UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20192020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _______________
Commission File Number: 001-36689
INSPIRED ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 47-1025534 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) | |
| 250 West 57th Street, Suite | ||
| New York, NY | 10107 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(646) 565-3861
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☒ | Smaller reporting company ☒ | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common stock, par value $0.0001 per share | INSE | The NASDAQ Stock Market LLC | ||
| Preferred Stock Purchase Rights | The NASDAQ Stock Market LLC |
As of November 8, 2019,August 11, 2020, there were 22,818,07123,029,492 shares of the Company’s common stock issued and outstanding.
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
September 30, 2019 | September 30, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash | $ | 29.6 | $ | 22.5 | $ | 39.9 | $ | 29.1 | ||||||||
| Accounts receivable, net | 10.0 | 14.3 | 18.6 | 24.2 | ||||||||||||
| Inventory, net | 5.1 | 5.2 | 19.0 | 18.8 | ||||||||||||
| Fair value of hedging instrument | 0.6 | 0.8 | ||||||||||||||
| Prepaid expenses and other current assets | 11.7 | 15.8 | 17.0 | 23.2 | ||||||||||||
| Corporate tax and other taxes receivable | 1.0 | — | ||||||||||||||
| Total current assets | 58.0 | 58.6 | 94.5 | 95.3 | ||||||||||||
| Property and equipment, net | 28.5 | 45.7 | 68.4 | 79.3 | ||||||||||||
| Software development costs, net | 36.8 | 40.0 | 41.0 | 46.9 | ||||||||||||
| Other acquired intangible assets subject to amortization, net | 2.3 | 5.7 | 7.3 | 9.9 | ||||||||||||
| Goodwill | 43.3 | 45.8 | 75.4 | 80.9 | ||||||||||||
| Right of use asset | 12.7 | 9.4 | ||||||||||||||
| Investment | — | 0.6 | ||||||||||||||
| Other assets | 6.5 | 12.1 | 4.0 | 5.1 | ||||||||||||
| Total assets | $ | 175.4 | $ | 207.9 | $ | 303.3 | $ | 327.4 | ||||||||
| Liabilities and Stockholders’ Deficit | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Accounts payable | $ | 13.0 | $ | 14.4 | $ | 21.3 | $ | 22.2 | ||||||||
| Accrued expenses | 15.2 | 14.3 | 26.7 | 31.2 | ||||||||||||
| Earnout liability | — | 8.0 | ||||||||||||||
| Corporate tax and other current taxes payable | 1.1 | 2.0 | 6.0 | 6.6 | ||||||||||||
| Deferred revenue, current | 9.3 | 9.2 | 9.2 | 10.1 | ||||||||||||
| Operating lease liabilities | 3.3 | 3.6 | ||||||||||||||
| Other current liabilities | 3.5 | 3.9 | 1.4 | 1.9 | ||||||||||||
| Current portion of long-term debt | 9.0 | — | 24.7 | 2.6 | ||||||||||||
| Current portion of capital lease obligations | 0.1 | 0.5 | ||||||||||||||
| Current portion of finance lease liabilities | 0.6 | 0.1 | ||||||||||||||
| Total current liabilities | 51.2 | 52.3 | 93.2 | 78.3 | ||||||||||||
| Long-term debt | 132.8 | 131.2 | 268.4 | 270.5 | ||||||||||||
| Capital lease obligations, net of current portion | — | 0.1 | ||||||||||||||
| Long term finance lease liabilities | 0.5 | — | ||||||||||||||
| Deferred revenue, net of current portion | 17.9 | 23.9 | 13.9 | 17.7 | ||||||||||||
| Derivative liability | 0.5 | 7.8 | 1.6 | — | ||||||||||||
| Operating lease liabilities | 9.2 | 5.2 | ||||||||||||||
| Other long-term liabilities | 4.8 | 5.1 | 8.3 | 5.2 | ||||||||||||
| Total liabilities | 207.2 | 220.4 | 395.1 | 376.9 | ||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Stockholders’ deficit | ||||||||||||||||
| Preferred stock; $0.0001 par value; 1,000,000 shares authorized | — | — | — | — | ||||||||||||
| Series A Junior Participating Preferred stock; $0.0001 par value; 1,000,000 shares authorized; 49,000 shares designated; no shares issued and outstanding at September 30, 2019 and 2018 | — | — | ||||||||||||||
| Common stock; $0.0001 par value; 49,000,000 shares authorized; 22,193,955 shares and 20,860,591 shares issued and outstanding at September 30, 2019 and 2018, respectively | — | — | ||||||||||||||
| Series A Junior Participating Preferred stock; $0.0001 par value; 1,000,000 shares authorized; 49,000 shares designated; no shares issued and outstanding at June 30, 2020 and December 31, 2019 | — | — | ||||||||||||||
| Common stock; $0.0001 par value; 49,000,000 shares authorized; 22,405,376 shares and 22,230,768 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | — | — | ||||||||||||||
| Additional paid in capital | 345.3 | 328.5 | 348.6 | 346.6 | ||||||||||||
| Accumulated other comprehensive income | 51.3 | 58.5 | 42.7 | 45.1 | ||||||||||||
| Accumulated deficit | (428.4 | ) | (399.5 | ) | (483.1 | ) | (441.2 | ) | ||||||||
| Total stockholders’ deficit | (31.8 | ) | (12.5 | ) | (91.8 | ) | (49.5 | ) | ||||||||
| Total liabilities and stockholders’ deficit | $ | 175.4 | $ | 207.9 | $ | 303.3 | $ | 327.4 | ||||||||
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(LOSS) INCOME
(in millions, except share and per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||
| Service | $ | 23.8 | $ | 32.8 | $ | 80.2 | $ | 100.6 | $ | 15.2 | $ | 25.6 | $ | 58.4 | $ | 56.4 | ||||||||||||||||
| Hardware | 2.8 | 2.8 | 6.8 | 9.4 | 0.4 | 1.1 | 9.5 | 4.0 | ||||||||||||||||||||||||
| Total revenue | 26.6 | 35.6 | 87.0 | 110.0 | 15.6 | 26.7 | 67.9 | 60.4 | ||||||||||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||||||||||
| Cost of service | (4.7 | ) | (5.5 | ) | (15.4 | ) | (17.4 | ) | (3.1 | ) | (5.3 | ) | (9.7 | ) | (10.7 | ) | ||||||||||||||||
| Cost of hardware | (2.3 | ) | (1.1 | ) | (4.9 | ) | (7.3 | ) | (0.3 | ) | (1.0 | ) | (7.3 | ) | (2.6 | ) | ||||||||||||||||
| Selling, general and administrative expenses | (11.5 | ) | (12.8 | ) | (39.0 | ) | (43.7 | ) | (10.6 | ) | (12.8 | ) | (39.7 | ) | (27.5 | ) | ||||||||||||||||
| Stock-based compensation expense | (2.2 | ) | (1.5 | ) | (6.6 | ) | (4.2 | ) | (1.0 | ) | (2.3 | ) | (2.0 | ) | (4.4 | ) | ||||||||||||||||
| Impairment expense | — | (7.7 | ) | — | (7.7 | ) | ||||||||||||||||||||||||||
| Acquisition and integration related transaction expenses | (3.3 | ) | (0.1 | ) | (4.9 | ) | (0.3 | ) | (1.2 | ) | (0.7 | ) | (4.4 | ) | (1.6 | ) | ||||||||||||||||
| Depreciation and amortization | (8.3 | ) | (10.6 | ) | (27.1 | ) | (32.3 | ) | (13.3 | ) | (9.1 | ) | (25.9 | ) | (18.8 | ) | ||||||||||||||||
| Net operating loss | (5.7 | ) | (3.7 | ) | (10.9 | ) | (2.9 | ) | (13.9 | ) | (4.5 | ) | (21.1 | ) | (5.2 | ) | ||||||||||||||||
| Other (expense) income | ||||||||||||||||||||||||||||||||
| Interest income | 0.0 | 0.1 | 0.1 | 0.2 | 0.1 | 0.1 | 0.4 | 0.1 | ||||||||||||||||||||||||
| Interest expense | (4.4 | ) | (5.4 | ) | (12.9 | ) | (15.7 | ) | (8.1 | ) | (4.0 | ) | (14.2 | ) | (8.5 | ) | ||||||||||||||||
| Change in fair value of earnout liability | — | 0.9 | (2.3 | ) | 4.0 | — | — | — | (2.3 | ) | ||||||||||||||||||||||
| Change in fair value of derivative liability | 2.9 | (7.3 | ) | 2.8 | (5.8 | ) | — | (1.3 | ) | — | (0.1 | ) | ||||||||||||||||||||
| Loss from equity method investee | — | — | (0.5 | ) | — | |||||||||||||||||||||||||||
| Other finance income (expense) | (1.2 | ) | 3.5 | (0.9 | ) | 3.9 | (2.5 | ) | (0.9 | ) | (6.2 | ) | 0.3 | |||||||||||||||||||
| Total other expense, net | (2.7 | ) | (8.2 | ) | (13.2 | ) | (13.4 | ) | (10.5 | ) | (6.1 | ) | (20.5 | ) | (10.5 | ) | ||||||||||||||||
| Loss before income taxes | (8.4 | ) | (11.9 | ) | (24.1 | ) | (16.3 | ) | (24.4 | ) | (10.6 | ) | (41.6 | ) | (15.7 | ) | ||||||||||||||||
| Income tax expense | (0.1 | ) | — | (0.1 | ) | (0.1 | ) | (0.1 | ) | (0.1 | ) | (0.3 | ) | — | ||||||||||||||||||
| Net loss | (8.5 | ) | (11.9 | ) | (24.2 | ) | (16.4 | ) | (24.5 | ) | (10.7 | ) | (41.9 | ) | (15.7 | ) | ||||||||||||||||
| Other comprehensive (loss)/income: | ||||||||||||||||||||||||||||||||
| Foreign currency translation gain | 0.5 | — | 0.7 | 0.1 | 0.4 | 0.7 | 3.5 | 0.2 | ||||||||||||||||||||||||
| Change in fair value of hedging instrument | 3.1 | 0.3 | 3.4 | 0.3 | (0.8 | ) | 2.4 | (2.3 | ) | 0.3 | ||||||||||||||||||||||
| Reclassification of gain on hedging instrument to comprehensive income | (3.4 | ) | (0.3 | ) | (4.5 | ) | (0.3 | ) | 0.3 | (2.6 | ) | 0.7 | (1.1 | ) | ||||||||||||||||||
| Actuarial (losses) gains on pension plan | (3.1 | ) | 2.9 | (4.2 | ) | 7.2 | ||||||||||||||||||||||||||
| Other comprehensive (loss)/income | (2.9 | ) | 2.9 | (4.6 | ) | 7.3 | ||||||||||||||||||||||||||
| Actuarial losses on pension plan | (8.7 | ) | (2.0 | ) | (4.3 | ) | (1.1 | ) | ||||||||||||||||||||||||
| Other comprehensive loss | (8.8 | ) | (1.5 | ) | (2.4 | ) | (1.7 | ) | ||||||||||||||||||||||||
| Comprehensive loss | $ | (11.4 | ) | $ | (9.0 | ) | $ | (28.8 | ) | $ | (9.1 | ) | $ | (33.3 | ) | $ | (12.2 | ) | $ | (44.3 | ) | $ | (17.4 | ) | ||||||||
| Net loss per common share – basic and diluted | $ | (0.38 | ) | $ | (0.57 | ) | $ | (1.11 | ) | $ | (0.79 | ) | $ | (1.09 | ) | $ | (0.48 | ) | $ | (1.87 | ) | $ | (0.73 | ) | ||||||||
| Weighted average number of shares outstanding during the period – basic and diluted | 22,193,955 | 20,860,591 | 21,790,075 | 20,858,827 | 22,400,107 | 22,193,955 | 22,392,218 | 21,583,648 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE PERIOD OCTOBERJANUARY 1, 20182020 TO SEPTEMBERJUNE 30, 2019 2020
(in millions, except share data)
(Unaudited)
| Common stock | Additional paid in | Accumulated other comprehensive | Accumulated | Total stockholders’ | Common stock | Additional paid in | Accumulated other comprehensive | Accumulated | Total stockholders’ | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | capital | income | deficit | deficit | Shares | Amount | capital | income | deficit | deficit | |||||||||||||||||||||||||||||||||||||
| Balance at October 1, 2018 | 20,860,591 | $ | — | $ | 328.5 | $ | 58.5 | $ | (399.5 | ) | $ | (12.5 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Actuarial losses on pension plan | — | — | — | (2.8 | ) | — | (2.8 | ) | ||||||||||||||||||||||||||||||||||||||||
| Change in fair value of hedging instrument | — | — | — | 2.6 | — | 2.6 | ||||||||||||||||||||||||||||||||||||||||||
| Reclassification of gain on hedging instrument to comprehensive income | — | — | — | (2.4 | ) | — | (2.4 | ) | ||||||||||||||||||||||||||||||||||||||||
| Shares issued upon net settlement of RSUs | 9,806 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 1.4 | — | — | 1.4 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (4.7 | ) | (4.7 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 20,870,397 | $ | — | $ | 329.9 | $ | 55.9 | $ | (404.2 | ) | $ | (18.4 | ) | |||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2020 | 22,230,768 | $ | — | $ | 346.6 | $ | 45.1 | $ | (441.2 | ) | $ | (49.5 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (0.5 | ) | — | (0.5 | ) | — | — | — | 3.1 | — | 3.1 | ||||||||||||||||||||||||||||||||||
| Actuarial gains on pension plan | — | — | — | 0.9 | — | 0.9 | — | — | — | 4.4 | — | 4.4 | ||||||||||||||||||||||||||||||||||||
| Change in fair value of hedging instrument | — | — | — | (2.1 | ) | — | (2.1 | ) | — | — | — | (1.5 | ) | — | (1.5 | ) | ||||||||||||||||||||||||||||||||
| Reclassification of gain on hedging instrument to comprehensive income | — | — | — | 1.5 | — | 1.5 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued on earnout | 1,323,558 | — | 8.6 | — | — | 8.6 | ||||||||||||||||||||||||||||||||||||||||||
| Reclassification of loss on hedging instrument to comprehensive income | — | — | — | 0.4 | — | 0.4 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued in net settlement of RSUs | 166,959 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 1.7 | — | — | 1.7 | — | — | 1.0 | — | — | 1.0 | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (5.0 | ) | (5.0 | ) | — | — | — | — | (17.4 | ) | (17.4 | ) | ||||||||||||||||||||||||||||||||
| Balance at March 31, 2019 | 22,193,955 | $ | — | $ | 340.2 | $ | 55.7 | $ | (409.2 | ) | $ | (13.3 | ) | |||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | 22,397,727 | $ | — | $ | 347.6 | $ | 51.5 | $ | (458.6 | ) | $ | (59.5 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 0.7 | — | 0.7 | — | — | — | 0.4 | — | 0.4 | ||||||||||||||||||||||||||||||||||||
| Actuarial losses on pension plan | — | — | — | (2.0 | ) | — | (2.0 | ) | ||||||||||||||||||||||||||||||||||||||||
| Actuarial loss on pension plan | — | — | — | (8.7 | ) | — | (8.7 | ) | ||||||||||||||||||||||||||||||||||||||||
| Change in fair value of hedging instrument | — | — | — | 2.4 | — | 2.4 | — | — | — | (0.8 | ) | — | (0.8 | ) | ||||||||||||||||||||||||||||||||||
| Reclassification of gain on hedging instrument to comprehensive income | — | — | — | (2.6 | ) | — | (2.6 | ) | ||||||||||||||||||||||||||||||||||||||||
| Conversion of awards previously classified as derivatives | — | — | 0.8 | — | — | 0.8 | ||||||||||||||||||||||||||||||||||||||||||
| Reclassification of loss on hedging instrument to comprehensive income | — | — | — | 0.3 | — | 0.3 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense – ESPP | 7,649 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2.1 | — | — | 2.1 | — | — | 1.0 | — | — | 1.0 | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (10.7 | ) | (10.7 | ) | — | — | — | — | (24.5 | ) | (24.5 | ) | ||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | 22,193,955 | $ | — | $ | 343.1 | $ | 54.2 | $ | (419.9 | ) | $ | (22.6 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 0.5 | — | 0.5 | ||||||||||||||||||||||||||||||||||||||||||
| Actuarial losses on pension plan | — | — | — | (3.1 | ) | — | (3.1 | ) | ||||||||||||||||||||||||||||||||||||||||
| Change in fair value of hedging instrument | — | — | — | 3.1 | — | 3.1 | ||||||||||||||||||||||||||||||||||||||||||
| Reclassification of gain on hedging instrument to comprehensive income | — | — | — | (3.4 | ) | — | (3.4 | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2.2 | — | — | 2.2 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (8.5 | ) | (8.5 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 22,193,955 | $ | — | $ | 345.3 | $ | 51.3 | $ | (428.4 | ) | $ | (31.8 | ) | |||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | 22,405,376 | $ | — | $ | 348.6 | $ | 42.7 | $ | (483.1 | ) | $ | (91.8 | ) | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (CONTINUED)
FOR THE PERIOD OCTOBERJANUARY 1, 20172019 TO SEPTEMBERJUNE 30, 20182019
(in millions, except share data)
(Unaudited)
| Common stock | Additional paid in | Accumulated other comprehensive | Accumulated | Total stockholders’ | Common stock | Additional paid in | Accumulated other comprehensive | Accumulated | Total stockholders’ | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | capital | income | deficit | (deficit) | Shares | Amount | capital | income | deficit | deficit | |||||||||||||||||||||||||||||||||||||
| Balance at October 1, 2017 | 20,402,602 | $ | — | $ | 323.5 | $ | 53.1 | $ | (378.9 | ) | $ | (2.3 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 0.1 | — | 0.1 | ||||||||||||||||||||||||||||||||||||||||||
| Actuarial losses on pension plan | — | — | — | (2.0 | ) | — | (2.0 | ) | ||||||||||||||||||||||||||||||||||||||||
| Shares issued on exercise of warrants | 50 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon cashless exercise of RSUs | 445,723 | — | (1.1 | ) | — | — | (1.1 | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 0.8 | — | — | 0.8 | ||||||||||||||||||||||||||||||||||||||||||
| Reclassification of RSUs to derivative liability due to modification | — | — | (1.5 | ) | — | — | (1.5 | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (4.2 | ) | (4.2 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2017 | 20,848,375 | $ | — | $ | 321.7 | $ | 51.2 | $ | (383.1 | ) | $ | (10.2 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 0.3 | — | 0.3 | ||||||||||||||||||||||||||||||||||||||||||
| Actuarial gains on pension plan | — | — | — | 1.3 | — | 1.3 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon cashless exercise of RSUs | 12,216 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 1.0 | — | — | 1.0 | ||||||||||||||||||||||||||||||||||||||||||
| Reclassification of RSUs from derivative liability due to stockholder approval of equity plan | — | — | 2.8 | — | — | 2.8 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (0.5 | ) | (0.5 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2018 | 20,860,591 | — | 325.5 | 52.8 | (383.6 | ) | (5.3 | ) | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (0.2 | ) | — | (0.2 | ) | ||||||||||||||||||||||||||||||||||||||||
| Actuarial gains on pension plan | — | — | — | 3.0 | — | 3.0 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 1.5 | — | — | 1.5 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (4.0 | ) | (4.0 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2018 | 20,860,591 | $ | — | $ | 327.0 | $ | 55.6 | $ | (387.6 | ) | $ | (5.0 | ) | |||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2019 | 20,870,397 | $ | — | $ | 329.9 | $ | 55.9 | $ | (404.2 | ) | $ | (18.4 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | — | — | (0.5 | ) | — | (0.5 | |||||||||||||||||||||||||||||||||||
| Actuarial gains on pension plan | — | — | — | 2.9 | — | 2.9 | — | — | — | 0.9 | — | 0.9 | ||||||||||||||||||||||||||||||||||||
| Change in fair value of hedging instrument | — | — | — | 0.3 | — | 0.3 | — | — | — | (2.1 | ) | — | (2.1 | ) | ||||||||||||||||||||||||||||||||||
| Reclassification of gain on hedging instrument to comprehensive income | — | — | — | (0.3 | ) | — | (0.3 | ) | ||||||||||||||||||||||||||||||||||||||||
| Reclassification of loss on hedging instrument to comprehensive income | — | — | — | 1.5 | — | 1.5 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued in earnout | 1,323,558 | — | 8.6 | — | — | 8.6 | ) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 1.5 | — | — | 1.5 | — | — | 1.7 | — | — | 1.7 | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (11.9 | ) | (11.9 | ) | — | — | — | — | (5.0 | ) | (5.0 | ) | ||||||||||||||||||||||||||||||||
| Balance as of September 30, 2018 | 20,860,591 | $ | — | 328.5 | $ | 58.5 | $ | (399.5 | ) | (12.5 | ) | |||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2019 | 22,193,955 | $ | — | $ | 340.2 | $ | 55.7 | $ | (409.2 | ) | $ | (13.3 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 0.7 | — | 0.7 | ||||||||||||||||||||||||||||||||||||||||||
| Actuarial losses on pension plan | — | — | — | (2.0 | ) | — | (2.0 | ) | ||||||||||||||||||||||||||||||||||||||||
| Change in fair value of hedging instrument | — | — | — | 2.4 | — | 2.4 | ||||||||||||||||||||||||||||||||||||||||||
| Reclassification of loss on hedging instrument to comprehensive income | — | — | — | (2.6 | ) | — | (2.6 | ) | ||||||||||||||||||||||||||||||||||||||||
| Conversion of awards previously classified as derivatives | — | — | 0.8 | — | — | 0.8 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2.1 | — | — | 2.1 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (10.7 | ) | (10.7 | ) | |||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2019 | 22,193,955 | $ | — | $ | 343.1 | $ | 54.2 | $ | (419.9 | ) | $ | (22.6 | ) | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
| Nine Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Six Months Ended June 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net loss | $ | (24.2 | ) | $ | (16.4 | ) | $ | (41.9 | ) | $ | (15.7 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 27.1 | 32.3 | 25.9 | 18.8 | ||||||||||||
