
“Recurring
Revenue” includes our share of revenue generated from (i) our Virtual Sports products placed with operators; (ii) licensing our
game content and intellectual property to third parties; and (iii) our games on third-party online gaming platforms that are interoperable
with our game servers.
“Virtual
Sports Long term license amortization” is the upfront license fee which is typically spread over the life of the contract.
Virtual
Sports, key events
During
the nine months ended September 30, 2022, we launched Virtual Horse racing with the DC Lottery into their lottery locations.
New
contracts were signed with Scientific Games for Virtual Sports content to be sold to Netherlands Lottery (NLO), Goldbet covering the
provision of Virtual Sports into both their retail and online channels in Italy and a contract for Class 4 VLT games in Ladbrokes Belgium
retail.
We
signed a long-term extension to our contract with BetFred covering the provision of Virtual Sports into their retail LBO estate in the
UK. In addition, we signed contract term extensions with Bet Victor, Sisal (Italy), Niké, spol. s r.o (Slovakia) and additional
territories were added to our contract with Kaizen Gaming, planned to go live in the quarter ending December 31, 2022.
A
new Virtuals Plug and Play contract was signed with Morocco Lottery and launched, plus an extension to the retail contract.
In
the three-month period, we launched Virtuals Women’s Soccer to coincide with UEFA Women’s Euro 2022. We also
launched Matchday Ultra 2 and Soccer Ultra 2 with SNAI (Italy) retail and online, and optimized OPAP retail schedule increasing the frequency
of events and added product enhancements.
Virtual
Sports, Results of Operations
| |
For
the Three-Month Period ended | | |
Variance | | |
For
the Nine-Month Period ended | | |
Variance | |
(In millions) | |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | |
| |
2022 | | |
2021 | | |
Variance
Attributable to Currency Movement | | |
Variance
on a Functional currency basis | | |
Total
Functional Currency Variance % | | |
Total
Reported Variance % | | |
2022 | | |
2021 | | |
Variance
Attributable to Currency Movement | | |
Variance
on a Functional currency basis | | |
Total
Functional Currency Variance % | | |
Total
Reported Variance % | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Service Revenue | |
$ | 14.6 | | |
$ | 10.5 | | |
$ | (2.5 | ) | |
$ | 6.6 | | |
| 63.0 | % | |
| 39.0 | % | |
$ | 40.2 | | |
$ | 25.0 | | |
$ | (4.4 | ) | |
$ | 19.6 | | |
| 78.5 | % | |
| 60.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Service | |
| (0.5 | ) | |
| (0.5 | ) | |
| 0.1 | | |
| (0.1 | ) | |
| 11.9 | % | |
| (4.4 | )% | |
| (1.7 | ) | |
| (1.3 | ) | |
| 0.2 | | |
| (0.6 | ) | |
| 43.4 | % | |
| 30.4 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| (1.6 | ) | |
| (1.4 | ) | |
| 0.1 | | |
| (0.3 | ) | |
| 17.1 | % | |
| 14.2 | % | |
| (4.6 | ) | |
| (5.2 | ) | |
| 0.4 | | |
| 0.2 | | |
| (4.3 | )% | |
| (12.3 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| (0.2 | ) | |
| (0.3 | ) | |
| 0.0 | | |
| 0.0 | | |
| (11.3 | )% | |
| (24.4 | )% | |
| (0.5 | ) | |
| (0.5 | ) | |
| 0.1 | | |
| (0.1 | ) | |
| 19.6 | % | |
| 7.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| (0.7 | ) | |
| (0.7 | ) | |
| 0.1 | | |
| (0.1 | ) | |
| 17.1 | % | |
| (0.2 | )% | |
| (2.0 | ) | |
| (2.5 | ) | |
| 0.2 | | |
| 0.4 | | |
| (14.6 | )% | |
| (22.7 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net operating Income (Loss) | |
$ | 11.6 | | |
$ | 7.6 | | |
$ | (2.2 | ) | |
$ | 6.2 | | |
| 83.6 | % | |
| 52.5 | % | |
$ | 31.4 | | |
$ | 15.5 | | |
$ | (3.6 | ) | |
$ | 19.6 | | |
| 126.9 | % | |
| 103.4 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ | |
| 1.18 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | | |
| 1.25 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | |
Note:
Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly
different from the average rate during the period depending on timing of transactions.
All
variances discussed in the Virtual Sports results below are on a functional currency (at constant rate) basis, which excludes the impact
of any changes in foreign currency exchange rates.
Virtual
Sports revenue
During
the three- and nine-month periods, revenue increased by $6.6 million, or 63%, and $19.6 million, or 79%, respectively. These increases
were driven by $7.1 million and $16.3 million increases in Online Virtuals, respectively, primarily driven by the growth from our existing
online customers along with expanding jurisdictions, as well as increases in Retail Virtuals of $3.3 million, in the nine-month
period due to retail venues being open for the whole of the period compared to the prior period.
Virtual
Sports operating income
Operating
income increased by $6.2 million during the three-month period and by $19.6 million in the nine-month period.
The
increases in the periods were primarily due to the increase in revenue of $6.6 million in the three-month period and $19.6 million in
the nine-month period.
Interactive
We
generate revenue from our Interactive segment through the licensing of our products. Typically, we receive fees in exchange for the licensing
of our products, on a long-term contract basis, on a participation basis. Our participation contracts are usually structured to pay us
a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and other
promotional costs and any relevant regulatory levies) from Interactive content placed on our customers’ websites. Typically, we
recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue
growth for our Interactive segment is principally driven by the number of customers we have, the number of live games, the net win performance
of the games and the net win percentage that we receive pursuant to our contracts with our customers.
Interactive,
Key Performance Indicators
| |
For the Three-Month Period ended | | |
Variance | | |
For the Nine-Month Period ended | | |
Variance | |
| |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | |
Interactive | |
2022 | | |
2021 | | |
| | |
% | | |
2022 | | |
2021 | | |
| | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
No. of Live Customers at the end of the period | |
| 125 | | |
| 91 | | |
| 34 | | |
| 37.4 | % | |
| 125 | | |
| 91 | | |
| 34 | | |
| 37.4 | % |
Average No. of Live Customers | |
| 124 | | |
| 90 | | |
| 34 | | |
| 37.9 | % | |
| 117 | | |
| 87 | | |
| 30 | | |
| 34.7 | % |
No. of Live Games at the end of the period | |
| 262 | | |
| 226 | | |
| 36 | | |
| 15.9 | % | |
| 262 | | |
| 226 | | |
| 36 | | |
| 15.9 | % |
Average No. of Live Games | |
| 259 | | |
| 224 | | |
| 36 | | |
| 15.9 | % | |
| 249 | | |
| 213 | | |
| 36 | | |
| 17.0 | % |
Total Revenue (£’m) | |
£ | 4.9 | | |
£ | 4.4 | | |
£ | 0.5 | | |
| 10.3 | % | |
£ | 13.4 | | |
£ | 12.3 | | |
£ | 1.1 | | |
| 9.0 | % |
In
the table above:
“No.
of Live Customers at the end of the period” and “Average No. of Live Customers” represent the number of customers from
which there is Interactive revenue at the end of the period and the average number of customers from which there is Interactive revenue
during the period, respectively.