| Amortization of right of use asset | 2.0 | — | ||||||||||||||
| Stock-based compensation expense | 6.6 | 4.2 | 2.0 | 4.4 | ||||||||||||
| Change in fair value of derivative liability | (2.8 | ) | 5.8 | — | 0.1 | |||||||||||
| Change in fair value of earnout liability | 2.3 | (4.0 | ) | — | 2.3 | |||||||||||
| Impairment expense | — | 7.7 | ||||||||||||||
| Impairment of investment in equity method investee | 0.7 | — | ||||||||||||||
| Foreign currency translation on senior bank debt | 4.8 | (3.4 | ) | 6.6 | 0.3 | |||||||||||
| Foreign currency translation on cross currency swaps | (3.8 | ) | — | — | (0.6 | ) | ||||||||||
| Reclassification of gain on hedging instrument to comprehensive income | 0.5 | — | ||||||||||||||
| Non-cash interest expense relating to senior debt | 1.4 | 4.8 | 1.2 | 0.9 | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Accounts receivable | 1.0 | (2.6 | ) | 3.7 | 0.8 | |||||||||||
| Inventory | (0.3 | ) | (1.0 | ) | (1.4 | ) | (0.5 | ) | ||||||||
| Prepaid expenses and other assets | 4.4 | 3.0 | 5.7 | 4.5 | ||||||||||||
| Corporate tax and other current taxes payable | (1.8 | ) | (0.8 | ) | 0.1 | (0.5 | ) | |||||||||
| Accounts payable | 8.5 | 3.9 | 0.8 | 4.4 | ||||||||||||
| Deferred revenues and customer prepayment | (4.3 | ) | 3.6 | (3.8 | ) | (2.1 | ) | |||||||||
| Accrued expenses | 3.3 | 1.8 | 9.3 | 2.4 | ||||||||||||
| Operating lease liabilities | (1.6 | ) | — | |||||||||||||
| Other long-term liabilities | 0.2 | (4.5 | ) | 0.4 | 0.2 | |||||||||||
| Net cash provided by operating activities | 22.4 | 34.4 | 10.2 | 19.7 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Purchases of property and equipment | (4.9 | ) | (21.9 | ) | (8.8 | ) | (2.2 | ) | ||||||||
| Disposals of property and equipment | — | 0.2 | ||||||||||||||
| Purchases of capital software | (11.6 | ) | (14.2 | ) | (6.7 | ) | (7.8 | ) | ||||||||
| Net cash used in investing activities | (16.5 | ) | (36.1 | ) | (15.5 | ) | (9.8 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from issuance of revolver and long-term debt | 9.3 | 140.0 | ||||||||||||||
| Repayments of revolver and long-term debt | — | (122.1 | ) | |||||||||||||
| Payment of financing costs | — | (4.6 | ) | |||||||||||||
| Repayments of capital leases | (0.3 | ) | (0.4 | ) | ||||||||||||
| Proceeds from issuance of revolver | 22.3 | 9.3 | ||||||||||||||
| Debt fees incurred | (3.1 | ) | — | |||||||||||||
| Repayments of finance leases | (0.6 | ) | (0.3 | ) | ||||||||||||
| Net cash provided by financing activities | 9.0 | 12.9 | 18.6 | 9.0 | ||||||||||||
| Effect of exchange rate changes on cash | (1.3 | ) | 0.3 | (2.5 | ) | (1.2 | ) | |||||||||
| Net increase in cash | 13.6 | 11.5 | 10.8 | 17.7 | ||||||||||||
| Cash, beginning of period | 16.0 | 11.0 | 29.1 | 16.0 | ||||||||||||
| Cash, end of period | $ | 29.6 | $ | 22.5 | $ | 39.9 | $ | 33.7 | ||||||||
| Supplemental cash flow disclosures | ||||||||||||||||
| Cash paid during the period for interest | $ | 12.5 | $ | 10.4 | $ | 0.4 | $ | 8.2 | ||||||||
| Cash paid during the period for income taxes | $ | — | $ | — | $ | 0.1 | $ | — | ||||||||
| Cash paid during the period for operating leases | $ | 1.2 | $ | — | ||||||||||||
| Supplemental disclosure of noncash investing and financing activities | ||||||||||||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||||||||||
| Lease liabilities arising from obtaining right of use assets | $ | (6.1 | ) | $ | — | |||||||||||
| Adjustment to goodwill arising from adjustment to fair value of assets acquired | $ | (0.3 | ) | $ | — | |||||||||||
| Capitalized interest payments | $ | 10.6 | $ | — | ||||||||||||
| Property and equipment acquired through finance lease | $ | 1.5 | $ | — | ||||||||||||
| Additional paid in capital reclassified from derivative liability | $ | 0.8 | $ | 2.8 | $ | — | $ | 0.8 | ||||||||
| Senior debt exit premium | $ | — | $ | 4.2 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(Unaudited)
| 1. | Nature of Operations, Management’s Plans and Summary of Significant Accounting Policies |
Company Description and Nature of Operations
Inspired Entertainment, Inc. (the “Company,” “we,” “our,” and “us”) is a global business-to-business gaming technology company, supplying Server Based Gaming (“SBG”) and Virtual Sports (which includes Interactive) systems to regulated lottery, betting and gaming operators worldwide through an “omni-channel” distribution strategy. We provide end-to-end digital gaming solutions on our proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices such as smartphones and tablets and online computer and social applications. Our products can be found in licensed betting offices, adult gaming centers, bingo halls, and through our Acquired Businesses (defined herein), in UK pubs, airports, motorway service areas, and leisure parks.
The Company was formed in Delaware on May 30, 2014 under the name Hydra Industries Acquisition Corp. (“Hydra”) as a “blank check company” for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, recapitalization or other similar business transaction, one or more operating businesses or assets. On December 23, 2016 (the “Closing Date”), the Company consummated a business combination by acquiring Inspired Gaming Group (“Inspired”) pursuant to a share sale agreement dated as of July 13, 2016 (the “Sale Agreement”). Pursuant to the Sale Agreement, the Company acquired all of the outstanding equity and shareholder loan notes of Inspired. The transaction was accounted for as a reverse merger where Inspired was the acquirer and Hydra was the acquired company. We refer to the acquisition and the other transactions contemplated by the Sale Agreement, collectively, as the “Business Combination” or the “Merger.”
On October 1, 2019, the Company completed the acquisition of the Gaming Technology Group (“NTG”) of Novomatic UK Ltd., a division of Novomatic Group, a leading international supplier of gaming equipment and solutions (see Note 27).
Management Liquidity Plans
As of SeptemberJune 30, 2019,2020, the Company’s cash on hand was $29.6$39.9 million, and the Company had working capital of $6.8$1.3 million. As of September 30, 2019, $2.4 million of our cash on hand had arisen from our operations in Greece and was being held in local accounts. In the ordinary course of business, we seek, from time to time, to transfer funds earned in Greece to our accounts outside of Greece. However, Greece imposes capital controls that can delay or prevent the flow of capital out of the country. The Company recorded net losses of $24.2$41.9 million and $16.4$15.7 million for the ninesix months ended SeptemberJune 30, 2020 and 2019, respectively. Net losses include non-cash stock-based compensation of $2.0 million and 2018,$4.4 million for the six months ended June 30, 2020 and 2019, respectively. Historically, the Company has generally had positive cash flows from operating activities and has relied on a combination of cash flows provided by operations and the incurrence of debt and/or the refinancing of existing debt to fund its obligations. Cash flows provided by operations amounted to $10.2 million and $19.7 million for the six months ended June 30, 2020 and 2019, respectively. Working capital of $6.8$1.3 million includes a non-cash settled item of $9.3$9.2 million of deferred income. Management currently believes that, absent any unanticipated coronavirus (“COVID-19”) impact (see below), the Company’s cash balances on hand, cash flows expected to be generated from operations, ability to control and defer capital projects and amounts available from the Company’s external borrowings including the new senior facility agreement as discussed in Note 27, will be sufficient to fund the Company’s net cash requirements through November 2020.August 2021.
Our business is being, and will continue to be, adversely affected by the rapidly expanding nature of the COVID-19 pandemic. Whilst the majority of venues offering land-based gaming, including our products, have now re-opened, social distancing measures have impacted the ability of some venues to operate to the same capacity. In addition, the risk of there being a “second wave” or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which we operate, which could see the government re-impose restrictions on, or changes to, our operations up to and including complete or partial closures of retail venues, and the long-term impacts of the pandemic on the global economy, trade relations, consumer behavior, our industry and our business operations, remains.
Due to the closure of land-based revenues we saw a significant increase in our online revenues from slots and virtual sports and following the success of this area of the business and the successful re-opening of various revenue streams, the Company repaid £10 million ($12.4 million) of the revolving credit facility subsequent to the end of the period, on July 14, 2020. There is a risk of further shutdowns in certain markets if COVID-19 cases increase.
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.
On September 24, 2018, the Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31 commencing with the year ending December 31, 2019. As such, our last completed fiscal year ended on September 30, 2018, the three-month period from October 1, 2018 to December 31, 2018 was a transitional period and the nine-month period from January 1, 2019 to September 30, 2019 is the first nine months of fiscal 2019.
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 periodsyears ended September 30, 2018December 31, 2019 and 2017.2018. The financial information as of September 30, 2018December 31, 2019 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K filed with the SEC on December 10, 2018.March 30, 2020. The interim results for the three and ninesix months ended SeptemberJune 30, 20192020 are not necessarily indicative of the results to be expected for the year ending December 31, 20192020 or for any future interim periods.
Principles of Consolidation
All monetary values set forth in these unaudited interim condensed consolidated financial statements are in US Dollars (“USD”) unless otherwise stated herein. The accompanying unaudited interim condensed consolidated financial statements include the results of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency Translation
For most of our operations, the British pound (“GBP”) is our functional currency. Our reporting currency is the USD. We also have operations where the local currency is the functional currency, including our operations in mainland Europe and South America. Assets and liabilities of foreign operations are translated at period-end rates of exchange, equity is translated at historical rates of exchange and results of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating the foreign currency financial statements are recorded as a separate component of accumulated other comprehensive loss in stockholders’ deficit. Gains or losses resulting from foreign currency transactions are included in selling, general and administrative expenses, interest income (expense) and other finance (costs) income in the consolidated statements of operations and comprehensive loss.
Use of Estimates
The preparation of unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates, including those related to the revenue recognition for contracts involving software and non-software elements, allowance for doubtful accounts, inventory reserve for net realizable value, currency swaps, valuation of hedging activities, goodwill and intangible assets, useful lives of long-lived assets, stock-based compensation, valuation allowances on deferred taxes, earnout liability, pension liability, commitments and contingencies and litigation, among others. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. We regularly evaluate these significant factors and make adjustments when facts and circumstances dictate. Actual results may differ from these estimates.
Revenue Recognition
The Company adopted Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts with Customers” (“ASC 606”) as of January 1, 2019 using the modified retrospective method. This method allows the Company to apply ASC 606 to new contracts entered into after January 1, 2019, and to its existing contracts for which revenue earned through December 31, 2018 has been recognized under the guidance in effect prior to the effective date of ASC 606. The revenue recognition processes the Company applied prior to adoption of ASC 606 align with the recognition and measurement guidance of the new standard, therefore adoption of ASC 606 did not require a cumulative adjustment to opening equity.
Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of distinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied and the customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for goods or services. Under the standard, a contract’s transaction price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:
Step 1 – Identify the contract
The Company identifies contracts with its customers when all parties have approved the contract and are committed to perform their respective obligations, when each party’s rights and the payment terms regarding the goods or services to be transferred can be identified. The contract must also have commercial substance, and it must be probable that the Company will collect the consideration to which it will be entitled.
Contracts entered into at or near the same time with the same customer or related parties of the customer are accounted for as one contract if any of the following criteria are met:
Step 2 – Identify performance obligations
Performance obligations are identified by considering whether a good or service is distinct. The Company considers a good or service to be distinct only when the customer can benefit from it either on its own or together with other resources that are readily available, and when the promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
The Company applies the series guidance to its performance obligations where the following criteria apply:
Step 3 – Determine the transaction price
The Company considers all amounts to which it has rights in exchange for the goods or services transferred in determining the transaction price. This includes fixed and variable consideration. Typically, consideration is stated in the contract with the customer.
The Company assesses usage-based fees to determine whether they qualify as variable consideration. It also considers the impact of any liquidated damages clauses or service level agreements.
Where the Company’s performance obligations are determined to be a series, variable consideration is not estimated upfront in accordance with the exception allowed by ASC 606.
Where non-refundable upfront fees are included in the Company’s contracts with customer, the Company considers whether or not they represent payment for a transferred good or service. Where they represent payment for future goods or services, the Company further considers whether they represent a material right.
Step 4 – Allocate the transaction price
The Company allocates a transaction price to each performance obligation based on the relative standalone selling prices of the goods or services being provided. Where a contract includes multiple performance obligations, the Company determines the standalone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocates the transaction price in proportion to those standalone selling prices. Where possible, the Company uses the price charged for the good or service to other customers in similar circumstances as evidence of standalone selling price. Where this is not possible, the standalone selling price is estimated by experienced management using the best available judgement.
With respect to performance obligations that are considered to be a series, where appropriate and where the required criteria are met, variable consideration is allocated entirely to a distinct good or service that is part of a series.
Step 5 – Recognize revenue
The Company recognizes revenue over time for performance obligations that meet one of the following criteria:
Revenue for the Company’s remaining performance obligations that do not meet one of the above criteria is recognized at the point at which the customer obtains control of the good or service.
Server Based Gaming Revenue
Revenue from SBG terminals, access to our content and SBG platform, including electronic table gaming products is recognized in accordance with the criteria set forth in ASC 606 and is usually based upon a contracted percentage of the operator’s net winnings from the terminals’ daily use. Where this is not the case, revenue is based upon a fixed daily or weekly usage fee. We recognize revenue from these arrangements in accordance with the series guidance over time on a daily basis over the term of the arrangement, or when not specified over the expected customer relationship period. Performance obligations under these arrangements may include the delivery and installation of our SBG terminals for use over a term, as well as service obligations related to hardware repairs and server based content and maintenance. Consideration with respect to these performance obligations typically takes the form of usage based fees, billed at the end of a set period (usually monthly) and due typically 30 days from the date of the invoice.
We sometimes bill for SBG arrangements up front in order to help fund our working capital and development requirements, or at the request of a customer. Upfront fees on SBG arrangements are deferred and recognized ratably over time, or when not specified over the expected customer relationship period, where they represent payment for future goods and services. In the case where we receive upfront fees pursuant to which there are no further obligations and no undelivered elements, we will recognize the upfront fees upon delivery. Upfront fees are normally billed upon signing of the relevant agreement, and become due and payable at set times thereafter. Hardware sales take the form of a transfer of ownership of our developed gaming terminals, and are recognized at a point in time upon delivery as they are considered to meet the required criteria to be considered distinct. Payment for hardware sales is typically due a set number of days after delivery.
SBG arrangements typically include service level agreements, consisting of a specified amount of ‘uptime’ with financial penalties for breaches in excess of specified levels.
Virtual Sports Revenue
Revenue from licensing of our gaming software is recognized in accordance with the criteria set forth in ASC 606. Virtual sports retail revenue, which includes the provision of virtual sports content and services to retail betting outlets, and virtual sports online and mobile revenue, which includes the provision of virtual sports content and services to mobile and online operators, is based upon a contracted percentage of the operator’s net winnings or a fixed rental fee. We recognize revenue for these fees over time on a daily or weekly basis in accordance with the series guidance over the term of the arrangement. Consideration with respect to these performance obligations typically takes the form of usage based fees, billed at the end of a set period (usually monthly) and due typically 30 days from the date of the invoice.
These arrangements also typically include a perpetual license billed up front, granted to the customer for access to our gaming platform and content. As these up front bills represent payment for future services, revenue from the licensing of perpetual licenses is recognized ratably over time, or when not specified, over the expected customer relationship period. Upfront fees are normally billed upon signing of the relevant agreement, and become due and payable at set times thereafter.
Revenue from the development of bespoke games licensed on a perpetual basis to mobile and online operators is recognized at a point in time on delivery and acceptance by the customer. We have no ongoing service obligations subsequent to customer acceptance of our bespoke games, and they meet the criteria to be considered as distinct. Payment for bespoke games is typically due a set number of days after delivery.
Virtual Sports arrangements typically include service level agreements, consisting of a specified amount of ‘uptime’ with financial penalties for breaches in excess of specified levels.
Disaggregation of revenue
Information on disaggregation of revenue is included in Note 25 “Segment Reporting and Geographic Information.”
| 2. |
Accounts receivable consist of the following:
September 30, 2019 | September 30, 2018 | |||||||
| (in millions) | ||||||||
| Trade receivables | $ | 12.2 | $ | 17.8 | ||||
| Less: long-term receivable recorded in other assets | (1.6 | ) | (2.2 | ) | ||||
| Other receivables | 0.1 | 0.1 | ||||||
| Allowance for doubtful accounts | (0.7 | ) | (1.4 | ) | ||||
| Total accounts receivable, net | $ | 10.0 | $ | 14.3 | ||||
| Inventory |
Inventory consists of the following:
September 30, 2019 | September 30, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
| (in millions) | (in millions) | |||||||||||||||
| Component parts | $ | 3.7 | $ | 3.6 | $ | 13.3 | $ | 12.7 | ||||||||
| Work in progress | 1.5 | 2.1 | ||||||||||||||
| Finished goods | 1.4 | 1.6 | 4.2 | 4.0 | ||||||||||||
| Total inventories | $ | 5.1 | $ | 5.2 | $ | 19.0 | $ | 18.8 | ||||||||
Component parts include parts for gaming terminals. Included in component partsinventory are reserves for excess and slow-moving inventory of $0.2$1.2 million and $0.5$0.9 million as of SeptemberJune 30, 20192020 and 2018,December 31, 2019, respectively. Our finished goods inventory primarily consists of gaming terminals which are ready for sale.
Prepaid expenses and other assets consist of the following:
| September 30, 2019 | September 30, 2018 | |||||||
| (in millions) | ||||||||
| Prepaid expenses and other assets | $ | 4.3 | $ | 5.0 | ||||
| Unbilled accounts receivable | 7.4 | 10.8 | ||||||
| Total prepaid expenses and other assets | $ | 11.7 | $ | 15.8 | ||||
| September 30, 2019 | September 30, 2018 | |||||||
| (in millions) | ||||||||
| Short-term leasehold property | $ | 0.3 | $ | 0.4 | ||||
| Video lottery terminals | 113.1 | 121.7 | ||||||
| Construction in progress | 0.3 | — | ||||||
| Computer equipment | 8.4 | 8.7 | ||||||
| Plant and machinery | 2.0 | 2.5 | ||||||
| 124.1 | 133.3 | |||||||
| Less: accumulated depreciation and amortization | (95.6 | ) | (87.6 | ) | ||||
| $ | 28.5 | $ | 45.7 | |||||
Depreciation and amortization expense amounted to $3.7 million and $4.7 million for the three months ended September 30, 2019 and 2018, respectively, and $12.9 million and $15.5 million for the nine months ended September 30, 2019 and 2018, respectively.
Software development costs, net consisted of the following:
| September 30, 2019 | September 30, 2018 | |||||||
| (in millions) | ||||||||
| Software development costs | $ | 109.5 | $ | 100.9 | ||||
| Less: accumulated amortization | (72.7 | ) | (60.9 | ) | ||||
| $ | 36.8 | $ | 40.0 | |||||
During the three months ended September 30, 2019 and 2018, the Company capitalized $3.7 million and $4.6 million of software development costs, respectively. During the nine months ended September 30, 2019 and 2018, the Company capitalized $11.1 million and $13.4 million of software development costs, respectively. Amounts in the above table include $1.0 million and $1.3 million of internal use software at September 30, 2019 and 2018, respectively.
The total amount of software costs amortized was $3.8 million and $5.1 million for the three months ended September 30, 2019 and 2018, respectively, and $11.8 million and $14.2 million for the nine months ended September 30, 2019 and 2018, respectively. Software costs written down to net realizable value amounted to $0.0 million and $5.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.0 million and $5.4 million for the nine months ended September 30, 2019 and 2018, respectively. The weighted average amortization period was 3.1 years for the three and nine months ended September 30, 2019 and 3.1 years and 3.2 years for the three and nine months ended September 30, 2018, respectively.
The estimated software amortization expense for the years ending December 31 are as follows:
| Year ending December 31, (in millions) | ||||
| 2019 (three months) | $ | 4.5 | ||
| 2020 | 15.7 | |||
| 2021 | 9.5 | |||
| 2022 | 4.5 | |||
| 2023 | 1.8 | |||
| Thereafter | 0.8 | |||
| Total | $ | 36.8 | ||
The following tables present certain information regarding our intangible assets. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives of ten years with no estimated residual values, which materially approximates the expected pattern of use.
| September 30, 2019 | September 30, 2018 | |||||||
| (in millions) | ||||||||
| Trademarks | $ | 16.7 | $ | 17.6 | ||||
| Customer relationships | 14.2 | 15.1 | ||||||
| 30.9 | 32.7 | |||||||
| Less: accumulated amortization | (28.6 | ) | (27.0 | ) | ||||
| $ | 2.3 | $ | 5.7 | |||||
Aggregate intangible asset amortization expense amounted to $0.8 million for the three months ended September 30, 2019 and 2018 and $2.4 million and $2.6 million for the nine months ended September 30, 2019 and 2018, respectively.
The estimated intangible asset amortization expense for the years ending December 31 are as follows:
| Year ending December 31, (in millions) | ||||
| 2019 (three months) | $ | 0.8 | ||
| 2020 | 1.5 | |||
| Total | $ | 2.3 | ||
Goodwill
The difference in the carrying amount of goodwill at September 30, 2019 and 2018 (amounting to $2.5 million), as reported in the accompanying unaudited interim condensed consolidated balance sheets, is attributable to foreign currency translation adjustments.
Other assets consist of the following:
| September 30, 2019 | September 30, 2018 | |||||||
| (in millions) | ||||||||
| Pension surplus | $ | — | $ | 5.3 | ||||
| Long term receivables | 1.6 | 2.2 | ||||||
| Fair value of hedging instrument | 2.0 | — | ||||||
| Long term prepaid expenses and other assets | 2.9 | 4.6 | ||||||
| $ | 6.5 | $ | 12.1 | |||||
Accrued expenses consist of the following:
| September 30, 2019 | September 30, 2018 | |||||||
| (in millions) | ||||||||
| Direct costs of sales | $ | 3.7 | $ | 4.4 | ||||
| Payroll and related costs | 3.9 | 3.1 | ||||||
| Accrued corporate cost expenses | 1.1 | 3.2 | ||||||
| Asset retirement obligations | 0.9 | 0.5 | ||||||
| Contract termination costs | 0.1 | — | ||||||
| Interest payable - cash | — | 0.1 | ||||||
| Other creditors | 5.5 | 3.0 | ||||||
| $ | 15.2 | $ | 14.3 | |||||
| Contract Liabilities and Other Disclosures |
The following table summarizes the changes in contract liabilities:related balances:
| Deferred Income | ||||
| (in millions) | ||||
| Balance at October 1, 2018 | $ | (33.1 | ) | |
| Revenue recognized | 11.8 | |||
| Revenue deferred | (8.2 | ) | ||
| Foreign currency translation adjustments | 2.3 | |||
| Balance at September 30, 2019 | $ | (27.2 | ) | |
| Deferred Income | ||||
| (in millions) | ||||
| Balance at October 1, 2017 | $ | (27.3 | ) | |
| Revenue recognized | 10.6 | |||
| Revenue deferred | (16.9 | ) | ||
| Foreign currency translation adjustments | 0.5 | |||
| Balance at September 30, 2018 | $ | (33.1 | ) | |
| Accounts Receivable | Unbilled Accounts Receivable | Deferred Income | Customer Prepayments and Deposits | |||||||||||||
| (in millions) | ||||||||||||||||
| At June 30, 2020 | $ | 19.7 | $ | 7.4 | $ | (24.0 | ) | $ | (0.9 | ) | ||||||
| At December 31, 2019 | $ | 24.5 | $ | 15.3 | $ | (27.8 | ) | $ | (1.9 | ) | ||||||
| At December 31, 2018 | $ | 11.5 | $ | 11.0 | $ | (32.0 | ) | $ | (3.6 | ) | ||||||
Revenue recognized that was included in the deferred income balance at the beginning of the period amounted to $9.4$5.9 million and $7.7$9.6 million for the ninesix months ended SeptemberJune 30, 20192020 and the year ended September 30, 2018,December 31, 2019, respectively.
The following table summarizes contract related balances (other than deferred income disclosed above):
| Accounts Receivable | Unbilled Accounts Receivable | Customer Prepayments and Deposits | ||||||||||
| (in millions) | ||||||||||||
| At October 1, 2018 | $ | 17.8 | $ | 10.8 | $ | (3.7 | ) | |||||
| At September 30, 2019 | $ | 12.2 | $ | 7.4 | $ | (3.2 | ) | |||||
| Accounts Receivable | Unbilled Accounts Receivable | Customer Prepayments and Deposits | ||||||||||
| (in millions) | ||||||||||||
| At October 1, 2017 | $ | 25.5 | $ | 9.5 | $ | (4.3 | ) | |||||
| At September 30, 2018 | $ | 17.8 | $ | 10.8 | $ | (3.7 | ) | |||||
Other liabilities consist of the following:
| September 30, 2019 | September 30, 2018 | |||||||
| (in millions) | ||||||||
| Customer prepayments and deposits | $ | 3.2 | $ | 3.7 | ||||
| Fair value of hedging instrument | 0.3 | 0.2 | ||||||
| Total other liabilities, current | 3.5 | 3.9 | ||||||
| Other payables, net of current portion | — | 0.5 | ||||||
| Asset retirement obligations | 0.2 | 0.4 | ||||||
| Pension liability | 0.4 | — | ||||||
| Senior debt exit premium | 4.2 | 4.2 | ||||||
| Total other liabilities, long-term | 4.8 | 5.1 | ||||||
| $ | 8.3 | $ | 9.0 | |||||
| Long Term and Other Debt |
As ofOn September 30, 2019, the Company’s debt included $140.0 million of senior notes issued under a Note Purchase Agreement and Guaranty dated August 13, 2018 (the “NPA”) with a 5-year duration and a cash interest rate of 9% plus 3-month LIBOR borrowings under a revolving credit facility (the “2018 Revolving Facility Agreement”) with a 3-year duration and a cash interest rate on any utilization at 4% plus 3-month LIBOR, with any unutilized amount carrying a 1.4% cash interest cost (the NPA, together with the 2018 Revolving Credit Facility, the “Existing Financing”). As of September 30,27, 2019, the Company, also hadtogether with certain direct and indirect wholly-owned subsidiaries, entered into a 3-year, fixed-rate, cross-currency swapSenior Facilities Agreement (the “SFA”) with Lucid Agency Services Limited, as agent, Nomura International plc and Macquarie Corporate Holdings Pty Limited (UK Branch) as arrangers and/or bookrunners and each lender party thereto (the “Lenders”), pursuant to which the Lenders agreed to provide, subject to certain conditions, two tranches of senior secured term loans (the “Term Loans”), in an original principal amount of £140.0 million ($173.0 million) and €90.0 million ($101.1 million), respectively and a secured revolving facility loan in an original principal amount of £20.0 million ($24.7 million).
On June 25, 2020, the Company, certain direct and indirect subsidiaries of the Company, Lucid Agency Services Limited, and Lucid Trustee Services Limited as security agent under the SFA and the Intercreditor Agreement (as defined in the SFA), entered into an Amendment and Restatement Agreement (the “ARA”) with respect to the NPA (see Note 13).SFA.
The ARA amends the SFA by, among other things, (i) capitalizing certain interest payments that fell due on April 1, 2020, (ii) resetting the leverage and capital expenditure financial covenants applicable under the SFA, removing certain rating requirements under the SFA, (iii) allowing the Company and its subsidiaries to incur additional indebtedness under the UK Coronavirus Large Business Interruption Loan Scheme under a stand-alone facility, which may rank pari passu or junior to the facilities under the SFA, in an amount not exceeding £10.0 million ($12.4 million), (iv) removing certain rating requirements under the SFA, (v) limiting the ability of the Company and its subsidiaries to incur additional indebtedness, including by reducing the amount of general indebtedness the Company and its subsidiaries are permitted to incur and removing the ability to incur senior secured, second lien and unsecured indebtedness in an amount not exceeding the aggregate of (A) an unlimited amount, as long as, pro forma for the utilization of such indebtedness, the consolidated total net leverage ratio does not exceed the lower of 3.4:1 and the then applicable ratio with respect to the consolidated total net leverage financial covenant summarized further below, plus (B) an amount equal to the greater of £16.0 million ($19.8 million) and 25% of the consolidated pro forma EBITDA of the Company and its subsidiaries for the relevant period (as defined in the SFA, but disregarding, for the purposes of calculating the usage of such cap, any financial indebtedness applied to refinancing other financial indebtedness, together with any related interest, fees, costs and expenses), (vi) increasing the margin applicable to the Facilities (as defined in the SFA) by 1% and adding an additional payment-in-kind margin of 0.75% payable on any principal amounts outstanding under Facility B (as defined in the SFA) after September 24, 2021 (the “Relevant Date”), (vii) adding an exit fee payable by the Company with respect to any repayment or prepayment of Facility B after the Relevant Date at the time of such repayment or prepayment in an amount equal to 0.75% of the principal amount of Facility B being repaid or prepaid, (viii) removing any ability to carry forward or carry back any unused allowance under the capital expenditure financial covenant in the SFA and (ix) granting certain additional information rights to the Lenders under the SFA, including the provision of a budget, and certain board observation rights until December 31, 2022. All other material terms of the SFA remain unchanged in all material respects.
In connectionconsideration for the amendments listed above, the Company agreed to pay the Lenders an amendment fee equal to 1% of the Total Commitments (as defined in the SFA) after giving effect to the capitalization of the interest payment described above. The amendment fee is payable to the Lenders pro rata to their commitments under the SFA.
The modification to the SFA is not considered to be substantial in accordance with Topic 470-50 and has therefore not been treated as a debt extinguishment. The amendment fees, amounting to $3.1 million, are associated with the acquisition of NTG,modified debt instrument and will be amortized along with the Company entered into a new senior facilities agreement dated September 27, 2019 (“SFA”) and used a portionexisting unamortized debt issuance costs. Fees payable to third parties are expensed as incurred, resulting in $1.0 million charged to interest expense for the three months ended June 30, 2020.
There were no breaches of the loans available under the SFA to prepay and terminate the Existing Financing on October 1, 2019 (see Note 27). The termination of the NPA carried a prepayment premium of 3.00% of the amount repaid or prepaid, or $4.2 million, which is included in other long term liabilitiesdebt covenants in the accompanying condensed consolidated balance sheet. No prepayment premium applies to the 2018 Revolving Facility Agreement. In addition, on October 1, 2019, the Company terminated the 3-year, fixed-rate, cross-currency swap.periods ended June 30, 2020 and December 31, 2019.
The new term loans have a 5-year duration and are repayable in full on October 1, 2024. The £140.0 million ($172.5 million) loan carries a cash interest rate of 7.25% plus 3-month LIBOR, the €90.0 million ($98.1 million) loan carries a cash interest rate of 6.75% plus a 3-month EUROLIBOR. The £20.0 million revolving credit facility is available until September 1, 2024 and carries a cash interest rate on any utilization at 5.50% plus 3-month LIBOR, with any unutilized amount carrying a cash interest cost at 30% of the applicable margin on the revolving credit facility loan.
During the nine months ended September 30, 2019, the Company borrowed the full amount available under the 2018 Revolving Credit Facility, for an aggregate amount outstanding of $9.0 million at September 30, 2019, which is included in current portion of long-term debt in the accompanying condensed balance sheet.
Outstanding Debt and CapitalFinance Leases
The following reflects outstanding debt and capital leases as of the dates indicated below:June 30, 2020:
| Principal | Unamortized deferred financing charge | Book value, September 30, 2019 | ||||||||||
| (in millions) | ||||||||||||
| Senior bank debt | $ | 149.0 | $ | (7.2 | ) | $ | 141.8 | |||||
| Capital leases and hire purchase contract | 0.1 | — | 0.1 | |||||||||
| Total long-term debt outstanding | 149.1 | (7.2 | ) | 141.9 | ||||||||
| Less: current portion of long-term debt | (9.1 | ) | — | (9.1 | ) | |||||||
| Long-term debt, excluding current portion | $ | 140.0 | $ | (7.2 | ) | $ | 132.8 | |||||
| Principal | Unamortized deferred financing charge | Book value, September 30, 2018 | ||||||||||
| (in millions) | ||||||||||||
| Senior bank debt | $ | 140.0 | $ | (8.7 | ) | $ | 131.3 | |||||
| Capital leases and hire purchase contract | 0.5 | — | 0.5 | |||||||||
| Total long-term debt outstanding | 140.5 | (8.7 | ) | $ | 131.8 | |||||||
| Less: current portion of long-term debt | (0.5 | ) | — | (0.5 | ) | |||||||
| Long-term debt, excluding current portion | $ | 140.0 | $ | (8.7 | ) | $ | 131.3 | |||||
The Company is in compliance with all relevant financial covenants and the long term debt portion is correctly classified as such in line with the underlying agreements.
Long term debt as of September 30, 2019 matures as follows:
| Fiscal period: | Senior bank debt | Capital leases and hire purchase contract | Total | |||||||||
| (in millions) | ||||||||||||
| 2019 | $ | 9.0 | $ | 0.1 | $ | 9.1 | ||||||
| 2020 | — | — | — | |||||||||
| 2021 | — | — | — | |||||||||
| 2022 | — | — | — | |||||||||
| 2023 | 140.0 | — | 140.0 | |||||||||
| Total | $ | 149.0 | $ | 0.1 | $ | 149.1 | ||||||
| Principal | Unamortized deferred financing charge | Book value, June 30, 2020 | ||||||||||
| (in millions) | ||||||||||||
| Senior bank debt | $ | 309.5 | $ | (16.4 | ) | $ | 293.1 | |||||
| Finance lease liabilities | 1.1 | — | 1.1 | |||||||||
| Total long-term debt outstanding | 310.6 | (16.4 | ) | 294.2 | ||||||||
| Less: current portion of long-term debt | (25.3 | ) | — | (25.3 | ) | |||||||
| Long-term debt, excluding current portion | $ | 285.3 | $ | (16.4 | ) | $ | 268.9 | |||||
| Derivatives and Hedging Activities |
As of September 30, 2019,On January 15, 2020, the Company was partyentered into two interest rate swaps with UBS AG designed to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a 3-year, fixed-rate, cross-currency swap with Nomura Global Financial Products Inc. which swapped the principal and interest payments that would be payable in USD under the NPA to Euros (“EUR”), in part, and GBP, in part. Specifically, with respect to the principal payments 1/3portion of the payments would be swapped from USD to EUR and 2/3current floating rate debt facilities. The swaps fix the variable interest rate of the payments from USD to GBP. Additionally, with respect to thecurrent debt facilities and provide protection over potential interest payments 1/3 would be swapped from USD to GBP and 2/3 from USD to EUR. The swap provided forrate increases by providing a foreign exchangefixed rate of $1.13935 USD per €1 EURinterest payment in return. These interest rate swaps are for £95 million at a fixed rate of 0.9255% based on the 6-month LIBOR rate and $1.27565 USD per £1 GBP.