“No.
of Live Games at the end of the period” and “Average No. of Live Games” represents the number of games from which there
is Interactive revenue at the end of the period and the average number of games from which there is Interactive revenue during the period,
respectively.
“Total
Revenue (£m)” represents total revenue for the Interactive segment, including recurring and upfront service revenue.
Interactive,
Recurring Revenue
Set
forth below is a breakdown of our Interactive recurring revenue which consists principally of Interactive participation revenue. See
“Interactive Segment Revenue” below for a discussion of Interactive service revenue between the periods under review.
| |
For the Three-Month Period ended | | |
Variance | | |
For the Nine-Month Period ended | | |
Variance | |
| |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | |
(In £ millions) | |
2022 | | |
2021 | | |
| | |
% | | |
2022 | | |
2021 | | |
| | |
% | |
Interactive Recurring Revenue | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Interactive Revenue | |
£ | 4.9 | | |
£ | 4.4 | | |
£ | 0.5 | | |
| 10.3 | % | |
£ | 13.4 | | |
£ | 12.3 | | |
£ | 1.1 | | |
| 9.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Recurring Revenue - Interactive | |
£ | 4.9 | | |
£ | 4.4 | | |
£ | 0.5 | | |
| 10.3 | % | |
£ | 13.4 | | |
£ | 12.3 | | |
£ | 1.1 | | |
| 9.0 | % |
Interactive Recurring Revenue as a Percentage of Total Interactive Revenue | |
| 100.0 | % | |
| 100.0 | % | |
| 0.0 | % | |
| | | |
| 100.0 | % | |
| 100.0 | % | |
| 0.0 | % | |
| | |
Interactive,
key events
During
the nine-month period ended September 30, 2022, we undertook 30 new brand launches, 23 during the first half of 2022 and seven
during the third quarter of 2022. We expanded territories with Bet365, BetMGM and Gamesys in Ontario, along with DraftKings in New
Jersey and Connecticut and Rush Street Interactive in Michigan and Pennsylvania. Additional brands are expected to launch in
Pennsylvania in the fourth quarter.
We
deployed 27 new games in the nine-month period, 20 new games in the first half of the year, including “Anubis Gold”, “Big
Scary Fortune”, “Big Egyptian Fortune” and “Big Wheel Bonus” and 6 new games in the third quarter, including
“Anubis Gold” and “Big Scary Fortune”.
Loto-Quebec
launched our first iLottery title with “Pharaon Reaction” in the first half of 2022.
Interactive,
Results of Operations
| |
For
the Three-Month Period ended | | |
Variance | | |
For
the Nine-Month Period ended | | |
Variance | |
(In
millions) | |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | |
| |
2022 | | |
2021 | | |
Variance
Attributable to Currency Movement | | |
Variance
on a Functional currency basis | | |
Total
Functional Currency Variance % | | |
Total
Reported Variance % | | |
2022 | | |
2021 | | |
Variance
Attributable to Currency Movement | | |
Variance
on a Functional currency basis | | |
Total
Functional Currency Variance % | | |
Total
Reported Variance % | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Service
Revenue | |
$ | 5.7 | | |
$ | 6.1 | | |
$ | (1.0 | ) | |
$ | 0.6 | | |
| 10.3 | % | |
| (5.7 | )% | |
$ | 16.8 | | |
$ | 17.1 | | |
$ | (1.8 | ) | |
$ | 1.5 | | |
| 9.0 | % | |
| (1.4 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost
of Service | |
| (0.8 | ) | |
| (1.0 | ) | |
| 0.1 | | |
| 0.1 | | |
| (7.4 | )% | |
| (19.5 | )% | |
| (2.6 | ) | |
| (2.7 | ) | |
| 0.3 | | |
| (0.1 | ) | |
| 5.3 | % | |
| (4.3 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling,
general and administrative expenses | |
| (1.8 | ) | |
| (1.7 | ) | |
| 0.4 | | |
| (0.5 | ) | |
| 30.5 | % | |
| 4.8 | % | |
| (5.1 | ) | |
| (4.0 | ) | |
| 0.6 | | |
| (1.7 | ) | |
| 41.8 | % | |
| 27.9 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based
compensation | |
| (0.1 | ) | |
| (0.2 | ) | |
| 0.0 | | |
| 0.0 | | |
| (27.2 | )% | |
| (37.7 | )% | |
| (0.4 | ) | |
| (0.4 | ) | |
| 0.0 | | |
| (0.1 | ) | |
| 22.6 | % | |
| 10.9 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation
and amortization | |
| (0.7 | ) | |
| (0.9 | ) | |
| 0.1 | | |
| 0.1 | | |
| (9.2 | )% | |
| (22.4 | )% | |
| (2.1 | ) | |
| (2.5 | ) | |
| 0.2 | | |
| 0.2 | | |
| (6.6 | )% | |
| (15.5 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
operating Income (Loss) | |
$ | 2.3 | | |
$ | 2.3 | | |
$ | (0.3 | ) | |
$ | 0.3 | | |
| 13.9 | % | |
| 1.0 | % | |
$ | 6.6 | | |
$ | 7.5 | | |
$ | (0.7 | ) | |
$ | (0.2 | ) | |
| (2.4 | )% | |
| (11.7 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange
Rate - $ to £ | |
| 1.18 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | | |
| 1.25 | | |
| 1.39 | | |
| | | |
| | | |
| | | |
| | |
Note:
Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly
different from the average rate during the period depending on timing of transactions.
All
variances discussed in the Interactive results below are on a functional currency (at constant rate) basis, which excludes the impact
of any changes in foreign currency exchange rates.