In connection withfor €60 million at a fixed rate of 0.102% based on the entry into the SFA,6 month EUROLIBOR rate and are effective until maturity on October 1, 2019, the Company terminated the 3-year, fixed-rate, cross-currency swap (see Note 27).2023.
Risk Management ObjectiveHedges of Using DerivativesMultiple Risks
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, includingCompany’s objectives in using interest rate liquidity,derivatives are to add stability to interest and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Certain of the Company’s foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain liabilities in terms of its functional currency, GBP.
Hedges of Multiple Risks
The Company has variable-rate borrowings denominated in currencies other than its functional currency. As a result, the Company is exposed to fluctuations in both the underlying variable interest rate and the foreign currency of the borrowing against its functional currency, GBP. The Company uses derivatives including cross-currency interest rate swaps to manage its exposure to fluctuations ininterest rate movements. To accomplish this objective, the variable borrowing rate and the GBP-USD exchange rate. Cross-currencyCompany primarily uses interest rate swaps involve exchanging fixedas part of its interest rate interest payments for floatingrisk management strategy. Interest rate interest receipts both of which will occur at the GBP-USD forward exchange rates in effect upon entering into the instrument. The Company designates these derivativesswaps designated as cash flow hedges involve the receipt of both interest rate and foreignvariable amounts from a counterparty in exchange risks.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 both interest rate risk and foreign exchange risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the periodssame period(s) during which the hedged transaction affects earnings withinearnings. Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the same income statement line item asCompany’s variable-rate debt. During the earnings effect ofnext twelve months, the hedged transaction. The Company estimates that during the year ended December 31, 2019,an additional $1.5 million will be reclassified as a reductionan increase to interest expense.
As of SeptemberJune 30, 2019 and 2018,2020, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges that were used to hedge bothof interest rate risk and foreign exchange risk:
| Foreign Currency Derivative | Number of Instruments | Pay Fixed Notional | Receive Floating Notional | |||||||
| (in millions) | ||||||||||
| Cross currency interest rate swaps | 1 | GBP | 36.6 | USD | 46.7 | |||||
Non-designated Hedges
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
As of September 30, 2019 and 2018, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:
| Foreign Currency Derivative | Number of Instruments | Pay Fixed Notional | Receive Floating Notional | |||||||
| (in millions) | (in millions) | |||||||||
| Cross currency interest rate swaps | 1 | EUR | 81.9 | USD | 93.3 | |||||
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheet as of September 30, 2019.
| Balance Sheet Classification | Asset Derivatives Fair Value | Balance Sheet Classification | Liability Derivatives Fair Value | |||||||||
| (in millions) | (in millions) | |||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||
| Interest Rate and Foreign Exchange Products | Fair Value of Hedging Instruments | $ | 2.6 | Derivative Liability | $ | — | ||||||
| Total derivatives designated as hedging instruments | $ | 2.6 | $ | — | ||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||
| Interest Rate and Foreign Exchange Products | Fair Value of Hedging Instruments | $ | — | Derivative Liability | $ | (0.8 | ) | |||||
| Total derivatives not designated as hedging instruments | $ | — | $ | (0.8 | ) | |||||||
| Interest Rate Derivative | Number of Instruments | Notional | |||
| Interest rate swaps | 2 | £95 million at a fixed rate of 0.9255% based on the 6-month LIBOR rate and €60 million at a fixed rate of 0.102% based on the 6 month EUROLIBOR rate | |||
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheet as of SeptemberJune 30, 2018.2020.
| Balance Sheet Classification | Asset Derivatives Fair Value | Balance Sheet Classification | Liability Derivatives Fair Value | |||||||||
| (in millions) | (in millions) | |||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||
| Interest Rate and Foreign Exchange Products | Fair Value of Hedging Instruments | $ | 0.8 | Derivative Liability | $ | (3.4 | ) | |||||
| Total derivatives designated as hedging instruments | $ | 0.8 | $ | (3.4 | ) | |||||||
| Derivatives not designated as hedging instruments: | ||||||||||||
| Interest Rate and Foreign Exchange Products | Fair Value of Hedging Instruments | $ | — | Derivative Liability | $ | (4.4 | ) | |||||
| Total derivatives not designated as hedging instruments | $ | — | $ | (4.4 | ) | |||||||
| Balance Sheet Classification | Asset Derivatives Fair Value | Balance Sheet Classification | Liability Derivatives Fair Value | |||||||||
| (in millions) | (in millions) | |||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||
| Interest Rate Products | Fair Value of Hedging Instruments | $ | — | Other Current Liabilities and long term Derivative Liability | $ | (2.1 | ) | |||||
| Total derivatives designated as hedging instruments | $ | — | $ | (2.1 | ) | |||||||
The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income as of SeptemberAccumulated Other Comprehensive Income for the six months ended June 30, 2019.2020.
| Amount of Gain Recognized in Other Comprehensive Income on Derivative | Location of Gain Reclassified from Accumulated Other Comprehensive Income into Income | |||||||||
| (in millions) | (in millions) | |||||||||
| Interest Rate and Foreign Exchange Products | $ | 3.4 | Interest Expense | $ | 1.3 | |||||
| Foreign Currency Remeasurement | 3.2 | |||||||||
| Total | $ | 3.4 | $ | 4.5 | ||||||
The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income as of September 30, 2018.
| Amount of Gain Recognized in Other Comprehensive Income on Derivative | Location of Gain Reclassified from Accumulated Other Comprehensive Income into Income | |||||||||
| (in millions) | (in millions) | |||||||||
| Interest Rate and Foreign Exchange Products | $ | 0.3 | Interest Expense | $ | — | |||||
| Foreign Currency Remeasurement | 0.3 | |||||||||
| Total | $ | 0.3 | $ | 0.3 | ||||||
The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements as of September 30, 2019.
| Interest Expense | Foreign Currency Remeasurement | |||||||
| (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 | $ | 12.9 | $ | 0.9 | ||||
| Gain/(loss) on cash flow hedging relationships in Subtopic 815-20 | $ | 1.3 | $ | 3.2 | ||||
| Amount of Gain/(Loss) Recognized in Other Comprehensive Income on Derivative | Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Income | |||||||||
| (in millions) | (in millions) | |||||||||
| Interest Rate and Foreign Exchange Products | $ | (2.3 | ) | Interest Expense | $ | (0.7 | ) | |||
| Total | $ | (2.3 | ) | $ | (0.7 | ) | ||||
The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements asConsolidated Statements of SeptemberOperations for the six months ended June 30, 2018.2020.
| Interest Expense | Foreign Currency Remeasurement | Interest Expense | ||||||||||
| (in millions) | (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 | $ | 15.7 | $ | (3.9 | ) | $ | 14.2 | |||||
| Gain/(loss) on cash flow hedging relationships in Subtopic 815-20 | $ | — | $ | 0.3 | $ | (0.7 | ) | |||||
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments in the consolidated income statement as of September 30, 2019.
| Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 | Location of Income Recognized in | Amount of Income Recognized in Income on Derivative | ||||
| (in millions) | ||||||
| Interest Rate and Foreign Exchange Products | Change in fair value of derivative liability | $ | 2.8 | |||
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments in the consolidated income statement as of September 30, 2018.
| Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 | Location of Loss Recognized in | Amount of Loss Recognized in Income on Derivative | ||||
| (in millions) | ||||||
| Interest Rate and Foreign Exchange Products | Change in fair value of derivative liability | $ | (7.4 | ) | ||
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of SeptemberJune 30, 2019 and 2018.2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheet.
The ISDA Master Agreement between Gaming Acquisitions Limited, a wholly-owned subsidiary of the Company, and Nomura Global Financial Products, Inc.UBS AG is documented using the 2002 Form and the ISDA standard set-off provision in Section 6(f) of the ISDA Master Agreement apply to both parties and is only modified to include Affiliates of the Payee. There is no CSA and thus there is no collateral posting. The only other security for the ISDA include a guaranty of Nomura’s obligations from Nomura Holdings, Inc. and with respect to Gaming Acquisitions Limited, its obligations under the ISDA are cross-collateralized with the debt obligations under the Credit Agreement in the same pool of collateral that supports the debt obligations.
Offsetting of Derivative Assets
September 30, 2019
Gross Amounts Not Offset in the Statement of Financial Position | ||||||||||||||||||||||||
| Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Financial Position | Net Amounts | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Fair value of hedging instrument | $ | 2.6 | $ | — | $ | 2.6 | $ | — | $ | — | $ | — | ||||||||||||
| Offsetting of Derivative Liabilities | ||||||||||||||||||||||||
| September 30, 2019 | ||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statement of Financial Position | ||||||||||||||||||||||||
| Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Liabilities presented in the Statement of Financial Position | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Fair value of hedging instrument | $ | 0.8 | $ | — | $ | 0.8 | $ | — | $ | — | $ | — | ||||||||||||
| Offsetting of Derivative Assets | ||||||||||||||||||||||||
| June 30, 2020 | ||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statement of Financial Position | ||||||||||||||||||||||||
| Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets presented in the Statement of Financial Position | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Fair value of hedging instrument | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Offsetting of Derivative Assets | ||||||||||||||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statement of Financial Position | ||||||||||||||||||||||||
| Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets presented in the Statement of Financial Position | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Fair value of hedging instrument | $ | 0.8 | $ | — | $ | 0.8 | $ | — | $ | — | $ | — | ||||||||||||
| Offsetting of Derivative Liabilities | Offsetting of Derivative Liabilities | Offsetting of Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statement of Financial Position | Gross Amounts Not Offset in the Statement of Financial Position | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Liabilities presented in the Statement of Financial Position | Financial Instruments | Cash Collateral Received | Net Amount | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Liabilities presented in the Statement of Financial Position | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of hedging instrument | $ | 7.8 | $ | — | $ | 7.8 | $ | — | $ | — | $ | — | $ | 2.1 | $ | — | $ | 2.1 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Credit-risk-related Contingent Features
The Company has entered into an industry standard ISDA Master Agreement, with a negotiated Scheduled thereto (the “ISDA Agreement”), with the counterparty to its derivative transactions and which ISDA Agreement sets forth various provisions which govern the trading relationship between the Company and its counterparty. Such provisions include certain events which, if triggered by either party, may give rise to an acceleration of the ISDA Agreement, thus triggering the exchange of a breakage payment between the parties.
The ISDA Agreement with the Company’s derivative counterparty contains a provision where the Company could be declared in default on its derivative obligations if, among others, its repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. The ISDA Agreement can also be accelerated if Lucid Trustee Services Limited requests or requires that the Company’s creditworthiness becomes materially weaker as the result of a merger, change of controllender terminates or substantial change in capital structure or if the Company’s obligationscloses-out any Transaction under the ISDA Agreement are no longer securedpursuant to Clause 4.10 of the Intercreditor Agreement between primarily the Company, Lucid Agency Services as Senior Agent and Lucid Trustee Services Limited as Security Agent; in the event of certain refinancing circumstances; and in the event of certain reductions in the principal with respect to amounts loaned under the underlying indebtedness.Senior Facilities Agreement.
As of SeptemberJune 30, 2019 and 2018,2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to the ISDA Agreements was ($0.8) and ($7.0), respectively.$2.1 million. As of SeptemberJune 30, 2019,2020, the Company has not posted any collateral related to the ISDA Agreement, as no collateral is required under the terms of such ISDA Agreement. If the Company had breached any of the provision under the ISDA Agreement which resulted in an acceleration of the ISDA Agreement at SeptemberJune 30, 2019,2020, it could have been required to settle its obligations under the ISDA Agreement at its termination value of $1.0 million.$2.5 million
| 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 which are principally cash, accounts receivable, prepaid expenses and other current assets, accounts payable and other long term liabilities, 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.
| September 30, | September 30, | |||||||||||
| Level | 2019 | 2018 | ||||||||||
| (in millions) | ||||||||||||
| Earnout liability (see Note 15) | 3 | $ | — | $ | 8.0 | |||||||
| Derivative liability (see Notes 13 and 16) | 2 | $ | 0.5 | $ | 7.8 | |||||||
| Long term receivable (included in other assets) | 2 | $ | 1.6 | $ | 2.2 | |||||||
| June 30, | December 31, | |||||||||
| Level | 2020 | 2019 | ||||||||
| (in millions) | ||||||||||
| Derivative liability (see Note 5) | 2 | $ | 2.1 | $ | — | |||||
| Long term receivable (included in other assets) | 2 | $ | 1.3 | $ | 1.5 | |||||
Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s principal financial officer, who reports to the principal executive officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Principal Financial Officer and approved by the Principal Executive Officer.
Level 3 financial liabilities consist of the earnout liability for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptionsAt June 30, 2020 and recorded as appropriate (see Note 15).
At September 30,December 31, 2019, and 2018, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
An earnout payment of up to 2,500,000 shares of the Company’s common stock, subject to certain customary anti-dilution adjustments (the “Earnout Consideration”), was payable pursuant to the Sale Agreement to the previous owners of Inspired based on the financial performance of the Company’s businesses in six specific countries, China, Colombia, Greece, Norway, Spain and Ukraine (collectively, the “Earnout Jurisdictions”), as measured by earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the twelve months ended September 30, 2018 (the “Earnout Period”), with the maximum earnout payment of 2,500,000 shares issuable if such EBITDA results with respect to the Earnout Jurisdictions was equal to or greater than £15,000. Based on the EBITDA results for such fiscal year with respect to the Earnout Jurisdictions, the Company issued 1,323,558 shares of common stock as Earnout Consideration in March 2019, resulting in an aggregate amount of $8.6 million recorded upon the settlement of the earnout liability, with a corresponding credit to stockholders’ deficit.
The following table provides a reconciliation of the beginning and ending balances for the earnout liability measured using significant unobservable inputs (Level 3):
| (in millions) | ||||
| Balance – September 30, 2018 | $ | 8.0 | ||
| Change in fair value of earnout liability | 0.6 | |||
| Settlement of earnout liability | (8.6 | ) | ||
| Balance – September 30, 2019 | $ | — | ||
All movements in the balance of the earnout liability were due to movements in the price of the Company’s common stock.
The Company’s 2018 Omnibus Incentive Plan (the “2018 Plan”) was adopted by the Company’s Board of Directors in September 2018 subject to approval by the Company’s stockholders, which was obtained in May 2019. Initial awards covering an aggregate of 542,770 restricted stock units (“RSUs”) were approved under the 2018 Plan with respect to fiscal 2018 to members of management and other participants with a three-year vesting schedule (i.e., one-third vesting on each of December 31, 2019, 2020 and 2021). These awards, which were subject to cancellation in the event stockholders did not approve the 2018 Plan during 2019, were initially classified as a derivative liability due to the grant terms containing a commitment by the Company to make a liquidated damages payment to the participants in cash (with respect to the value of one-third of the award) in the event stockholders did not approve the 2018 Plan by the first scheduled vesting date. Such obligation was eliminated upon stockholder approval of the 2018 Plan being obtained, which resulted in the liability being reclassified to additional paid in capital at the fair value amount of $0.8 million.
See Note 13, “Derivatives and Hedging Activities,” for a discussion of the Company’s cross-currency swap.
| Stock-Based Compensation |
The Company’s stock-based compensation plans authorize awards of RSUs,restricted stock units (“RSUs”), stock options and other equity-related awards. In May 2019, in conjunction with the Company’s stockholders approving the 2018 Omnibus Incentive Plan (the “2018 Plan”), which authorizes a total of 2,550,000 shares to be issued pursuant to awards thereunder, the balances available for awards under the Company’s predecessor plans (i.e., the 2016 Long-Term Incentive Plan and the Second Long-Term Incentive Plan) (collectively, the “Prior Plans”) were terminated. Although outstanding awards under the Prior Plans remain governed by the terms of the Prior Plans, no new awards will be granted or become available for grant under the Prior Plans.
Awards granted under the 2018 Plan prior to stockholder approval being obtained in May 2019 consisted of: (1) the 542,770 RSUs approved for management and other participants with respect to fiscal 2018 as to which the contingent cash-settlement feature lapsed upon approval of the 2018 Plan by stockholders (see Note 16, “Derivative Liability”) and (2) 572,346 RSUs approved for management and other participants with respect to fiscal 2019 comprised of two components: (i) 50% represent performance-based target RSUs that require both attainment of Company performance criteria for 2019 and the participants remaining employed for a three-year service period; and (ii) 50% represent service-based RSUs that vest over a period of three years. In addition, an aggregate of 86,500 RSUs were awarded during the nine months ended September 30, 2019 (following approval of the 2018 Plan by stockholders) as new hire or special recognition grants.
As of SeptemberJune 30, 2019,2020, there were (i) 2,489,1972,429,011 shares subject to outstanding awards under the Prior Plans, including 1,092,633 shares subject to market-price vesting conditions, and (ii) 1,201,6161,139,739 shares subject to outstanding awards under the 2018 Plan, including 286,181100,000 shares subject to performance-based target awards asand 241,077 shares subject to awards that were previously subject to performance criteria that were determined to be met in June 2020 (at a level equal to approximately 87% of the target awards) which the number that ultimately may vest would range from 0%awards continue to 200% based on the performance level attained.remain subject to a time-based vesting schedule. As of SeptemberJune 30, 2019,2020, there were 1,348,3841,136,945 shares available for new awards under the 2018 Plan (or 1,062,203 shares if we reflect inclusion of performance-based awards at the maximum level of performance) and no shares available for new awards under the Prior Plans. All awards consist of RSUs and Restricted Stock.
The Company also has an employee stock purchase plan (“ESPP”) that authorizes the issuance of up to an aggregate of 500,000 shares of common stock pursuant to purchases thereunder by employees. The ESPP, which was approved by stockholders in July 2017, is administered by the Compensation Committee which has discretion to designate the length of offering periods and other terms subject to the requirements of the ESPP. The Company beganheld a twelve-month offering period under the ESPP that began on June 3, 2019 that authorizesand ended on June 2, 2020. This offering period authorized employees to contribute up to 10% of their base compensation to purchase a maximum of 1,000 shares. The shares will be purchased on the last day of the offering period at a discounted purchase price that willwould be equal to 85% of the lower of: (i) the closing price at the beginning of the offering period and (ii) the closing price at the end of the offering period. The Company estimates that approximately 10,000A total of 7,649 shares will bewere purchased during thison the last day of the offering period.period, June 2, 2020, at a discounted price of $3.2215 per share. As of SeptemberJune 30, 2019,2020, a total of 475,400 shares467,751shares remain available for purchase under the ESPP.
A summary of the Company’s RSUsRSU activity during the twelve month periodsix months ended SeptemberJune 30, 20192020 is as follows:
| Number of Shares | ||||
| Unvested Outstanding at | ||||
| Granted | ||||
| Forfeited | ( | ) | ||
| Vested | ( | ) | ||
| Unvested Outstanding at | ||||
In addition, during the twelve months ended September 30, 2019,Company issued a total of 9,806166,959 shares were issued and 1,059 shares withheld for taxesduring the six months ended June 30, 2020 in connection with the net settlement of awards of RSUs.RSUs that vested on December 31, 2019.
Stock-based compensation is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. For performance awards that are contingent upon the Company achieving certain pre-determined financial performance targets, compensation expense is calculated based on the number of shares expected to vest after assessing the probability that the performance criteria will be met. Determining the probability of achieving a performance target requires estimates and judgment.
The Company recognized stock-based compensation expense for Restricted Stock and RSUs amounting to $2.2$1.0 million and $1.5$2.3 million for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, and $6.6$2.0 million and $4.2$4.4 million for the ninesix months ended SeptemberJune 30, 2020 and 2019, respectively. Total unrecognized compensation expense related to unvested stock awards and 2018, respectively.unvested RSUs at June 30, 2020 amounts to $5.9 million and is expected to be recognized over a weighted average period of 1.7 years.
| Accumulated Other Comprehensive Loss (Income) |
The accumulated balances for each classification of comprehensive loss (income) are presented below:
| Foreign Currency Translation Adjustments | Change in Fair Value of Hedging Instrument | Unrecognized Pension Benefit Costs | Accumulated Other Comprehensive (Income) | |||||||||||||
| (in millions) | ||||||||||||||||
| Balance at September 30, 2018 | $ | (78.9 | ) | $ | 0.1 | $ | 20.3 | $ | (58.5 | ) | ||||||
| Change during the period | — | (0.2 | ) | 2.8 | 2.6 | |||||||||||
| Balance at December 31, 2018 | (78.9 | ) | (0.1 | ) | 23.1 | (55.9 | ) | |||||||||
| Change during the period | 0.5 | 0.6 | (0.9 | ) | 0.2 | |||||||||||
| Balance at March 31, 2019 | (78.4 | ) | 0.5 | 22.2 | (55.7 | ) | ||||||||||
| Change during the period | (0.7 | ) | 0.2 | 2.0 | 1.5 | |||||||||||
| Balance at June 30, 2019 | (79.1 | ) | 0.7 | 24.2 | (54.2 | ) | ||||||||||
| Change during the period | (0.5 | ) | 0.3 | 3.1 | 2.9 | |||||||||||
| Balance at September 30, 2019 | $ | (79.6 | ) | $ | 1.0 | $ | 27.3 | $ | (51.3 | ) | ||||||
| Foreign Currency Translation Adjustments | Change in Fair Value of Hedging Instrument | Unrecognized Pension Benefit Costs | Accumulated Other Comprehensive (Income) | |||||||||||||
| (in millions) | ||||||||||||||||
| Balance at January 1, 2020 | $ | (76.5 | ) | $ | 1.4 | $ | 30.0 | $ | (45.1 | ) | ||||||
| Change during the period | (3.1 | ) | 1.1 | (4.4 | ) | (6.4 | ) | |||||||||
| Balance at March 31, 2020 | (79.6 | ) | 2.5 | 25.6 | (51.5 | ) | ||||||||||
| Change during the period | (0.4 | ) | 0.5 | 8.7 | 8.8 | |||||||||||
| Balance at June 30, 2020 | $ | (80.0 | ) | $ | 3.0 | $ | 34.3 | $ | (42.7 | ) | ||||||
| Foreign Currency Translation Adjustments | Change in Fair Value of Hedging Instrument | Unrecognized Pension Benefit Costs | Accumulated Other Comprehensive (Income) | |||||||||||||
| (in millions) | ||||||||||||||||
| Balance at January 1, 2019 | $ | (78.9 | ) | $ | (0.1 | ) | $ | 23.1 | $ | (55.9 | ) | |||||
| Change during the period | 0.5 | 0.6 | (0.9 | ) | 0.2 | |||||||||||
| Balance at March 31, 2019 | (78.4 | ) | 0.5 | 22.2 | (55.7 | ) | ||||||||||
| Change during the period | (0.7 | ) | 0.2 | 2.0 | 1.5 | |||||||||||
| Balance at June 30, 2019 | $ | (79.1 | ) | $ | 0.7 | $ | 24.2 | $ | (54.2 | ) | ||||||
Included within accumulated other comprehensive income is an amount of $0.9 million relating to the change in fair value of discontinued hedging instruments. This amount will be amortized as a charge to income over the life of the original instrument, to August 2021 in accordance with US GAAP. The remaining $2.1 million relates to currently active hedging instruments.
| Net Loss per Share |
Basic loss per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period, including stock options, restricted stock, RSUs and warrants, using the treasury stock method, and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.
The computation of diluted EPS excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
| Three and Nine Months Ended September 30, | Three and Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Earnout Shares | — | 1,314,896 | ||||||||||||||
| RSUs | 3,066,697 | 1,826,472 | 2,944,634 | 3,066,697 | ||||||||||||
| Unvested Restricted Stock | 624,116 | 624,116 | 624,116 | 624,116 | ||||||||||||
| Stock Warrants | 9,539,565 | 9,539,565 | 9,539,565 | 9,539,565 | ||||||||||||
| 13,230,378 | 13,305,049 | 13,108,315 | 13,230,378 | |||||||||||||
| Other Finance Income (Costs) |
Other finance income (costs) consisted of the following for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| (in millions) | (in millions) | (in millions) | (in millions) | |||||||||||||||||||||||||||||
| Pension interest cost | $ | (0.6 | ) | $ | (0.7 | ) | $ | (2.0 | ) | $ | (2.2 | ) | $ | (0.5 | ) | $ | (0.7 | ) | $ | (1.1 | ) | $ | (1.4 | ) | ||||||||
| Expected return on pension plan assets | 0.9 | 0.9 | 2.7 | 2.8 | 0.7 | 0.9 | 1.5 | 1.8 | ||||||||||||||||||||||||
| Foreign currency translation on senior bank debt | (4.5 | ) | 3.3 | (4.8 | ) | 3.3 | (2.7 | ) | (3.2 | ) | (6.6 | ) | (0.3 | ) | ||||||||||||||||||
| Foreign currency remeasurement on hedging instrument | 3.0 | — | 3.2 | — | — | 2.1 | — | 0.2 | ||||||||||||||||||||||||
| $ | (1.2 | ) | $ | 3.5 | $ | (0.9 | ) | $ | 3.9 | $ | (2.5 | ) | $ | (0.9 | ) | $ | (6.2 | ) | $ | 0.3 | ||||||||||||
| Income Taxes |
Income taxes are accounted for under the asset and liability method. Our provision for income taxes is principally based on current period income (loss), changes in deferred tax assets and liabilities and changes in estimates with regard to uncertain tax positions. We estimate current tax expense and assess temporary differences resulting from differing treatments of items for tax and accounting purposes using enacted tax rates in effect for each taxing jurisdiction in which we operate for the period in which those temporary differences are expected to be recovered or settled. These differences result in deferred tax assets and liabilities. Our total deferred tax assets are principally comprised of depreciation and net operating loss carry forwards.
The effective income tax rate for the three months ended SeptemberJune 30, 2020 and 2019 was 0.4% and 20180.9%, respectively, resulting in a $0.1 million income tax expense in both periods. The effective income tax rate for the six months ended June 30, 2020 and 2019 was 1.2%0.7% and 0.0%, respectively, resulting in a $0.1$0.3 million and $0.0 million income tax expense, respectively. The Company’s effective income tax rate forhas fluctuated primarily as a result of the nine months ended September 30, 2019 and 2018 was 0.4% and 0.6%, respectively, resulting in a $0.1 million and $0.1 million income tax (expense)/benefit, respectively. mix between jurisdictions.
The income tax benefitexpense for the three and ninesix months ended SeptemberJune 30, 2020 and 2019 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to changes inpre-tax losses for which no tax benefit can be recorded, and foreign earnings being taxed at rates different than the valuation allowance for deferred taxes and the net losses generated by the Company’s non-US foreign subsidiaries. The income tax expense for the three and nine months ended September 30, 2018 differs from the amount that would be expected after applying theUS statutory U.S. federal income tax rate primarily due to the impact of the U.S. statutory tax rate change on deferred tax assets and liabilities, the changes in the valuation allowance for deferred taxes and the net losses generated by the Company’s non-US foreign subsidiaries.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the consideration of these items, management determined that it is more likely than not that the Company will not realize the deferred income tax asset balances and therefore, recorded a full valuation allowance of $61.3 million as of September 30, 2019.
The utilization of the Company’s pre-Merger net operating losses is subject to a limitation due to the “change of ownership provisions” under Section 382 of the Internal Revenue Code and similar state provisions.rate.
| Related Parties |
HG Vora Special Opportunities Master Fund, Ltd.Macquarie Corporate Holdings Pty Limited (UK Branch) (“HGV Fund”Macquarie UK”), which purchasedis an affiliate of MIHI LLC, the promissory notes issued under the NPA (see Note 12), ownsbeneficial owner of approximately 16.5%16.75% of our common stock and warrants to purchase additional shares. HGV Fundstock. Macquarie UK is also a stockholder and investor in Leisure Acquisition Corp., a special purpose acquisition company affiliated with two membersone of our management. Interest expense paid to HGV Fundthe lending parties with respect to our senior secured term loans and revolving credit facility under our senior facilities agreement dated September 27, 2019, as amended and restated on June 25, 2020 (the “SFA”) (see Note 4). The portion of the promissory notes for the three and nine months ended Septembertotal loans of $309.5 million under these facilities held by Macquarie UK at June 30, 2019 amounted to $4.1 million and $12.3 million, respectively.2020 was $27.9 million. Interest expense paidpayable to HGV Fund with respect to the promissory notesMacquarie UK for the three and nine months ended September 30, 2018 amounted to $2.1 million. The promissory notes under the NPA were repaid on October 1, 2019 (see Note 27).
We occupy office space leased by a company affiliated with our Executive Chairman, Hydra Management LLC, and incur amounts monthly in maintenance expenses primarily for the lease of the office. Expenditures amounted to less than $0.1 million during the three months ended SeptemberJune 30, 2020 and 2019 and 2018 and $0.1amounted to $0.6 million and $0.0 million, respectively, and for the six months ended June 30, 2020 and 2019 amounted to $1.1 million and $0.0 million, respectively. In addition, $0.5 million of a total $6.0 million of accrued interest payable was due to Macquarie UK at June 30, 2020, and Macquarie UK received $0.3 million of the total $3.1 million of SFA amendment fees paid (see Note 4). MIHI LLC, is also a party to a stockholders agreement with the Company and other stockholders, dated December 23, 2016, pursuant to which, subject to certain conditions, MIHI LLC, jointly with Hydra Industries Sponsor LLC, are permitted to designate two directors to be nominated for election as directors of the Company at any annual or special meeting of stockholders at which directors are to be elected, until such time as MIHI LLC and Hydra Industries Sponsor LLC in the aggregate hold less than $0.1 million during5% of the nineoutstanding shares of the Company.
The Company held a 40% non-controlling equity interest in Innov8 Gaming Limited (“Innov8”) from October 2019 until April 2020 when the Company disposed of its interest. Revenue earned from Innov8 while a related party for the six months ended SeptemberJune 30, 2020 and 2019 amounted to $0.6 million and 2018,$0.0 million, respectively and purchases from Innov8 while a related party for the six months ended June 30, 2020 and 2019 amounted to $0.2 million and $0.0 million, respectively. The value of the investment was impaired by $0.7 million to $Nil in March 2020 prior to disposal.
| 13. |
The Company is party to leases with third parties with respect to various gaming machines. Gaming machine leases typically include a lease (of the machine) and a non-lease (provision of software services) component.
The components of lease income were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in millions) | (in millions) | |||||||||||||||
| Interest receivable from sales type leases | $ | — | $ | — | $ | — | $ | — | ||||||||
| Operating lease income | — | — | 1.0 | — | ||||||||||||
| Variable income from sales type leases | — | — | 0.2 | — | ||||||||||||
| $ | — | $ | — | $ | 1.2 | $ | — | |||||||||
| 14. | Commitments and Contingencies |
Legal Matters
From time to time, the Company may become involved in lawsuits and legal matters arising in the ordinary course of business. While the Company believes that, currently, it has no such matters that are material, there can be no assurance that existing or new matters arising in the ordinary course of business will not have a material adverse effect on the Company’s business, financial condition or results of operations.
| Pension Plan |
We operate a combined scheme which comprises aboth defined benefit section and a defined contribution sectioncontributions pension schemes in the UK. The defined contribution scheme assets are held separately from those of the Company in an independently administered fund. The defined benefit section ishas been closed to new entrants since April 1, 1999 and closed to future accruals for services rendered to the Company.Company for the entire financial statement periods presented. On March 15, 2019, it was agreed that no further deficit reduction contributions shall be made to the scheme, except in the event that the scheme funding level does not progress as expected, in which case contingent contributions would be made subject to an agreed maximum amount. NoIt was determined that contingent contributions will becomeof $1.1 million and expense contributions of $0.4 million would be payable during the year endingended December 31, 2019. The Company will continue2020, with agreement reached with the trustees of the scheme to make expense allowancedefer $0.4 million of the contingent contributions to the scheme; however, no further expense allowance contributions will be made duringinto the year endingto December 31, 2019.2021 The funding level of the scheme will next be tested against the expected position at December 31, 2020 to determine whether further contingent contributions are payable over the year to December 31, 2021.
The total amount of employer contributions paid during the ninesix months ended SeptemberJune 30, 20192020 amounted to $0.2$0.1 million.
For the nine months ended September 30, 2019 and 2018,The following table presents the components of totalour net periodic pension benefit costs were as follows:cost:
| Nine Months Ended | Six Months Ended June 30, | |||||||||||||||
| September 30, | 2020 | 2019 | ||||||||||||||
| 2019 | 2018 | (in millions) | ||||||||||||||
| (in millions) | ||||||||||||||||
| Components of net periodic benefit: | ||||||||||||||||
| Components of net periodic pension benefit cost: | ||||||||||||||||
| Interest cost | $ | 2.0 | $ | 2.2 | $ | 1.1 | $ | 1.4 | ||||||||
| Expected return on plan assets | (2.7 | ) | (2.8 | ) | (1.5 | ) | (1.8 | ) | ||||||||
| Net periodic benefit | $ | (0.7 | ) | $ | (0.6 | ) | $ | (0.4 | ) | $ | (0.4 | ) | ||||
The following table sets forth the estimate of the combined funded status of the pension plans and their reconciliation to the related amounts recognized in our consolidated financial statements at the respective measurement dates:
June 30, 2020 | December 31, 2019 | |||||||
| (in millions) | ||||||||
| Change in benefit obligation: | ||||||||
| Benefit obligation at beginning of period | $ | 110.4 | $ | 94.1 | ||||
| Interest cost | 1.1 | 2.7 | ||||||
| Prior service cost | — | — | ||||||
| Actuarial loss | 7.2 | 14.1 | ||||||
| Benefits paid | (1.3 | ) | (4.2 | ) | ||||
| Foreign currency translation adjustments | (6.9 | ) | 3.7 | |||||
| Benefit obligation at end of period | $ | 110.5 | $ | 110.4 | ||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of period | $ | 107.3 | $ | 97.4 | ||||
| Actual gain on plan assets | 4.0 | 10.3 | ||||||
| Employer contributions | 0.1 | 0.2 | ||||||
| Benefits paid | (1.3 | ) | (4.2 | ) | ||||
| Foreign currency translation adjustments | (6.8 | ) | 3.6 | |||||
| Fair value of assets at end of period | $ | 103.3 | $ | 107.3 | ||||
| Amount recognized in the consolidated balance sheets: | ||||||||
| Unfunded status (non-current) | $ | (7.2 | ) | $ | (3.1 | ) | ||
| Net amount recognized | $ | (7.2 | ) | $ | (3.1 | ) | ||
| Segment Reporting and Geographic Information |
The Company operates its business along twothree operating segments, which are segregated based on the basis of revenue stream: Service Based Gaming, and Virtual Sports (which includes Interactive). and Acquired Businesses. The Company believes this method of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated.
The following tables present revenue, cost of sales, excluding depreciation and amortization, selling, general and administrative expenses, depreciation and amortization, stock-based compensation expense and acquisition related transaction expenses, operating profit/(loss), total assets and total capital expenditures for the periods ended SeptemberJune 30, 20192020 and 2018,2019, respectively, by business segment. Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these costs are not allocable and to do so would not be practical. Corporate function costs consist primarily of selling, general and administrative expenses, depreciation and amortization, capital expenditures, cash, prepaid expenses and property and equipment and software development costs relating to corporate/shared functions.