Interactive
revenue
During
the three- and nine-month periods, revenue increased by $0.6 million and $1.5 million, respectively, primarily driven by recurring revenue
growth due to the consistent launch of new content across the estate, growth in the customer base in new, emerging and core markets and
increased promotional activity through exclusive deals with tier-one customers.
Interactive
operating income
Operating
income for the three and nine-month period increased by $0.3 million and declined by $0.2 million, respectively.
Revenue
increased in both periods; however, it was partially offset by an increase in SG&A expenses driven by the investment in the
segment to help drive revenues and for the nine-month period staff returning from furlough and to full pay ($0.5 million in the
three-month period and $1.7 million in the nine-month period, respectively).
Leisure
We
typically generate revenue from our Leisure segment through the supply of our gaming and amusement machines. We receive rental fees for
machines, typically on a long-term contract basis, on both a participation and fixed fee basis, with our newer digital pub machines typically
contracted on a fixed fee basis. Our participation contracts are usually structured to pay us a percentage of net win (defined as net
revenue to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming
terminals placed in our customers’ facilities. We generally recognize revenue from these arrangements on a daily basis over the
term of the contract.
Revenue
growth for our Leisure segment is principally driven by the number of customers we have, the number of gaming machines in operation,
the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
Leisure,
Key Performance Indicators
| |
For
the Three-Month Period ended | | |
Variance | | |
For
the Nine-Month Period ended | | |
Variance | |
| |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | |
Leisure | |
2022 | | |
2021 | | |
| | |
% | | |
2022 | | |
2021 | | |
| | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
End
of period installed base Gaming machines (# of terminals) | |
| 10,987 | | |
| 11,546 | | |
| (559 | ) | |
| (4.8 | )% | |
| 10,987 | | |
| 11,546 | | |
| (559 | ) | |
| (4.8 | )% |
Average
installed base Gaming machines (# of terminals) | |
| 10,833 | | |
| 11,548 | | |
| (715 | ) | |
| (6.2 | )% | |
| 10,977 | | |
| 11,626 | | |
| (649 | ) | |
| (5.6 | )% |
End
of period installed base Other (# of terminals) | |
| 4,745 | | |
| 6,989 | | |
| (2,244 | ) | |
| (32.1 | )% | |
| 4,745 | | |
| 6,989 | | |
| (2,244 | ) | |
| (32.1 | )% |
Average
installed base Other (# of terminals) | |
| 4,696 | | |
| 7,062 | | |
| (2,366 | ) | |
| (33.5 | )% | |
| 5,248 | | |
| 7,134 | | |
| (1,886 | ) | |
| (26.4 | )% |
Pub
Digital Gaming Machines - Average installed base (# of terminals) | |
| 6,198 | | |
| 6,238 | | |
| (40 | ) | |
| (0.6 | )% | |
| 6,209 | | |
| 5,978 | | |
| 231 | | |
| 3.9 | % |
Pub
Analogue Gaming Machines - Average installed base (# of terminals) | |
| 1,419 | | |
| 1,969 | | |
| (549 | ) | |
| (27.9 | )% | |
| 1,479 | | |
| 2,146 | | |
| (666 | ) | |
| (31.1 | )% |
MSA
and Bingo Gaming Machines - Average installed base (# of terminals)(1) | |
| 3,216 | | |
| 3,085 | | |
| 131 | | |
| 4.2 | % | |
| 3,208 | | |
| 3,239 | | |
| (31 | ) | |
| (0.9 | )% |
Inspired
Leisure Revenue per Gaming Machine per week | |
£ | 63.2 | | |
£ | 60.4 | | |
£ | 2.9 | | |
| 4.7 | % | |
£ | 63.5 | | |
£ | 28.3 | | |
£ | 35.2 | | |
| 124.5 | % |
Inspired
Pub Digital Revenue per Gaming Machine per week | |
£ | 68.3 | | |
£ | 57.5 | | |
£ | 10.8 | | |
| 18.8 | % | |
£ | 68.5 | | |
£ | 27.8 | | |
£ | 40.7 | | |
| 146.2 | % |
Inspired
Pub Analogue Revenue per Gaming Machine per week | |
£ | 37.3 | | |
£ | 37.2 | | |
£ | 0.1 | | |
| 0.3 | % | |
£ | 37.8 | | |
£ | 16.8 | | |
£ | 21.0 | | |
| 125.2 | % |
Inspired
MSA and Bingo Revenue per Gaming Machine per week | |
£ | 92.5 | | |
£ | 83.2 | | |
£ | 9.3 | | |
| 11 | % | |
£ | 92.0 | | |
£ | 37.8 | | |
£ | 54.2 | | |
| 143.4 | % |
Inspired
Other Revenue per Machine per week | |
£ | 19.8 | | |
£ | 19.8 | | |
(£ | 0.0 | ) | |
| (0.2 | )% | |
£ | 19.7 | | |
£ | 8.2 | | |
£ | 11.6 | | |
| 141.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
Holiday Parks Revenue (Gaming and Non Gaming) (£’m) | |
£ | 13.6 | | |
£ | 12.5 | | |
£ | 1.1 | | |
| 8.6 | % | |
£ | 25.0 | | |
£ | 15.8 | | |
£ | 9.3 | | |
| 59 | % |
(1) |
Motorway
Service Area machines |
In
the table above:
“End
of period installed base Gaming” and “Average installed base Gaming” represent the number of gaming machines installed
(excluding Holiday Park machines) that are Category B and Category C only, from which there is participation or rental revenue at the
end of the period or as an average over the period.
“End
of period installed base Other” and “Average installed base Other” represent the number of all other category machines
installed (excluding Holiday Park machines) from which there is participation or rental revenue at the end of the period or as an average
over the period.
“Revenue
per machine unit per week” represents the average weekly participation or rental revenue recognized during the period.