As a result of improved processes that have allowed us to more accurately allocate costs between reporting segments, we have reclassified the previously reported segment allocation of selling, general and administrative expenses and stock-based compensation expense for the three and nine months ended SeptemberSegment Information
Three Months Ended June 30, 2018.2020
Server Based | Virtual Sports | Acquired Businesses | Intergroup Eliminations | Corporate Functions | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Service | $ | 3.6 | $ | 9.8 | $ | 1.8 | $ | — | $ | — | $ | 15.2 | ||||||||||||
| Hardware | 0.4 | — | — | — | — | 0.4 | ||||||||||||||||||
| Total revenue | 4.0 | 9.8 | 1.8 | — | — | 15.6 | ||||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||
| Cost of service | (1.0 | ) | (1.2 | ) | (0.9 | ) | — | — | (3.1 | ) | ||||||||||||||
| Cost of hardware | (0.3 | ) | — | — | — | — | (0.3 | ) | ||||||||||||||||
| Selling, general and administrative expenses | (2.0 | ) | (1.1 | ) | (3.6 | ) | — | (3.9 | ) | (10.6 | ) | |||||||||||||
| Stock-based compensation expense | (0.1 | ) | (0.1 | ) | — | — | (0.8 | ) | (1.0 | ) | ||||||||||||||
| Acquisition and integration related transaction expenses | — | — | — | — | (1.2 | ) | (1.2 | ) | ||||||||||||||||
| Depreciation and amortization | (6.0 | ) | (1.4 | ) | (5.6 | ) | — | (0.3 | ) | (13.3 | ) | |||||||||||||
| Segment operating income (loss) | (5.4 | ) | 6.0 | (8.3 | ) | — | (6.2 | ) | (13.9 | ) | ||||||||||||||
| Net operating loss | $ | (13.9 | ) | |||||||||||||||||||||
| Total assets at June 30, 2020 | $ | 64.2 | $ | 64.7 | $ | 135.7 | $ | — | $ | 38.7 | $ | 303.3 | ||||||||||||
| Total goodwill at June 30, 2020 | $ | — | $ | 43.4 | $ | 32.0 | $ | — | $ | — | $ | 75.4 | ||||||||||||
| Total capital expenditures for the three months ended June 30, 2020 | $ | 0.5 | $ | 2.0 | $ | 0.5 | $ | — | $ | 0.6 | $ | 3.6 | ||||||||||||
Segment Information
Three Months Ended SeptemberJune 30, 2019
| Server Based Gaming | Virtual Sports | Corporate Functions | Total | |||||||||||||
| (in millions) | ||||||||||||||||
| Revenue: | ||||||||||||||||
| Service | $ | 15.5 | $ | 8.3 | $ | — | $ | 23.8 | ||||||||
| Hardware | 2.8 | — | — | 2.8 | ||||||||||||
| Total revenue | 18.3 | 8.3 | — | 26.6 | ||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||
| Cost of service | (4.1 | ) | (0.6 | ) | — | (4.7 | ) | |||||||||
| Cost of hardware | (2.3 | ) | — | — | (2.3 | ) | ||||||||||
| Selling, general and administrative expenses | (5.7 | ) | (1.9 | ) | (3.9 | ) | (11.5 | ) | ||||||||
| Stock-based compensation expense | (0.4 | ) | (0.3 | ) | (1.5 | ) | (2.2 | ) | ||||||||
| Acquisition and integration related transaction expenses | — | — | (3.3 | ) | (3.3 | ) | ||||||||||
| Depreciation and amortization | (6.8 | ) | (1.3 | ) | (0.2 | ) | (8.3 | ) | ||||||||
| Segment operating income (loss) | (1.0 | ) | 4.2 | (8.9 | ) | (5.7 | ) | |||||||||
| Net operating loss | $ | (5.7 | ) | |||||||||||||
| Total assets at September 30, 2019 | $ | 75.1 | $ | 63.4 | $ | 36.9 | $ | 175.4 | ||||||||
| Total goodwill at September 30, 2019 | $ | — | $ | 43.3 | $ | — | $ | 43.3 | ||||||||
| Total capital expenditures for the three months ended September 30, 2019 | $ | 3.7 | $ | 1.4 | $ | 0.2 | $ | 5.3 | ||||||||
Three Months Ended September 30, 2018
| Server Based Gaming | Virtual Sports | Corporate Functions | Total | Server Based | Virtual Sports | Acquired Businesses | Intergroup Eliminations | Corporate Functions | Total | |||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||||||||||
| Service | $ | 23.3 | $ | 9.5 | $ | — | $ | 32.8 | $ | 16.4 | $ | 9.2 | $ | — | $ | — | $ | — | $ | 25.6 | ||||||||||||||||||||
| Hardware | 2.8 | — | — | 2.8 | 1.1 | — | — | — | — | 1.1 | ||||||||||||||||||||||||||||||
| Total revenue | 26.1 | 9.5 | — | 35.6 | 17.5 | 9.2 | — | — | — | 26.7 | ||||||||||||||||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | — | — | ||||||||||||||||||||||||||||||||||||||
| Cost of service | (4.6 | ) | (0.9 | ) | — | (5.5 | ) | (4.4 | ) | (0.9 | ) | — | — | — | (5.3 | ) | ||||||||||||||||||||||||
| Cost of hardware | (1.1 | ) | — | — | (1.1 | ) | (1.0 | ) | — | — | — | — | (1.0 | ) | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | (7.2 | ) | (2.7 | ) | (2.9 | ) | (12.8 | ) | (6.0 | ) | (2.1 | ) | — | — | (4.7 | ) | (12.8 | ) | ||||||||||||||||||||||
| Stock-based compensation expense | (0.2 | ) | (0.2 | ) | (1.1 | ) | (1.5 | ) | (0.5 | ) | (0.3 | ) | — | — | (1.5 | ) | (2.3 | ) | ||||||||||||||||||||||
| Impairment expense | (4.7 | ) | (3.0 | ) | — | (7.7 | ) | |||||||||||||||||||||||||||||||||
| Acquisition and integration related transaction expenses | — | — | (0.1 | ) | (0.1 | ) | — | — | — | — | (0.7 | ) | (0.7 | ) | ||||||||||||||||||||||||||
| Depreciation and amortization | (9.0 | ) | (1.1 | ) | (0.5 | ) | (10.6 | ) | (7.2 | ) | (1.4 | ) | — | — | (0.5 | ) | (9.1 | ) | ||||||||||||||||||||||
| Segment operating income (loss) | (0.7 | ) | 1.6 | (4.6 | ) | (3.7 | ) | (1.6 | ) | 4.5 | — | — | (7.4 | ) | (4.5 | ) | ||||||||||||||||||||||||
| Net operating loss | $ | (3.7 | ) | $ | (4.5 | ) | ||||||||||||||||||||||||||||||||||
| Total assets at September 30, 2018 | $ | 103.4 | $ | 69.5 | $ | 35.0 | $ | 207.9 | ||||||||||||||||||||||||||||||||
| Total assets at December 31, 2019 | $ | 80.8 | $ | 66.8 | $ | 156.7 | $ | — | $ | 23.1 | $ | 327.4 | ||||||||||||||||||||||||||||
| Total goodwill at September 30, 2018 | $ | — | $ | 45.8 | $ | — | $ | 45.8 | ||||||||||||||||||||||||||||||||
| Total capital expenditures for the three months ended September 30, 2018 | $ | 7.6 | $ | 1.8 | $ | — | $ | 9.4 | ||||||||||||||||||||||||||||||||
| Total goodwill at December 31, 2019 | $ | — | $ | 46.4 | $ | 34.5 | $ | — | $ | — | $ | 80.9 | ||||||||||||||||||||||||||||
| Total capital expenditures for the three months ended June 30, 2019 | $ | 2.1 | $ | 1.6 | $ | — | $ | — | $ | 0.5 | $ | 4.2 | ||||||||||||||||||||||||||||
NineSix Months Ended SeptemberJune 30, 2020
Server Based | Virtual Sports | Acquired Businesses | Intergroup Eliminations | Corporate Functions | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Service | $ | 17.0 | $ | 18.8 | $ | 23.2 | $ | (0.6 | ) | $ | — | $ | 58.4 | |||||||||||
| Hardware | 3.7 | — | 6.0 | (0.2 | ) | — | 9.5 | |||||||||||||||||
| Total revenue | 20.7 | 18.8 | 29.1 | (0.8 | ) | — | 67.9 | |||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||
| Cost of service | (4.6 | ) | (2.1 | ) | (3.6 | ) | 0.6 | — | (9.7 | ) | ||||||||||||||
| Cost of hardware | (2.1 | ) | — | (5.2 | ) | — | — | (7.3 | ) | |||||||||||||||
| Selling, general and administrative expenses | (7.0 | ) | (2.8 | ) | (20.5 | ) | — | (9.4 | ) | (39.7 | ) | |||||||||||||
| Stock-based compensation expense | (0.3 | ) | (0.2 | ) | — | — | (1.5 | ) | (2.0 | ) | ||||||||||||||
| Acquisition and integration related transaction expenses | — | — | — | — | (4.4 | ) | (4.4 | ) | ||||||||||||||||
| Depreciation and amortization | (12.2 | ) | (2.8 | ) | (10.4 | ) | — | (0.5 | ) | (25.9 | ) | |||||||||||||
| Segment operating income (loss) | (5.5 | ) | 10.9 | (10.5 | ) | (0.2 | ) | (15.8 | ) | (21.1 | ) | |||||||||||||
| Net operating loss | $ | (21.1 | ) | |||||||||||||||||||||
| Total capital expenditures for the six months ended June 30, 2020 | $ | 1.6 | $ | 3.6 | $ | 7.3 | $ | — | $ | 2.9 | $ | 15.4 | ||||||||||||
Six Months Ended June 30, 2019
| Server Based Gaming | Virtual Sports | Corporate Functions | Total | |||||||||||||
| (in millions) | ||||||||||||||||
| Revenue: | ||||||||||||||||
| Service | $ | 52.7 | $ | 27.5 | $ | — | $ | 80.2 | ||||||||
| Hardware | 6.8 | — | — | 6.8 | ||||||||||||
| Total revenue | 59.5 | 27.5 | — | 87.0 | ||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||
| Cost of service | (12.9 | ) | (2.5 | ) | — | (15.4 | ) | |||||||||
| Cost of hardware | (4.9 | ) | — | — | (4.9 | ) | ||||||||||
| Selling, general and administrative expenses | (18.3 | ) | (6.2 | ) | (14.5 | ) | (39.0 | ) | ||||||||
| Stock-based compensation expense | (1.3 | ) | (1.0 | ) | (4.3 | ) | (6.6 | ) | ||||||||
| Acquisition and integration related transaction expenses | — | — | (4.9 | ) | (4.9 | ) | ||||||||||
| Depreciation and amortization | (21.7 | ) | (4.2 | ) | (1.2 | ) | (27.1 | ) | ||||||||
| Segment operating income (loss) | 0.4 | 13.6 | (24.9 | ) | (10.9 | ) | ||||||||||
| Net operating loss | $ | (10.9 | ) | |||||||||||||
| Total capital expenditures for the nine months ended September 30, 2019 | $ | 8.7 | $ | 4.4 | $ | 0.9 | $ | 14.0 | ||||||||
Nine Months Ended September 30, 2018
| Server Based Gaming | Virtual Sports | Corporate Functions | Total | Server Based | Virtual Sports | Acquired Businesses | Intergroup Eliminations | Corporate Functions | Total | |||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||||||||||
| Service | $ | 71.4 | $ | 29.2 | $ | — | $ | 100.6 | $ | 37.2 | $ | 19.2 | $ | — | $ | — | $ | — | $ | 56.4 | ||||||||||||||||||||
| Hardware | 9.4 | — | — | 9.4 | 4.0 | — | — | — | — | 4.0 | ||||||||||||||||||||||||||||||
| Total revenue | 80.8 | 29.2 | — | 110.0 | 41.2 | 19.2 | — | — | — | 60.4 | ||||||||||||||||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||||||||||||||||||
| Cost of service | (13.9 | ) | (3.5 | ) | — | (17.4 | ) | (8.8 | ) | (1.9 | ) | — | — | — | (10.7 | ) | ||||||||||||||||||||||||
| Cost of hardware | (7.3 | ) | — | — | (7.3 | ) | (2.6 | ) | — | — | — | — | (2.6 | ) | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | (23.9 | ) | (8.0 | ) | (11.8 | ) | (43.7 | ) | (12.6 | ) | (4.3 | ) | — | — | (10.6 | ) | (27.5 | ) | ||||||||||||||||||||||
| Stock-based compensation expense | (0.8 | ) | (0.7 | ) | (2.7 | ) | (4.2 | ) | (0.9 | ) | (0.6 | ) | — | — | (2.9 | ) | (4.4 | ) | ||||||||||||||||||||||
| Impairment expense | (4.7 | ) | (3.0 | ) | — | (7.7 | ) | |||||||||||||||||||||||||||||||||
| Acquisition and integration related transaction expenses | — | — | (0.3 | ) | (0.3 | ) | — | — | — | — | (1.6 | ) | (1.6 | ) | ||||||||||||||||||||||||||
| Depreciation and amortization | (26.5 | ) | (4.7 | ) | (1.1 | ) | (32.3 | ) | (14.9 | ) | (2.9 | ) | — | — | (1.0 | ) | (18.8 | ) | ||||||||||||||||||||||
| Segment operating income (loss) | 3.7 | 9.3 | (15.9 | ) | (2.9 | ) | 1.4 | 9.5 | — | — | (16.1 | ) | (5.2 | ) | ||||||||||||||||||||||||||
| Net operating loss | $ | (2.9 | ) | $ | (5.2 | ) | ||||||||||||||||||||||||||||||||||
| Total capital expenditures for the nine months ended September 30, 2018 | $ | 28.3 | $ | 5.5 | $ | 0.1 | $ | 33.9 | ||||||||||||||||||||||||||||||||
| Total capital expenditures for the six months ended June 30, 2019 | $ | 5.0 | $ | 3.0 | $ | — | $ | — | $ | 0.7 | $ | 8.7 | ||||||||||||||||||||||||||||
Geographic Information
Geographic information for revenue is set forth below:
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| (in millions) | (in millions) | (in millions) | (in millions) | |||||||||||||||||||||||||||||
| Total revenue | ||||||||||||||||||||||||||||||||
| UK | $ | 16.0 | $ | 21.9 | $ | 53.7 | $ | 69.1 | $ | 9.2 | $ | 15.5 | $ | 47.6 | $ | 37.7 | ||||||||||||||||
| Greece | 4.9 | 6.0 | 14.5 | 19.1 | 2.6 | 4.8 | 7.4 | 9.6 | ||||||||||||||||||||||||
| Italy | 3.6 | 5.3 | 12.0 | 14.3 | 1.4 | 4.2 | 3.6 | 8.4 | ||||||||||||||||||||||||
| Rest of world | 2.1 | 2.4 | 6.8 | 7.5 | 2.4 | 2.2 | 9.3 | 4.7 | ||||||||||||||||||||||||
| Total | $ | 26.6 | $ | 35.6 | $ | 87.0 | $ | 110.0 | $ | 15.6 | $ | 26.7 | $ | 67.9 | $ | 60.4 | ||||||||||||||||
Geographic information of our non-current assets excluding goodwill is set forth below:
| September 30, 2019 | September 30, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
| (in millions) | (in millions) | |||||||||||||||
| Total non-current assets excluding goodwill | ||||||||||||||||
| UK | $ | 41.0 | $ | 60.0 | $ | 101.9 | $ | 116.1 | ||||||||
| Greece | 26.1 | 36.2 | 21.4 | 26.5 | ||||||||||||
| Italy | 1.9 | 3.4 | 2.2 | 2.3 | ||||||||||||
| Rest of world | 5.1 | 3.9 | 7.9 | 6.3 | ||||||||||||
| Total | $ | 74.1 | $ | 103.5 | $ | 133.4 | $ | 151.2 | ||||||||
Software development costs are included as attributable to the market in which they are utilized.
| Customer Concentration |
During the three months ended SeptemberJune 30, 2019,2020, two customers represented at least 10% of the Company’s revenues, each accounting for 25% and 18% of the Company’s revenues. The customer that accounted for 25% of the Company’s revenues was served by the Virtual Sports segment, the customer that accounted for 10% of the Company’s revenues was served by both the Server Based Gaming and Virtual Sports segments. During the three months ended SeptemberJune 30, 2018,2019, three customers represented at least 10% of revenues, accounting for 24%19%, 17%16% and 10% of the Company’s revenues. All three customers were served by both the Server Based Gaming and Virtual Sports segments.
During the six months ended June 30, 2020, one customer represented at least 10% of the Company’s revenues, accounting for 10% of the Company’s revenues. During the six months ended June 30, 2019, three customers represented at least 10% of revenues, accounting for 21%, 15% and 11% of the Company’s revenues. All these customers were served by both the Server Based Gaming and Virtual Sports segments.
During the nine months ended SeptemberAt June 30, 2020 and December 31, 2019, threethere were no customers represented at least 10% of revenues, accounting for 20%, 16% and 10% of the Company’s revenues. During the nine months ended September 30, 2018, three customers represented at least 10% of revenues, accounting for 23%, 17% and 14% of the Company’s revenues. All these customers were served by both the Server Based Gaming and Virtual Sports segments.
At September 30, 2019, two customersthat represented at least 10% of accounts receivable, accounting for 16% and 12% of the Company’s accounts receivable. At September 30, 2018, three customers represented at least 10% of accounts receivable, accounting for 15%, 13% and 12% of the Company’s accounts receivable.
| Subsequent Events |
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued. Other than as described below,Based upon this review, the Company did not identify subsequent events that would have required adjustment or disclosure in the consolidated financial statements.
On October 1, 2019, pursuant to the Share Purchase Agreement, dated as of June 11, 2019 (the “SPA”), by and between Inspired Gaming (UK) Limited, a subsidiary of the Company (the “Buyer”), and Novomatic UK Ltd., (the “Seller”), the Buyer completed its acquisition from the Seller of (i) all of the outstanding equity interests of each of (a) Astra Games Ltd, (b) Bell-Fruit Group Limited, (c) Gamestec Leisure Limited, (d) Harlequin Gaming Limited, and (e) Playnation Limited, and (ii) 60% of the outstanding equity interests of Innov8 Gaming Limited (“Innov8”, and the entities described in clauses (i) and (ii), together with certain of their subsidiaries, the “Acquired Companies” and the transactions contemplated by the SPA, the “Acquisition”). The Acquired Companies comprised the Seller’s Gaming Technology Group. The consideration for the Acquisition totaled approximately €104.6 million ($114.0 million) in cash, which was financed by the Senior Facilities Agreement discussed below.
Following the closing of the Acquisition, the Buyer transferred equity interests in Innov8 to the then-minority equityholders of Innov8 in exchange for the renegotiation of certain funding commitments. As a result, the Buyer currently holds approximately 40% of the outstanding equity interests of Innov8.
Acquisition and integration related transaction expenses amounting to $3.3 million and $4.9 million are recognized in the Condensed Consolidated Statements of Operations and Comprehensive Loss during the three and nine months ended September 30, 2019, respectively. Debt issuance costs not recognized as an expense amounted to $0.3 million at September 30, 2019, and are included within Prepaid expenses and other current assets.
Certain disclosure requirements required by ASC 805 have not been provided as the information is not yet available.
In connection with the Acquisition, on September 27, 2019, Gaming Acquisitions Limited, together with Inspired, and certain other direct and indirect wholly-owned subsidiaries of Inspired, entered into a Senior Facilities Agreement with Lucid Agency Services Limited, as agent, Nomura International plc and Macquarie Corporate Holdings Pty Limited (UK Branch) as arrangers and/or bookrunners and each lender party thereto (the “Lenders”), pursuant to which the Lenders agreed to provide, subject to certain conditions, two tranches of senior secured term loans (the “Term Loans”), in an original principal amount of £140.0 million ($172.5 million) and €90.0 million ($98.1 million), respectively and a secured revolving facility loan in an original principal amount of £20.0 million. On October 1, 2019, the debt was funded and proceeds from the Term Loans were used, among other things, to pay the purchase price of the Acquisition and to refinance existing indebtedness of the Company.
The new facilities are subject to covenant testing. These tests comprise a leverage ratio (consolidated total net debt/consolidated pro forma EBITDA) and a capital expenditure level. The leverage ratio is tested quarterly with the first test date being June 30, 2020. The capital expenditure level is tested annually with the first test date being December 31, 2019. There is also an annual excess cash flow calculation required, which if positive and over certain de minimis limits could require early prepayment of part of the facilities.