Leisure,
Recurring Revenue
Set
forth below is a breakdown of our Leisure recurring revenue which consists principally of Leisure participation revenue and Leisure other
fixed fee revenue. See “Leisure Segment Revenue” below for a discussion of leisure service revenue between the periods under
review.
| |
For the Three-Month Period ended | | |
Variance | | |
For the Nine-Month Period ended | | |
Variance | |
| |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022 vs 2021 | |
(In £ millions) | |
2022 | | |
2021 | | |
| | |
% | | |
2022 | | |
2021 | | |
| | |
% | |
Leisure Recurring Revenue | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Leisure Revenue | |
£ | 25.7 | | |
£ | 24.2 | | |
£ | 1.5 | | |
| 6.2 | % | |
£ | 61.1 | | |
£ | 32.7 | | |
£ | 28.4 | | |
| 86.9 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Leisure Recurring Revenue | |
£ | 25.2 | | |
£ | 23.4 | | |
£ | 1.8 | | |
| 7.8 | % | |
£ | 59.5 | | |
£ | 31.0 | | |
£ | 28.5 | | |
| 91.8 | % |
Leisure Recurring Revenue as a Percentage of Total Leisure Revenue | |
| 98.1 | % | |
| 96.6 | % | |
| 1.5 | % | |
| | | |
| 97.5 | % | |
| 95.0 | % | |
| 2.5 | % | |
| | |
Leisure,
key events
The quarter ending September 30, 2022 is peak season
for the Holiday Parks business. In addition after the quarter end, we successfully added another Butlins site in January 2023 making Inspired
the sole supplier of amusement and gaming machines for Butlins for the next seven years, and we secured a new five-year deal with Haven.
In
the Pubs sector, we have been reappointed as a supplier to Marston’s for a further four years and divested our prize vend assets
in the estate to allow focus on core gaming products with increased margins. This is the reason for the decline in Other installed base
year-on-year.
‘Slots
O Luck Rainbow Gold Free Spins’, ‘Bonus Fruits Free Spins’ and ‘Always Hot Deluxe’ were deployed across
the estate in the quarter, demonstrating our commitment to leveraging Inspired’s successful game portfolio for the pub sector.
Leisure,
Results of Operations
| |
For
the Three-Month Period ended | | |
Variance | | |
For
the Nine-Month Period ended | | |
Variance | |
(In
millions) | |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | | |
Sept 30, | | |
Sept 30, | | |
2022
vs 2021 | |
| |
2022 | | |
2021 | | |
Variance
Attributable to Currency Movement | | |
Variance
on a Functional currency basis | | |
Total
Functional Currency Variance % | | |
Total
Reported Variance % | | |
2022 | | |
2021 | | |
Variance
Attributable to Currency Movement | | |
Variance
on a Functional currency basis | | |
Total
Functional Currency Variance % | | |
Total
Reported Variance % | |
Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Service | |
$ | 29.9 | | |
$ | 32.4 | | |
$ | (5.0 | ) | |
$ | 2.4 | | |
| 7.4 | % | |
| (7.9 | )% | |
$ | 74.3 | | |
$ | 43.1 | | |
$ | (8.2 | ) | |
$ | 39.4 | | |
| 91.5 | % | |
| 72.5 | % |
Product | |
| 0.6 | | |
| 1.0 | | |
| (0.0 | ) | |
| (0.4 | ) | |
| (35.7 | )% | |
| (40.3 | )% | |
| 1.8 | | |
| 2.1 | | |
| (0.2 | ) | |
| (0.1 | ) | |
| (7.0 | )% | |
| (15.7 | )% |
Total
revenue | |
| 30.5 | | |
| 33.4 | | |
| (5.0 | ) | |
| 2.1 | | |
| 6.2 | % | |
| (8.8 | )% | |
| 76.1 | | |
| 45.2 | | |
| (8.4 | ) | |
| 39.3 | | |
| 86.9 | % | |
| 68.4 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost
of Sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost
of Service | |
| (8.5 | ) | |
| (8.2 | ) | |
| 1.5 | | |
| (1.8 | ) | |
| 22.1 | % | |
| 3.6 | % | |
| (19.9 | ) | |
| (11.6 | ) | |
| 2.3 | | |
| (10.6 | ) | |
| 91.8 | % | |
| 71.7 | % |
Cost
of Product | |
| (0.4 | ) | |
| (0.5 | ) | |
| 0.0 | | |
| 0.1 | | |
| (18.5 | )% | |
| (23.8 | )% | |
| (1.1 | ) | |
| (1.1 | ) | |
| 0.1 | | |
| (0.1 | ) | |
| 7.3 | % | |
| (0.5 | )% |
Total
cost of sales | |
| (8.9 | ) | |
| (8.7 | ) | |
| 1.5 | | |
| (1.7 | ) | |
| 19.4 | % | |
| 1.9 | % | |
| (21.0 | ) | |
| (12.7 | ) | |
| 2.4 | | |
| (10.7 | ) | |
| 84.1 | % | |
| 65.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling,
general and administrative expenses | |
| (11.9 | ) | |
| (11.7 | ) | |
| 2.1 | | |
| (2.2 | ) | |
| 19.0 | % | |
| 1.4 | % | |
| (35.2 | ) | |
| (23.1 | ) | |
| 3.7 | | |
| (15.8 | ) | |
| 68.7 | % | |
| 52.5 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based
compensation | |
| (0.1 | ) | |
| (0.1 | ) | |
| 0.0 | | |
| (0.0 | ) | |
| 12.5 | % | |
| (3.4 | )% | |
| (0.4 | ) | |
| (0.3 | ) | |
| 0.0 | | |
| (0.1 | ) | |
| 29.4 | % | |
| 16.5 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation
and amortization | |
| (3.1 | ) | |
| (3.9 | ) | |
| 0.5 | | |
| 0.3 | | |
| (8.1 | )% | |
| (20.5 | )% | |
| (10.3 | ) | |
| (12.2 | ) | |
| 1.1 | | |
| 0.8 | | |
| (6.3 | )% | |
| (15.6 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
operating Income (Loss) | |
| 6.5 | | |
| 9.0 | | |
$ | (0.9 | ) | |
$ | (1.6 | ) | |
| (17.5 | )% | |
| (27.5 | )% | |
| 9.2 | | |
| (3.1 | ) | |
$ | (1.1 | ) | |
$ | 13.4 | | |
| (431.8 | )% | |
| (394.1 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange
Rate - $ to £ | |
| 1.18 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | | |
| 1.25 | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | |
Note:
Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly
different from the average rate during the period depending on timing of transactions.
All
variances discussed in the Leisure results below are on a functional currency (at constant rate) basis, which excludes the impact of
any changes in foreign currency exchange rates.
Leisure
Revenue
For
the three- and nine-month period, revenue increased by $2.1 million, or 6.2%, and $39.3 million, or 87%, respectively, as our business
benefitted from no COVID-19 closures and fewer social distancing restrictions during the nine-month period and growth in Service revenue
for the three-month period.
Service
revenue increased by $2.4 million and $39.4 million, respectively, driven by all markets being open for the whole of the period,
particularly Holiday parks ($1.5 million), Motorway service areas ($0.4 million) and Bingo Halls ($0.3 million) for the three-month
period and for the nine-month period, Pubs ($15.3 million), Holiday parks ($12.8 million), Motorway service areas ($7.4 million) and Bingo Halls ($2.3 million).
Leisure
Operating Income/ (Loss)
Operating
income for the three-month period reduced by $1.6 million, from income of $9.0 million to income of $6.5 million. This was primarily
due to an increase in Cost of sales ($1.7 million) driven by Holiday Parks due to inflation and GBP weakness increasing the cost of
parts and prizes for our terminals, and SG&A expenses ($2.2 million), due to an increase in staff cost.
Operating
income for the nine-month period improved by $13.4 million, from a loss of $3.1 million to income of $9.2 million. This was primarily
due to the increase in revenue as venues reopened and COVID-19 restrictions were removed, as well as a reduction in depreciation and
amortization of $0.8 million. This was partially offset by increases in Cost of sales ($10.7 million) and SG&A expenses ($15.8 million),
due to staff returning from furlough and to full pay and in the later months from the increase in the UK national living wage.
Non-GAAP
Financial Measures
We
use certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA, to analyze our operating performance. We use these financial
measures to manage our business on a day-to-day basis. We believe that these measures are also commonly used in our industry to measure
performance. For these reasons, we believe that these non-GAAP financial measures provide expanded insight into our business, in addition
to standard U.S. GAAP financial measures. There are no specific rules or regulations for defining and using non-GAAP financial measures,
and as a result the measures we use may not be comparable to measures used by other companies, even if they have similar labels. The
presentation of non-GAAP financial information should not be considered in isolation from, or as a substitute for, or superior to, financial
information prepared and presented in accordance with U.S. GAAP. You should consider our non-GAAP financial measures in conjunction with
our U.S. GAAP financial measures.
We
define our non-GAAP financial measures as follows:
EBITDA
is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense.
Adjusted
EBITDA is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income
tax expense, and other additional exclusions and adjustments. Such additional excluded amounts include stock-based compensation
U.S. GAAP charges where the associated liability is expected to be settled in stock, and changes in the value of earnout liabilities
and income and expenditure in relation to legacy portions of the business (being those portions where trading no longer occurs) including
closed defined benefit pension schemes. Additional adjustments are made for items considered outside the normal course of business, including
(1) restructuring costs, which include charges attributable to employee severance, management changes, restructuring, dual running costs,
costs related to facility closures and integration costs, (2) merger and acquisition costs and (3) gains or losses not in the ordinary
course of business. This does not include any adjustments related to COVID-19.
We
believe Adjusted EBITDA, when considered along with other performance measures, is a particularly useful performance measure, because
it focuses on certain operating drivers of the business, including sales growth, operating costs, selling and administrative expense
and other operating income and expense. We believe Adjusted EBITDA can provide a more complete understanding of our operating results
and the trends to which we are subject, and an enhanced overall understanding of our financial performance and prospects for the future.
Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income or loss,
because it does not take into account certain aspects of our operating performance (for example, it excludes non-recurring gains and
losses which are not deemed to be a normal part of underlying business activities). Our use of Adjusted EBITDA may not be comparable
to the use by other companies of similarly termed measures. Management compensates for these limitations by using Adjusted EBITDA as
only one of several measures for evaluating our operating performance. In addition, capital expenditures, which affect depreciation and
amortization, interest expense, and income tax benefit (expense), are evaluated separately by management.
Functional
Currency at Constant rate. Currency impacts discussed have been calculated as the current-period average GBP: USD rate less the
equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining
difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied
by the prior-period average GBP: USD rate, as a proxy for functional currency at constant rate movement.
Currency
Movement represents the difference between the results in our reporting currency (USD) and the results on a functional currency
(at constant rate) basis.
Reconciliations
from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Loss, to Adjusted EBITDA are shown below.
Reconciliation
to Adjusted EBITDA by segment for the Three and Nine Months ended September 30, 2022
| |
For the Three-Month Period ended | | |
For the Nine-Month Period ended | |
| |
Sept 30, | | |
Sept 30, | |
(In millions) | |
2022 | | |
2022 | |
| |
Total | | |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate | | |
Total | | |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate | |
Net Income/ (loss) | |
$ | 10.2 | | |
$ | 4.5 | | |
$ | 11.6 | | |
$ | 2.3 | | |
$ | 6.5 | | |
$ | (14.7 | ) | |
$ | 19.2 | | |
$ | 16.0 | | |
$ | 31.4 | | |
$ | 6.6 | | |
$ | 9.2 | | |
$ | (44.0 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Items Relating to Legacy Activities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pension charges (1) | |
| 0.2 | | |
| | | |
| | | |
| | | |
| | | |
| 0.2 | | |
$ | 0.6 | | |
| | | |
| | | |
| | | |
| | | |
| 0.6 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Items outside the normal course of business: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Acquisition and integration related transaction expenses (2) | |
| 0.1 | | |
| | | |
| | | |
| | | |
| | | |
| 0.1 | | |
$ | 0.3 | | |
| 0.1 | | |
| | | |
| | | |
| | | |
| 0.2 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation expense | |
| 2.5 | | |
| 0.4 | | |
| 0.2 | | |
| 0.1 | | |
| 0.1 | | |
| 1.7 | | |
$ | 7.9 | | |
| 1.0 | | |
| 0.5 | | |
| 0.4 | | |
| 0.4 | | |
| 5.6 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
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| |
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| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| 8.8 | | |
| 3.9 | | |
| 0.7 | | |
| 0.7 | | |
| 3.1 | | |
| 0.4 | | |
$ | 28.7 | | |
| 12.8 | | |
| 2.0 | | |
| 2.1 | | |
| 10.3 | | |
| 1.5 | |
Interest expense net | |
| 6.2 | | |
| | | |
| | | |
| | | |
| | | |
| 6.2 | | |
$ | 18.7 | | |
| | | |
| | | |
| | | |
| | | |
| 18.7 | |
Profit on disposal of trade & assets (5) | |
| - | | |
| - | | |
| | | |
| | | |
| | | |
| - | | |
$ | (0.9 | ) | |
| (0.9 | ) | |
| | | |
| | | |
| | | |
| - | |
Other finance expenses / (income) | |
| (0.3 | ) | |
| | | |
| | | |
| | | |
| | | |
| (0.3 | ) | |
$ | (0.9 | ) | |
| | | |
| | | |
| | | |
| | | |
| (0.9 | ) |
Income tax | |
| 0.1 | | |
| | | |
| | | |
| | | |
| | | |
| 0.1 | | |
$ | 0.4 | | |
| | | |
| | | |
| | | |
| | | |
| 0.4 | |
Adjusted EBITDA | |
$ | 27.8 | | |
$ | 8.8 | | |
$ | 12.6 | | |
$ | 3.1 | | |
$ | 9.7 | | |
$ | (6.4 | ) | |
$ | 74.0 | | |
$ | 29.0 | | |
$ | 33.9 | | |
$ | 9.1 | | |
$ | 19.9 | | |
$ | (17.9 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Adjusted EBITDA | |
£ | 23.4 | | |
£ | 7.5 | | |
£ | 10.7 | | |
£ | 2.6 | | |
£ | 8.0 | | |
(£ | 5.4 | ) | |
£ | 59.2 | | |
£ | 23.0 | | |
£ | 27.3 | | |
£ | 7.3 | | |
£ | 16.0 | | |
(£ | 14.4 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ (6) | |
| 1.18 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 1.25 | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
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| | | |
| | | |
| | | |
| | | |
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| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Adj. EBITDA Margin | |
| 37.1 | % | |
| 36.3 | % | |
| 85.8 | % | |
| 54.7 | % | |
| 31.9 | % | |
| | | |
| 35.8 | % | |
| 39.3 | % | |
| 84.3 | % | |
| 54.3 | % | |
| 26.1 | % | |
| | |
Note:
Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these
costs are not allocable and to do so would not be practical; these are shown in the Corporate category.