31
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual future results could differ materially from the historical results discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included herein and in our annual report on Form 10-K.
COVID-19 Update
Investors and potential investors are advised to review this Form 10Q in light of ongoing events. As with other businesses worldwide, we are experiencing severe disruption to our business as a result of the COVID-19 pandemic and the far-reaching actions of the governments of various countries where we do, and hope to do, business, as well as countries sourcing our supply chain.
The World Health Organization declared COVID-19 to be a global pandemic. There were a number of government-imposed emergency measures in many of the jurisdictions in which we operate in response to the pandemic. Since the closure of all retail venues (including pubs, bookmakers, holiday parks, and adult gaming centers), restrictions on all non-essential travel, social distancing, bans on public mobility and shelter in place measures, there has been some easing of these measures during mid-May onwards but some retail venues remain closed, specifically in Scotland as well as bowling alleys and casinos in the UK.
Our business is being and will continue to be adversely affected by the rapidly expanding nature of the coronavirus (COVID-19) pandemic. Due to the speed and fluidity with which the situation continues to develop and the uncertainty on whether a “second wave” of the COVID-19 pandemic will occur later in calendar year 2020, we are not able at this time to estimate the extent of the impact of the COVID-19 pandemic on our financial results and operations in future periods. The risk of there being a “second wave” or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which we operate which could see the government re-impose restrictions on or changes to our operations up to and including complete or partial closures of retail venues and the long-term impacts of the pandemic on the global economy, trade relations, consumer behavior, our industry and our business operation remains.
While the situation is fluid, we have already experienced adverse effects on our business, which we are currently working to mitigate. Since mid-March, we have drawn down the full amount of GBP20.0 million (equivalent to $24.8 million at current exchange rates) on our revolving credit facility to provide additional near-term liquidity and cancelled or delayed material capital expenditures. Reduced compensation levels remain in place and during the period of this Report, a number of staff remained on furlough.
Due to the closure of land-based revenues we saw a significant increase in our online revenues from slots and virtual sports and following the success of this area of the business and the successful re-opening of various revenue streams, the Company repaid GBP10.0 million (equivalent to $12.4 million at current exchange rates) of the revolving credit facility subsequent to the end of the reporting period.
On June 15, 2020, the British government re-opened betting shops and on July 4, 2020 re-opened pubs, arcades and holiday parks. Bowling alleys and casinos remain closed. On June 15, 2020, the Italian government re-opened all bricks and mortar gaming halls. On June 8, 2020, the Greek government re-opened all bricks and mortar gaming halls following closures to prevent the spread of COVID-19.
Our ability to execute our strategy is necessarily affected by the ongoing COVID-19 pandemic and it is as yet unknown effects on our business. We continue to be highly focused on managing our cash flow and liquidity, as well as focusing on the phased opening up of our businesses.
However, the dynamic nature of the pandemic and government restrictions, as well as evolving potential for relevant, government sponsored business stimuli and creditor relief plans are neither quantifiable nor predictable as of this Report.
Forward-Looking Statements
We make forward-looking statements in this Quarterly Report on Form 10-Q. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business, and the timing and ability for us to complete currently contemplated or future acquisitions. Specifically, forward-looking statements may include statements relating to:
| ● | the future financial performance of the Company; |
| ● | restrictions in our existing borrowings, including covenants set forth in our existing debt facilities (and the recent amendment thereto), or any other indebtedness we may incur in the future, could adversely affect our business, financial condition, or results of operations, and our ability to make distributions to stockholders and the value of our common stock; |
| ● | the market for the Company’s products and services; |
| ● | expansion plans and opportunities, including currently contemplated or future acquisitions or additional business combinations; and |
| ● | other statements preceded by, followed by or that include words such as “anticipate”, “believe”, “can”, “continue”, “could”, “estimate”, “expect”, “forecast”, “intend”, “may”, “might”, “plan”, “possible”, “potential”, “predict”, “project”, “proposed”, “scheduled”, “seek”, “should”, “target”, “would” or similar expressions, among others. |
These forward-looking statements are based on information available as of the date hereof, and current expectations, forecasts and assumptions that involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause our actual results or performance to differ include:
| ● | the effect and impact of the ongoing global coronavirus (COVID-19) pandemic on our business including whether there is a “second wave” or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which we operate; the duration, degree and effectiveness of governmental, business or other actions in response to the pandemic, including but not limited to quarantine, shelter-in-place and social distancing measures; restrictions on or changes to our operations up to and including complete or partial closures of retail venues; the long-term impacts of the pandemic on the global economy, trade relations, consumer behavior, our industry and our business operations; |
| ● | our ability to compete effectively in our industries; |
| ● | the effect of evolving technology on our business; |
| ● | our ability to renew long-term contracts and retain customers, and secure new contracts and customers; |
| ● | our ability to maintain relationships with suppliers; |
| ● | our ability to protect our intellectual property; |
| ● | our ability to protect our business against cybersecurity threats; | |
| ● | government regulation of our industries; |
| ● | our ability to successfully grow by acquisition as well as organically; |
| ● | fluctuations due to seasonality; |
| ● | our ability to attract and retain key members of our management team; |
| ● | our need for working capital; |
| ● | our ability to secure capital for growth and expansion; |
| ● | changing consumer, technology and other trends in our industries; |
| ● | our ability to successfully operate across multiple jurisdictions and markets around the world; |
| ● | changes in local, regional and global economic and political conditions; |
| ● | other factors. |
Overview
We are a global business-to-business gaming technology company, supplying Server Based Gaming (“SBG”) and Virtual Sports (which includes Interactive) systems to regulated lottery, betting and gaming operators worldwide through an “omni-channel” distribution strategy. We provide end-to-end digital gaming solutions on our proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices such as smartphones and tablets and online computer and social applications. Our products can be found in licensed betting offices, adult gaming centers, bingo halls, and through our Acquired Businesses, in UK pubs, airports, motorway service areas, and leisure parks.
Our key strategic priorities are to:
| ● | Extend our strong positions in each of Virtual Sports, Interactive and SBG by developing new omni-channel products; |
| ● | Continue to invest in games and technology in order to grow our existing customers’ revenues; |
| ● | Add new customers by expanding into underpenetrated markets and newly regulated jurisdictions; and |
| ● | Pursue targeted mergers and acquisitions to expand our product portfolio and/or distribution footprint. |
Our most recent fiscal year ended on September 30, 2018. On September 24, 2018, our Board of Directors determined, in accordance with our bylaws and the recommendation of the Audit Committee of our Board of Directors, to change our financial year, so that it begins on January 1 and ends on December 31 of each year, commencing on January 1, 2019. Accordingly, this Form 10-Q, covers the third quarter of our financial year, being the period from July 1, 2019 to September 30, 2019 and covers the first nine months of our financial year, being the period from January 1, 2019 to September 30, 2019. Comparatives are shown for the same 2018 periods.
On October 1, 2019, the Company completed the acquisition of the Gaming Technology Group (“NTG”) of Novomatic UK Ltd., a division of Novomatic Group, a leading international supplier of gaming equipment and solutions, (see Note 27 of the Financial Statements for further details).and heretofore denoted as “Acquired Businesses.”
Business Segments
We report our operations in twothree business segments, SBG, and Virtual Sports (which includes Interactive, an operating segment which does not exceed the quantitative thresholds in Accounting Standards Committee (“ASC” 280-10-50-12), and Acquired Businesses (which is comprised of the aforementioned NTG business, acquired on October 1, 2019), representing our different products and services. We evaluate our business performance, resource allocation and capital spending on an operating segment level, where possible. We use our operating results and identified assets of each of our operating segments in order to make prospective operating decisions. Although our revenue and cost of sales (excluding depreciation and amortization) are reported exclusively by segment, we do include unallocated items in our consolidated financial statements for certain expenses including depreciation and amortization as well as selling, general and administrative expenses. Unallocated balance sheet line items include items that are a shared resource and therefore not allocated between operating segments.
In this report, we have changed how certain selling, general and administrative expenses are split between segments, reducing the allocation of costs within “Corporate Functions”, which management believes provides a more informed allocation. As such, we have restated the segment splits for the comparative prior periods in line with the revised allocations, to give a clear comparison with the current period. Commentary within this section refers to changes from the restated segment numbers.
Our SBG business segment designs, develops, markets and distributes a broad portfolio of games through our digital network architecture. Our SBG customers include UK licensed betting offices (“LBOs”), casinos, gaming hall operators, bingo operators and regulated operators of lotteries, as well as government-affiliated operators.
Our Virtual Sports business segment designs, develops, markets and distributes ultra-high-definition games that create an always-on sports wagering experience. Our Virtual Sports customers include virtual sports retail and digital operators, including regulated betting operators, lotteries, casinos, online and social gaming operators and other gaming and lottery operators in the UK, continental Europe, Africa, Asia and North America. Our Interactive business segment (reported as part of Virtual Sports) comprises the offering of our SBG and Virtual Sports content via our remote gaming servers.
Our Acquired Businesses designs, develops, markets and distributes a broad portfolio of games through our digital network architecture. In addition, it operates analog gaming and amusement machines for certain customers, including UK pubs, adult gaming centers, motorway service stations and holiday resorts.
Revenue
We generate revenue in twothree principal ways: on a participation basis, on a fixed rental fee basis and through product sales and software license fees. Participation revenue includes a right to receive a share of revenue generated from (i) our Virtual Sports products placed with operators; (ii) our SBG terminals placed in gaming and lottery venues; (iii) licensing our game content and intellectual property to third parties; and (iv) our games on third-party online gaming platforms that are interoperable with our game servers.
SBG
Revenue from SBG terminals, access to our content and SBG platform, including electronic table gaming products is recognized based upon a contracted percentage of the operator’s net winnings from the terminals’ daily use. Where this is not the case, revenue is based upon a fixed daily or weekly usage fee. We recognize revenue from these arrangements in accordance with the series guidance in ASC 606 over time on a daily basis over the term of the arrangement, or when not specified over the expected customer relationship period. Hardware sales take the form of a transfer of ownership of our developed gaming terminals, and are recognized at a point in time upon delivery.
Virtual Sports
Virtual sports retail revenue, which includes the provision of virtual sports content and services to retail betting outlets, and virtual sports online and mobile revenue, which includes the provision of virtual sports content and services to mobile and online operators, is based upon a contracted percentage of the operator’s net winnings or a fixed rental fee. We recognize revenue for these fees over time on a daily or weekly basis in accordance with the series guidance in ASC 606 over the term of the arrangement. These arrangements also typically include a perpetual license billed up front, granted to the customer for access to our gaming platform and content. As these up-front bills represent payment for future services, revenue from the licensing of perpetual licenses is recognized ratably over time, or when not specified, over the expected customer relationship period. Revenue from the development of bespoke games licensed on a perpetual basis to mobile and online operators is recognized at a point in time on delivery and acceptance by the customer.
Geographic Range
Geographically, more than half of our revenue is derived from, and more than half of our non-current assets are attributed to, our UK operations, with the remainder of our revenue derived from, and non-current assets attributed to, Italy, Greece and the rest of the world.
For the three months ended SeptemberJune 30, 2019,2020, we earned approximately 60.2%59.0% of our revenue in the UK, 18.3%18.2% in Greece, 13.5%8.7% in Italy and the remaining 8.0%14.0% across the rest of the world. During the three months ended SeptemberJune 30, 2018,2019, we earned approximately 61.5%57.8%, 16.9%18.1%, 14.8%15.7% and 6.8%8.4% of our revenue in those regions, respectively.
For the ninesix months ended SeptemberJune 30, 2019,2020, we earned approximately 61.7%70.1% of our revenue in the UK, 16.7%11.3% in Greece, 13.8%5.2% in Italy and the remaining 7.8%13.7% across the rest of the world. During the ninesix months ended SeptemberJune 30, 2018,2019, we earned approximately 62.8%62.3%, 17.4%16.0%, 13.0%14.0% and 6.8%7.7% of our revenue in those regions, respectively.
Foreign Exchange
Our results are affected by changes in foreign currency exchange rates as a result of the translation of foreign functional currencies into our reporting currency and the re-measurement of foreign currency transactions and balances. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. The largest geographic region in which we operate is the UK and the British pound (“GBP”) is considered to be our functional currency. Our reporting currency is the U.S. dollar (“USD”). Our results are translated from our functional currency of GBP into the reporting currency of USD using average rates for profit and loss transactions and applicable spot rates for period-end balances. The effect of translating our functional currency into our reporting currency, as well as translating the results of foreign subsidiaries that have a different functional currency into our functional currency, is reported separately in Accumulated Other Comprehensive Income.
During the three months ended SeptemberJune 30, 2019,2020, we derived approximately 39.8%41% of our revenue from sales to customers outside the UK, compared to 38.5%42% during the three months ended SeptemberJune 30, 2018.2019.
During the ninesix months ended SeptemberJune 30, 2019,2020, we derived approximately 38.3%30% of our revenue from sales to customers outside the UK, compared to 37.2%38% during the ninesix months ended SeptemberJune 30, 2018.2019.
In the section “Results of Operations” below, currency impacts shown have been calculated as the current-period average GBP:USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP:USD rate. This is not a U.S. GAAP measure, but is one which management believes gives a clearer indication of results. In the tables below, variances in particular line items from period to period exclude currency translation movements, and currency translation impacts are shown independently.
Non-GAAP Financial Measures
We use certain financial measures that are not compliant with U.S. GAAP (“Non-GAAP financial measures”), including EBITDA and Adjusted EBITDA, to analyze our operating performance. In this discussion and analysis, we present certain non-GAAP financial measures, define and explain these measures and provide reconciliations to the most comparable U.S. GAAP measures. See “Non-GAAP Financial Measures” below.
Results of Operations
The following discussion and analysis of our results of operations has been organized in the following manner:
| ● | a discussion and analysis of the Company’s results of operations for the three-month period ended |
| ● | a discussion and analysis of the results of operations of our SBG and Virtual Sports business segments for the three-month period ended |
| ● | a discussion and analysis of the results of operations of our Acquired Businesses segments for the three-month period ended June 30, 2020, including KPI analysis; and | |
| ● | a discussion and analysis of the Company’s results of operations for the six-month period ended June 30, 2020, compared to the same period in 2019; and | |
| ● | a discussion and analysis of the results of operations of our SBG and Virtual Sports business segments for the | |
| ● | a discussion and analysis of the results of operations of our Acquired Businesses segments for the six-month period ended June 30, 2020, including KPI analysis. |
Our fiscal year begins on January 1 and ends on December 31 of each calendar year. The three-month financial periods presented consist of a 92-day periodresults for each of 2019 and 2018. Each of the foregoing periods is herein referred to as a “three-month period”. The nine-month financial periods presented consist of a 273-day period for each of 2019 and 2018. Each of the foregoing periods is herein referred to as a “nine-month period.”three months ended June 30, 2020 are unaudited.
Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). In the three-month periods ended SeptemberJune 30, 20192020 and 2018,June 30, 2019, the average GBP:USD rates were 1.231.24 and 1.30,1.29, respectively. In the nine-monthsix-month periods ended SeptemberJune 30, 20192020 and 2018,2019, the average GBP:USD rates were 1.281.27 and 1.35,1.30, respectively.
Our results for the quarter ended June 30, 2020 have been impacted by the temporary closure of most non-essential businesses around the world due to the outbreak of COVID-19. The ongoing COVID-19 pandemic is expected to have far reaching impact on global commerce, with governments discouraging non-essential movement and/or ordering social distancing and sheltering-in-place in an effort to help control the transmission of COVID-19, which in some cases include the mandatory closure of spaces where the public congregates. With respect to the jurisdictions in which the Company operates, the UK, Italy, Greece, and US (Illinois) each mandated the above shutdown measures in response to COVID-19 on March 20, 2020, March 10, 2020, March 14, 2020, and March 21, 2020, respectively. These jurisdictions reopened for business, with certain limitations, on June 15, 2020, June 15, 2020, June 8, 2020, and July 1, 2020, respectively. However, due to the changing nature of the COVID-19 pandemic, there continues to be the risk of shutdowns in jurisdictions in which the Company operates. The financial results discussed herein reflect the impact of these shutdowns through June 30, 2020.
In the discussion and analysis below, certain data may vary from the amounts presented in our consolidated financial statements due to rounding.