Reconciliation
to Adjusted EBITDA by segment for the Three and Nine Months ended September 30, 2021
| |
For the Three-Month Period ended | | |
For the Nine-Month Period ended | |
| |
Sept 30, | | |
Sept 30, | |
(In millions) | |
2021 | | |
2021 | |
| |
Total | | |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate | | |
Total | | |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate | |
Net Income/ (loss) | |
$ | 25.0 | | |
$ | 5.1 | | |
$ | 7.6 | | |
$ | 2.3 | | |
$ | 9.0 | | |
$ | 1.0 | | |
$ | (35.5 | ) | |
$ | (1.2 | ) | |
$ | 15.5 | | |
$ | 7.5 | | |
$ | (3.1 | ) | |
$ | (54.2 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Items Relating to Legacy Activities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pension charges (1) | |
| 0.2 | | |
| | | |
| | | |
| | | |
| | | |
| 0.2 | | |
| 0.6 | | |
| | | |
| | | |
| | | |
| | | |
| 0.6 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Items outside the normal course of business: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Acquisition and integration related transaction expenses (2) | |
| - | | |
| | | |
| | | |
| | | |
| | | |
| - | | |
| 1.5 | | |
| | | |
| | | |
| | | |
| | | |
| 1.5 | |
Refinancing of Company Debt (3) | |
| - | | |
| | | |
| | | |
| | | |
| | | |
| - | | |
| 0.8 | | |
| | | |
| | | |
| | | |
| | | |
| 0.8 | |
Italian tax related costs relating to prior years (4) | |
| - | | |
| | | |
| - | | |
| | | |
| | | |
| - | | |
| 1.4 | | |
| | | |
| 1.4 | | |
| | | |
| | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
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| |
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| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation expense | |
| 3.8 | | |
| 0.5 | | |
| 0.3 | | |
| 0.2 | | |
| 0.1 | | |
| 2.7 | | |
| 8.6 | | |
| 1.1 | | |
| 0.5 | | |
| 0.4 | | |
| 0.3 | | |
| 6.3 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
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| |
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| | | |
| | |
Depreciation and amortization | |
| 11.2 | | |
| 5.3 | | |
| 0.7 | | |
| 0.9 | | |
| 3.9 | | |
| 0.4 | | |
| 36.2 | | |
| 17.7 | | |
| 2.5 | | |
| 2.5 | | |
| 12.2 | | |
| 1.3 | |
Interest expense net | |
| 7.2 | | |
| | | |
| | | |
| | | |
| | | |
| 7.2 | | |
| 37.9 | | |
| | | |
| | | |
| | | |
| | | |
| 37.9 | |
Change in fair value of warrant liability | |
| (17.3 | ) | |
| | | |
| | | |
| | | |
| | | |
| (17.3 | ) | |
| (3.8 | ) | |
| | | |
| | | |
| | | |
| | | |
| (3.8 | ) |
Other finance expenses / (income) | |
| (0.3 | ) | |
| | | |
| | | |
| | | |
| | | |
| (0.3 | ) | |
| (5.5 | ) | |
| | | |
| | | |
| | | |
| | | |
| (5.5 | ) |
Income tax | |
| 0.3 | | |
| | | |
| | | |
| | | |
| | | |
| 0.3 | | |
| (0.1 | ) | |
| | | |
| | | |
| | | |
| | | |
| (0.1 | ) |
Adjusted EBITDA | |
$ | 30.1 | | |
$ | 10.9 | | |
$ | 8.6 | | |
$ | 3.4 | | |
$ | 13.0 | | |
$ | (5.8 | ) | |
$ | 42.0 | | |
$ | 17.6 | | |
$ | 19.9 | | |
$ | 10.4 | | |
$ | 9.4 | | |
$ | (15.2 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Adjusted EBITDA | |
£ | 21.8 | | |
£ | 7.9 | | |
£ | 6.1 | | |
£ | 2.5 | | |
£ | 9.4 | | |
(£ | 4.1 | ) | |
£ | 30.4 | | |
£ | 12.8 | | |
£ | 14.3 | | |
£ | 7.5 | | |
£ | 6.8 | | |
(£ | 11.0 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange Rate - $ to £ (6) | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 1.38 | | |
| | | |
| | | |
| | | |
| | | |
| | |
Note:
Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these
costs are not allocable and to do so would not be practical; these are shown in the Corporate category.
Notes
to Adjusted EBITDA reconciliation tables above:
(1) |
“Pension
charges” are profit and loss charges included within selling, general and administrative expenses, relating to a defined benefit
scheme which was closed to new entrants in 1999 and to future accrual in 2010. As well as the amortization of net loss, the figure
also includes charges relating to the Pension Protection Fund (which were historically borne by the pension scheme) and a small amount
of associated professional services expenses. These costs are included within Corporate Functions. |
|
|
(2) |
Acquisition
and integration related transaction expenses, Stock-based compensation expense, Depreciation and amortization, Total other expense,
net and Income tax are as described above in the Results of Operations line item discussions. Total expense, net includes interest
income, interest expense, change in fair value of earnout liability, change in fair value of derivative liability and other finance
income. |
|
|
(3) |
In
May 2021, the Company refinanced its debt. These are the one-off fees as a result of the refinancing. |
|
|
(4) |
“Italian
tax related costs relating to prior years invoicing” relate to a settlement with the Italian Tax Authorities in respect of
an audit for the period 2015-2017 in respect of the historic VAT treatment of supplies. |
|
|
(5) |
“Profit
on disposal of trade & assets” -- In January 2022, the Company sold its Italian VLT business, including all terminals and
other assets, staff costs and facilities and contracts to a non-connected party, recognizing a profit on this disposal. |
|
|
(6) |
Exchange
rate in the table is calculated by dividing the USD Adjusted EBITDA by the GBP Adjusted EBITDA, therefore this could be slightly
different from the average rate during the period depending on timing of transactions. |
Liquidity
and Capital Resources
Nine
Months ended September 30, 2022, compared to Nine Months ended September 30, 2021
Cash
Flow Summary - A Two Year Comparative
| |
Nine Months ended | | |
Variance | |
(in millions) | |
Sept 30, | | |
Sept 30, | | |
| |
| |
2022 | | |
2021 | | |
2022 to 2021 | |
Net profit/(loss) | |
$ | 19.2 | | |
$ | (35.5 | ) | |
$ | 54.7 | |
Amortization of debt fees | |
| 1.1 | | |
| 16.7 | | |
| (15.6 | ) |
Change in fair value of derivative and warrant liabilities and stock-based compensation expense | |
| 8.4 | | |
| 6.1 | | |
| 2.3 | |
Foreign currency translation on senior bank debt and cross currency swaps | |
| 0.0 | | |
| (4.6 | ) | |
| 4.6 | |
Depreciation and amortization (incl RoU assets) | |
| 30.6 | | |
| 38.7 | | |
| (8.1 | ) |
Other net cash utilized by operating activities | |
| (19.4 | ) | |
| (14.4 | ) | |
| (5.0 | ) |
Net cash provided by operating activities | |
| 39.9 | | |
| 7.0 | | |
| 32.9 | |
| |
| | | |
| | | |
| | |
Net cash used in investing activities | |
| (31.4 | ) | |
| (18.2 | ) | |
| (13.2 | ) |
Net cash used/(generated) by financing activities | |
| (10.4 | ) | |
| 0.9 | | |
| (11.3 | ) |
Effect of exchange rates on cash | |
| (8.5 | ) | |
| 0.3 | | |
| (8.8 | ) |
Net decrease in cash and cash equivalents | |
$ | (10.4 | ) | |
$ | (10.0 | ) | |
$ | (0.4 | ) |
Net
cash provided by operating activities
For
the nine months ended September 30, 2022, net cash inflow provided by operating activities was $39.9 million, compared to a $7.0 million
inflow for the nine months ended September 30, 2021, representing a $32.9 million increase in cash generation. This increase was driven
primarily by trading levels through increases in our online businesses and the worldwide trading restrictions in the nine months ended
September 30, 2021, resulting from the COVID-19 pandemic.
Amortization
of debt fees decreased by $15.6 million, to $1.1 million, due to the reduction in the level of capitalized debt fees after May 2021
following the Company’s refinancing of its debt and the $14.4 million write off of the remaining debt fees from the previous
financing arrangement.
Change
in the fair value of derivative and warrant liabilities and stock-based compensation expense increased by $2.3 million, from $6.1 million
to $8.4 million. Movements in the fair value of warrant liabilities in the prior period increased by $3.8 million which was partly offset
by a lower gain relating to terminated cross currency swaps ($0.8 million) and a lower stock-based compensation expense ($0.7 million).
Following
the refinancing in May 2021, there has been no foreign currency translation on senior bank debt and cross currency swaps. In the nine
months ended September 30, 2021, the foreign currency translation on senior bank debt and cross currency swaps resulted in a loss of
$4.6 million as a result of the movement in exchange rates during the period.
Depreciation
and amortization decreased by $8.1 million, to $30.6 million, with reductions of $3.2 million in machine depreciation, $4.6 million in
amortization of intangible assets and $0.6 million in amortization of right of use assets.
Other
net cash utilized by operating activities decreased by $5.0 million, to a $19.4 million outflow. The relative movements between the nine
months ended September 30, 2022 and the nine months ended September 30, 2021 resulted in a $16.3 million outflow through increased inventory
holding to reduce the risk of delaying machine builds due to non-supply of components, a $5.4 million outflow from accounts payable and
accruals and a $0.9 million outflow from corporate tax and other current taxes. These were offset by relative favorable movements between
the nine months ended September 30, 2022 and the nine months ended September 30, 2021 for prepayments and accrued income of $8.6 million,
interest accruals of $3.5 million and accounts receivable of $5.8 million due to COVID-19 closures restricting trading at the start of
the previous period.
Net
cash used in investing activities
Net
cash utilized in investing activities increased by $13.2 million, to $31.4 million in the nine months ended September 30, 2022. This
was driven by higher spend on plant, property and equipment (an $8.1 million increase compared to 2021) and capitalized software (a $4.5
million increase compared to 2021) due to spending in the previous year being low as a result of the pandemic. The nine months ended
September 30, 2022 also included the final payment of $0.6 million related to the acquisition of Sportech Lotteries, LLC, which was acquired
on December 31, 2021.
Net
cash (used)/generated by financing activities
During
the nine months ended September 30, 2022, net cash utilized by financing activities was $10.4 million, $10.0 million of which related
to the Company’s repurchase of its common shares under the Share Repurchase Program and $0.4 million of which related to finance
lease spend. During the nine months ended September 30, 2021, financing activities generated $0.9 million of cash with a net $1.3 million
from the refinancing in May 2021 after payment of associated fees less a spend of $0.4 million on finance leases.
Funding
Needs and Sources
To
fund our obligations, historically we have relied on a combination of cash flows provided by operations and the incurrence of additional
debt or the refinancing of existing debt. As of September 30, 2022, we had liquidity consisting of $37.4 million in cash and cash equivalents
and a further $22.3 million of undrawn revolver facility. This compares to $37.1 million of cash and cash equivalents as of September
30, 2021, with a further $27.0 million of revolver facilities undrawn. We had a working capital outflow of $19.4 million for the nine
months ended September 30, 2022, compared to a $14.4 million outflow for the nine months ended September 30, 2021.
The
level of our working capital surplus or deficit varies with the level of machine production we are undertaking and our capitalization
as well as the seasonality evident in some of the businesses. In periods with minimal machine volumes and capital spend, our working
capital is typically more stable. In periods where significant numbers of machines are being produced, the levels of inventory and creditors
are typically higher and there is a natural timing difference between converting the stock into sellable or capitalized plant and settling
payments to suppliers. These factors, along with movements in trading activity levels which have been seen during 2021 following the
COVID-19 closures, can result in significant working capital volatility. In periods of low activity, our working capital volatility is
reduced. Working capital is reviewed and managed with the aim of ensuring that current liabilities are covered by the level of cash held
and the expected level of short-term receipts.
Some
of our business operations require cash to be held within the machines. As of September 30, 2022, $4.8 million of our $37.4 million of
cash and cash equivalents were held as operational floats within the machines.
Management
currently believes that the Company’s cash balances on hand, cash flows expected to be generated from operations, and the ability
to control and defer capital projects will be sufficient to fund the Company’s net cash requirements through November 2023.
Long
Term and Other Debt
(In millions) | |
September 30, 2022 | | |
September 30, 2021 | |
Cash held | |
£ | 33.4 | | |
$ | 37.4 | | |
£ | 27.5 | | |
$ | 37.1 | |
Original principal senior debt | |
| (235.0 | ) | |
| (262.5 | ) | |
| (235.0 | ) | |
| (316.9 | ) |
Cash interest accrued | |
| (6.1 | ) | |
| (6.9 | ) | |
| (6.7 | ) | |
| (9.1 | ) |
Finance lease creditors | |
| (2.0 | ) | |
| (2.2 | ) | |
| (1.3 | ) | |
| (1.7 | ) |
Total | |
£ | (209.7 | ) | |
$ | (234.2 | ) | |
£ | (215.5 | ) | |
$ | (290.5 | ) |
(In millions) | |
September 30, 2022 | | |
September 30, 2021 | |
Cash held | |
£ | 33.4 | | |
$ | 37.4 | | |
£ | 27.5 | | |
$ | 37.1 | |
Original principal senior debt | |
| (235.0 | ) | |
| (262.5 | ) | |
| (235.0 | ) | |
| (316.9 | ) |
Cash interest accrued | |
| (6.1 | ) | |
| (6.9 | ) | |
| (6.7 | ) | |
| (9.1 | ) |
Finance lease creditors | |
| (2.0 | ) | |
| (2.2 | ) | |
| (1.3 | ) | |
| (1.7 | ) |
Total | |
£ | (209.7 | ) | |
$ | (234.2 | ) | |
£ | (215.5 | ) | |
$ | (290.5 | ) |
Debt
Covenants
Under
our debt facilities in place as of September 30, 2022, we are not subject to covenant testing on the Senior Secured Notes. We are, however,
subject to covenant testing at the level of Inspired Entertainment Inc., the ultimate holding company, on our Super Senior Revolving
Credit Facility which requires the Company to maintain a maximum consolidated senior secured net leverage ratio of 6.25x on the test
date for the relevant period ending June 30, 2021, stepping down to 6.0x on March 31, 2022, 5.75x on March 31, 2023 and 5.50x from March
31, 2024 and thereafter (the “RCF Financial Covenant”). The RCF Financial Covenant is calculated as the ratio of consolidated
senior secured net debt to consolidated pro forma EBITDA (defined as net loss excluding depreciation and amortization, interest expense,
interest income and income tax expense) for the 12-month period preceding the relevant quarterly testing date and is tested quarterly
on a rolling basis, subject to the Initial Facility (as defined in the RCF Agreement) being drawn on the relevant test date. The RCF
Financial Covenant does not include a minimum interest coverage ratio or other financial covenants. Covenant testing at September 30,
2022 showed covenant compliance.
There
were no breaches of the debt covenants in the periods ended September 30, 2022 or September 30, 2021.
Liens
and Encumbrances
As
of September 30, 2022, our senior bank debt was secured by the imposition of a fixed and floating charge in favor of the lender over
all the assets of the Company and certain of the Company’s subsidiaries.
Share
Repurchases
The
Board of Directors has authorized that the Company may use up to $25.0 million to repurchase Inspired shares of common stock,
subject to repurchases being effected on or before May 10, 2025. Management has discretion as to whether to repurchase shares of the
Company and as of September 30, 2022, an aggregate of $10.0 million of our shares of common stock had been repurchased.
Contractual
Obligations
As
of September 30, 2022, our contractual obligations were as follows:
Contractual Obligations (in millions) | |
Total | | |
Less than
1 yr | | |
1-3 years | | |
3-5 years | | |
More than
5 yrs | |
Operating activities | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest on long term debt | |
$ | 82.7 | | |
$ | 20.7 | | |
$ | 41.3 | | |
$ | 20.7 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financing activities | |
| | | |
| | | |
| | | |
| | | |
| | |
Senior bank debt - principal repayment | |
| 262.5 | | |
| - | | |
| - | | |
| 262.5 | | |
| - | |
Finance lease payments | |
| 2.2 | | |
| 1.0 | | |
| 1.0 | | |
| 0.2 | | |
| - | |
Operating lease payments | |
| 8.5 | | |
| 2.7 | | |
| 3.3 | | |
| 1.1 | | |
| 1.4 | |
Interest on non-utilisation fees | |
| 1.0 | | |
| 0.3 | | |
| 0.6 | | |
| 0.1 | | |
| - | |
Total | |
$ | 356.9 | | |
$ | 24.7 | | |
$ | 46.2 | | |
$ | 284.6 | | |
$ | 1.4 | |
Off-Balance
Sheet Arrangements
As
of September 30, 2022, there were no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, promulgated
by the U.S. Securities and Exchange Commission.
Critical
Accounting Policies and Accounting Estimates
The
preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted
in the United States (“U.S. GAAP”) requires management to make estimates and assumptions. We exercise considerable judgment
with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our
assets and liabilities, our recognition of revenue and expenses, and our disclosure of commitments and contingencies at the date of the
consolidated financial statements. Accounting policies concerning revenue recognition, inventories, software development costs, allowance
for doubtful accounts and the pension asset/liability are considered by management to be critical, and further detail on these policies
can be found in our Annual Report on Form 10-K filed with the SEC on March 31, 2022. On an on-going basis, we evaluate our estimates
and judgments. We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business
and industry and current and expected economic conditions, that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances
indicate that modifications are necessary. While we believe that the factors we evaluate provide us with a meaningful basis for establishing
and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these
estimates requires the exercise of judgment, actual results could differ from such estimates.