Three Months ended SeptemberJune 30, 20192020 compared to Three Months ended SeptemberJune 30, 20182019
| For the Three-Month Period ended | Variance | |||||||||||||||||||||||||||
| (In millions) | Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | Functional Currency at Constant rate | Functional Currency | Currency Movement | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||
| Service | $ | 23.8 | $ | 32.8 | $ | (9.0 | ) | (27.5 | )% | $ | (7.7 | ) | (23.5 | )% | $ | (1.3 | ) | |||||||||||
| Hardware | 2.8 | 2.8 | 0.0 | 0.4 | % | 0.2 | 7.5 | % | (0.2 | ) | ||||||||||||||||||
| Total revenue | 26.6 | 35.6 | (9.0 | ) | (25.3 | )% | (7.5 | ) | (21.0 | )% | (1.5 | ) | ||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||||||
| Cost of service | (4.7 | ) | (5.5 | ) | 0.8 | (14.2 | )% | 0.5 | (9.3 | )% | 0.3 | |||||||||||||||||
| Cost of hardware | (2.3 | ) | (1.1 | ) | (1.1 | ) | 100.5 | % | (1.2 | ) | 108.7 | % | 0.1 | |||||||||||||||
| Selling, general and administrative expenses | (11.5 | ) | (12.8 | ) | 1.3 | (10.3 | )% | 0.7 | (5.4 | )% | 0.6 | |||||||||||||||||
| Stock-based compensation | (2.2 | ) | (1.5 | ) | (0.7 | ) | 48.4 | % | (0.8 | ) | 56.8 | % | 0.1 | |||||||||||||||
| Acquisition and integration related transaction expenses | (3.3 | ) | (0.1 | ) | (3.2 | ) | 5457.0 | % | (3.4 | ) | 7118.4 | % | 0.2 | |||||||||||||||
| Impairment expense | - | (7.7 | ) | 7.7 | (100.0 | )% | 7.7 | (100.0 | )% | 0.0 | ||||||||||||||||||
| Depreciation and amortization | (8.3 | ) | (10.6 | ) | 2.2 | (21.3 | )% | 1.8 | (16.7 | )% | 0.5 | |||||||||||||||||
| Net operating Income (Loss) | (5.7 | ) | (3.7 | ) | (2.1 | ) | 56.2 | % | (2.3 | ) | 64.2 | % | 0.3 | |||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||
| Interest income | (0.0 | ) | 0.1 | (0.1 | ) | (163.9 | )% | (0.1 | ) | (194.2 | )% | (0.0 | ) | |||||||||||||||
| Interest expense | (4.4 | ) | (5.4 | ) | 1.0 | (19.1 | )% | 0.7 | (13.7 | )% | 0.3 | |||||||||||||||||
| Change in fair value of earnout liability | - | 0.9 | (0.9 | ) | (100.0 | )% | (0.9 | ) | (100.0 | )% | (0.0 | ) | ||||||||||||||||
| Change in fair value of derivative liability | 2.9 | (7.3 | ) | 10.3 | N/A | 10.4 | N/A | (0.2 | ) | |||||||||||||||||||
| Other finance income (expense) | (1.2 | ) | 3.5 | (4.8 | ) | (135.5 | )% | (4.9 | ) | (138.0 | )% | 0.1 | ||||||||||||||||
| Total other income (expense), net | (2.7 | ) | (8.2 | ) | 5.5 | (67.0 | )% | 5.3 | (64.5 | )% | 0.2 | |||||||||||||||||
| Net loss from continuing operations before income taxes | (8.4 | ) | (11.9 | ) | 3.5 | (29.1 | )% | 2.9 | (24.7 | )% | 0.5 | |||||||||||||||||
| Income tax expense | (0.1 | ) | (0.0 | ) | (0.1 | ) | 252.9 | % | (0.1 | ) | 271.9 | % | 0.0 | |||||||||||||||
| Net loss | $ | (8.5 | ) | $ | (11.9 | ) | $ | 3.4 | (28.5 | )% | $ | 2.9 | (24.1 | )% | $ | 0.5 | ||||||||||||
| Exchange Rate - $ to £ | 1.23 | 1.30 | ||||||||||||||||||||||||||
| For the Three-Month | ||||||||||||||||||||||||||||
| Period ended | Variance | |||||||||||||||||||||||||||
| Unaudited | Unaudited | Functional | ||||||||||||||||||||||||||
| June 30, | June 30, | Variance | Currency at | Functional | Currency | |||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 vs 2019 | Constant rate | Currency | Movement | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||
| Service | $ | 15.2 | $ | 25.6 | $ | (10.4 | ) | (40.6 | )% | $ | (9.9 | ) | (38.5 | )% | $ | (0.5 | ) | |||||||||||
| Hardware | 0.4 | 1.1 | (0.7 | ) | (67.5 | )% | (0.7 | ) | (66.8 | )% | (0.0 | ) | ||||||||||||||||
| Total revenue | 15.6 | 26.7 | (11.1 | ) | (41.7 | )% | (10.6 | ) | (39.6 | )% | (0.5 | ) | ||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||||||
| Cost of service | (3.1 | ) | (5.3 | ) | 2.3 | (42.4 | )% | 2.1 | (40.3 | )% | 0.1 | |||||||||||||||||
| Cost of hardware | (0.3 | ) | (1.0 | ) | 0.6 | (65.0 | )% | 0.6 | (62.3 | )% | 0.0 | |||||||||||||||||
| Selling, general and administrative expenses | (10.6 | ) | (12.8 | ) | 2.2 | (17.3 | )% | 1.9 | (14.5 | )% | 0.4 | |||||||||||||||||
| Stock-based compensation | (1.0 | ) | (2.3 | ) | 1.3 | (58.4 | )% | 1.3 | (56.9 | )% | 0.0 | |||||||||||||||||
| Acquisition and integration related transaction expenses | (1.2 | ) | (0.7 | ) | (0.5 | ) | 69.0 | % | (0.6 | ) | 74.0 | % | 0.0 | |||||||||||||||
| Depreciation and amortization | (13.3 | ) | (9.1 | ) | (4.2 | ) | 46.8 | % | (4.7 | ) | 52.3 | % | 0.5 | |||||||||||||||
| Net operating Income (Loss) | (13.9 | ) | (4.5 | ) | (9.4 | ) | 210.2 | % | (9.9 | ) | 221.8 | % | 0.5 | |||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||
| Interest income | 0.1 | 0.1 | (0.0 | ) | (11.6 | )% | (0.0 | ) | (8.2 | )% | (0.0 | ) | ||||||||||||||||
| Interest expense | (8.1 | ) | (4.0 | ) | (4.1 | ) | 100.6 | % | (4.4 | ) | 107.9 | % | 0.3 | |||||||||||||||
| Change in fair value of derivative liability | - | (1.3 | ) | 1.3 | (100.0 | )% | 1.3 | (100.0 | )% | (0.0 | ) | |||||||||||||||||
| Other finance income (expense) | (2.5 | ) | (0.9 | ) | (1.6 | ) | 192.3 | % | (1.8 | ) | 203.5 | % | 0.1 | |||||||||||||||
| Loss from equity method investee | - | - | - | N/A | - | N/A | - | |||||||||||||||||||||
| Total other income (expense), net | (10.5 | ) | (6.1 | ) | (4.4 | ) | 71.7 | % | (4.8 | ) | 76.9 | % | 0.4 | |||||||||||||||
| Net loss from continuing operations before income taxes | (24.4 | ) | (10.6 | ) | (13.8 | ) | 130.1 | % | (14.7 | ) | 137.7 | % | 0.9 | |||||||||||||||
| Income tax expense | (0.1 | ) | (0.1 | ) | 0.0 | (31.6 | )% | 0.0 | (31.4 | )% | (0.0 | ) | ||||||||||||||||
| Net loss | $ | (24.5 | ) | $ | (10.7 | ) | $ | (13.8 | ) | 128.7 | % | $ | (14.7 | ) | 136.3 | % | $ | 0.9 | ||||||||||
| Exchange Rate - $ to £ | 1.24 | 1.29 | ||||||||||||||||||||||||||
Revenue
Total reported revenue for the periodthree months ended SeptemberJune 30, 20192020 decreased by $9.0$11.1 million, or 25.3%41.7%, to $26.6 million.$15.6 million on a reported basis. Revenue was significantly impacted by the shutdown of non-essential businesses most of the second quarter in all of the jurisdictions in which the Company operates, due to the ongoing COVID-19 pandemic. Adverse currency movements accounted for $1.5a $0.5 million of the decrease.impact. On a functional currency at constant rate basis, revenue decreased by $7.5$10.6 million, or 21.0%39.6%, with service revenue decreasing by $7.7$9.9 million and hardware revenue decreasing by $0.7 million. The change in total reported revenue was comprised of a decrease of $13.5 million in SBG revenue, offset by hardwarean increase of $0.6 million in Virtual Sports revenue increasing by $0.2 million.and an increase in revenue of $1.8 million from the Acquired Businesses segment.
SBG revenue, which is included in total reported revenue above, decreased by $6.6$13.5 million on a functional currency at constant rate basis, or 25.5%77.1%, comprised of a reduction in service revenue of $6.9$12.6 million, partially offset by an increaseand a $0.7 million decrease in hardware sales of $0.2 million.sales.
The decrease in SBG service revenue decreased by $12.7 million on a reported basis, of which $0.1 million was primarily dueattributable to a decrease in revenue in the UK LBO market of $5.2 million, which was driven by the reduction in maximum permitted bets on B2 gaming machines in the UK, effective as of April 1, 2019 (“Triennial Implementation”). The impact of the Triennial Implementation reduced UK LBO Customer Gross Win per unit per day by 37.7%; however, the decline in Gross Win improved by 3.6% over the previous quarter. Additionally, there was a decrease in revenue in the Italian market of $1.1 million driven by an increase in the tax rate on gross stakes and a decrease in the Greece market of $0.4 million due to the reduction in software license sales of $1.3 million, partly offset by the rollout of terminals which drove additional income of $0.9 million.
The increase in hardware revenue was driven by an increase in hardware sales in the UK market of $2.6 million, due to higher Self Service Betting Terminal (“SSBT”) sales and higher Flex terminal sales. This was partly offset by a decrease in Electronic Table Game (“ETG”) sales of the Sabre HydraTM terminal of $2.0 million and a decrease in the Italian market of $0.4 million.
Virtual Sports revenue decreased onadverse currency movements. On a functional currency at constant rate basis, SBG service revenue decreased by $0.8$12.6 million, or 8.8%. There77.1%, to $3.6 million.
SBG hardware revenue decreased by $0.7 million to $0.4 million on a reported basis. On a functional currency at constant rate basis, the revenue decrease was a $0.3$0.7 million decrease in revenue due to a rephasing of the annual contractor 67.8% with a major customer, a $0.3 million decrease due to the expiration of a fixed term contract and $0.3 million from one-time revenue received in the prior period. de minimis currency impact.
Virtual Sports reported revenue was also impactedincreased by $0.6 million, or 6.4%, on a decline in revenue from long-term Virtual Sports licensesreported basis. This increase includes the impact of $0.2 million which have now been fully amortized andadverse currency movements of $0.4 million. On a decline in Interactive content sales of $0.2 million. This was partly offset by growth in the UK of $0.3 million and in the rest of the world of $0.2 million, due to the launch of the Moroccan Lottery. Excluding these,functional currency at constant rate basis, Virtual Sports revenue increased by $0.5$1.0 million, or 10.5%. This increase included a $3.6 million decline in retail recurring revenue from the COVID-19 national shutdowns, predominantly driven by Italy which locked down earlier than other territories. Declines were offset by growth in Scheduled Online Virtuals of $2.9 million and Interactive of $1.3 million.
Acquired Businesses revenue accounted for $1.8 million in service revenue and nil hardware revenue. As with the Company’s other businesses in the UK, the general shutdown due to COVID-19 resulted in a cessation of gaming operations for most of the second quarter.
Cost of sales, excluding depreciation and amortization
Cost of sales, excluding depreciation and amortization, which includes machine cost of sales, consumables, content royalties and connectivity costs, increaseddecreased by $0.3$2.9 million, or 5.2%45.9%, on a reported basis, to $7.0 million. Of this variance, $0.4$3.4 million, aroseincluding the impact of $0.1 million from favorable currency movements. On a functional currency at constant rate basis, cost of sales increaseddecreased by $0.7$2.8 million, or 10.6%43.8%.
This increaseOf this decrease, $4.1 million was dueattributable to an increase in cost of hardware of $1.2 million, or 108.7%, due to higher hardware sales in the UK market, and a decrease in cost of service of $0.5 million, or 9.3%, primarily due to a $0.3 million decrease indecreased SBG service costs due to reduced consumable usage in line with the reduced machine estate due to the Triennial, and $0.2COVID-19 impact. This was offset by $0.9 million in Virtual Sportsof service costs.costs attributable to the acquisition of the Acquired Businesses.
Selling, general and administrative expenses
SG&A expenses decreased by $1.3$2.2 million, or 10.3%17.3%, on a reported basis, to $11.5$10.6 million. This included $0.4 million comprised of a decrease of $0.7 million onfavorable currency movements. On a functional currency at constant rate basis, and $0.6SG&A decreased by $1.9 million, attributable to favorable currency movements. Thisor 14.5%. The reported decrease was driven by staff-related cost savingsincremental SG&A expenses of $1.5$3.6 million $1.8 million of which were made in conjunction withfrom the Triennial Implementation, and facilities cost savings of $0.2 million. This was partlyAcquired Businesses, offset by an increase in the costs of group restructure of $0.4a $4.6 million (removed from Adjusted EBITDA) and a decrease in labor capitalizationselling, general and manufacturing recoveries of $0.4 millionadministrative expenses in SBG and Virtual Sports due to lower headcount, mix of projects and lower factory throughput.staff furloughs attributable to the COVID-19 pandemic.
Costs of group restructure include redundancy costs, Payments In Lieu of Notice costs, any associated employer taxes and costs associated with onerous property leases. To qualify as being an adjusting item, costs must be part of a large restructuring project, which will reduce ongoing future costs. These costs were incurred in connection with the property consolidation exercise within the UK and redundancies following the Triennial Implementation.
Stock-based compensation
During the three months ended SeptemberJune 30, 2019,2020, the Company recorded an expense of $2.2$1.0 million with respect to outstanding awards. Of this expense, $0.1 million related to costs from awards made under the 2016 Long Term Incentive Plan and $0.9 million from awards made under the 2018 Plan. The entirety of this cost related to recurring costs. During the three months ended June 30, 2019, the charge for stock-based compensation was $2.3 million. Of this expense, $1.5 million related to costs from awards made under the 2016 Long Term Incentive Plan and $0.7$0.8 million from awards made under the 2018 Omnibus Incentive Plan (the “2018 Plan”). The entiretywith some of thisthe 2018 Plan awards impacted by movements in the stock price between the award granting date and May 14, 2019, the date the scheme was formally approved by stockholders. Following approval, the cost was related to recurring costs. Duringno longer impacted by stock price movements being charged by the three months ended September 30, 2018, the charge for stock-based compensation was $1.5 million,same method as all of which related to awards made under the 2016 Long Term Incentive Plan and related to recurring costs.other award plans.
Acquisition and integration related transaction expenses
Acquisition related transaction expenses increased by $3.2$0.5 million to $1.2 million, on a reported basis, to $3.3 million.basis. The entirety of the 2020 and 2019 period expenses were related to work in respect of potential acquisitions with the 2019 expenses relatedrelating to the acquisition and third-partythird party integration fees associated withlinked exclusively to the acquisition and integration of Novomatic UK’s Gaming Technology Group. The 2018Group and the 2020 expenses relatedrelating to potential acquisitions.the group integration costs following the acquisition.
Impairment expense
Impairment expense decreased by $7.7 million as there was no charge in the current period, but a $7.7 million expense in the prior period. This expense in the prior period was considered to be outside the normal course of business. Following a review of key strategic areas and therefore future priority areas by the Office of the Executive Chairman, the carrying value of these assets were deemed to be in excess of their current fair value.
Depreciation and amortization
Depreciation and amortization decreasedincreased by $2.2$4.2 million, or 21.1%,46.8% to $13.3 million on a reported basis, to $8.3 million.basis. This included the impact of favorable currency movements of $0.5 million.
On a functional currency at constant rate basis, depreciation and amortization decreasedincreased by $1.8$4.7 million, or 16.7%52.3%. This decreaseincrease was driven by lower machineincremental depreciation and amortization of $1.8 million. This decrease was attributable to fully depreciated machines in$5.6 million from the UK LBO market driving $1.6 million and in Italy of $0.3 million.Acquired Businesses. This was partlypartially offset by additionala $1.0 million decrease of depreciation and amortization in Greece of $0.2 millionSBG and Virtual Sports, due primarily to the deployment of additional terminals in the Greek market.UK and Italy machine estates reaching full depreciation status.
Net operating loss
During the period, on a reported basis, net operating loss movedincreased by $9.4 million from a loss of $3.7$4.5 million to a loss of $5.7 million.$13.9 million on a reported basis. On a functional currency at constant rate basis, net operating loss increased by $2.3$9.9 million, mainly due toas the reductiondecline in revenue and increase in acquisition related transaction expenses and stock-based compensation, partlyto COVID-19 was impacted by the addition of SG&A associated with the Acquired Businesses, only partially offset by savingsthe declines in cost of sales, SG&A, expense, Impairment expenses and depreciation and amortization, as well as a $0.3 million favorable currency movement. The net impact of the Triennial Implementation for the period (included in the $5.7 million) was $2.9 million.depreciation.
Interest expense
Interest expense decreasedincreased by $1.0$4.1 million in the period, to $4.4$8.1 million, on a reported basis. Of this variance $0.3 million was due to favorablean adverse currency movement. On a functional currency at a constant rate basis, interest expense was $0.7$4.4 million (13.7%(107.9%) lowerhigher than the prior period. Savingsyear due to an increase of $2.9 million of cash interest due to a higher debt balance amount after the acquisition of Novomatic UK’s Gaming Technology Group in October 2019, a $1.0 million of PIK interest (no longer incurred followingcharge for debt fees relating to the debt refinancing in August 2018)restructure and a foreign exchange benefit of $0.4 million were offset by an increase of $0.4 million of cash interest charge due to a higher debt balance amount andrevolver draw as a $0.3 million increase in amortizationresult of capitalized debt fees.the COVID-19 pandemic.
Change in fair value of earnout liability
On March 25, 2019, the shares relating to the earnout liability were issued and accordingly no charge was made in the current quarter. In the prior period, due to changes in share price, the corresponding figure was a $0.9 million credit.
Change in fair value of derivative liability
ChangeFollowing the termination of the cross-currency swaps on October 1, 2019, there was no change in the fair values of derivative liabilities in the three months ended June 30, 2020. For the three months ended June 30, 2019, the change in fair value of derivative liability was a $2.9 million credit arising from the fair valuing of the cross-currency swaps executed in August 2018 in connection with the debt refinancing of the Company. This represents the unhedged amount of the cross-currency swap. For the three months ended September 30, 2018, the change in fair value in derivative liability was a $7.3$1.3 million charge.
Other finance income (expense)
Other finance income for the periodthree months ended SeptemberJune 30, 20192020 was a $1.2charge of $2.5 million compared to a $0.9 million charge in the three months ended June 30, 2019. The $2.5 million charge for the three months ended June 30, 2020 related to a $4.8 million increase over the prior period. Changes in exchange rates resulted in a loss$2.7m retranslation of $7.9 million in retranslating thesenior debt balance. This was partly offset by a $3.0$0.2m pension credit. The $0.9 million gaincharge in the prior year related to a $3.2m retranslation of senior debt offset by a $0.2m pension credit and a $2.2 million benefit from the GBP:USD cross currencycross-currency swap entered into to mitigate this impact, accounted for under hedge accounting. Both the current and the prior period had a pension interest gain of $0.2 million.which was terminated on October 1, 2019.
Income tax expense
Our effective tax rate for the period ended SeptemberJune 30, 20192020 was 1.2%,0.3% and our effective tax rate for the period ended SeptemberJune 30, 20182019 was 0.2%(0.8)%.
Net loss
On a reported basis, net loss improvedincreased by $3.4$13.8 million, from a loss of $11.9$10.7 million to a loss of $8.5$24.5 million in the periodthree months ended SeptemberJune 30, 2019, $0.5 million of which was due to a favorable currency movement.2020. On a functional currency at constant rate basis, net loss decreasedincreased by $2.9$14.7 million, mainly due to the $10.4 million reductionshutdowns associated with COVID-19, as well as increases in operating expenses attributable to the changeAcquired Businesses, in fair value of derivative liability and the reductionaddition to increases in impairment expenses of $7.7 million. This was partly offset by the reduction in revenue discussed above, the increase in acquisition and integration related transaction expensesinterest expense and other finance expense.costs, offset by a reduction in earnout liability.
Three Months ended SeptemberJune 30, 20192020 compared to Three Months ended SeptemberJune 30, 20182019 – Server Based Gaming Segment
We generate revenue from our SBG business segment through product sales (both hardware and software) and long-term participation agreements, which include access to our SBG platform and selection of game titles, usually over a term of between three and five years but longer in certain territories. 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 SBG terminals placed in our customers’ facilities, which include retail outlets, casinos and other gaming operations, or from SBG gaming software used by customers’ players through mobile or online devices. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue growth for our SBG business is principally driven by the number of operator customers we have, the number of SBG machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
SBG Segment, Key Performance Indicators
SBG
| For the Three-Month Period ended | For the Three-Month Period ended | |||||||||||||||||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | Unaudited | Unaudited | ||||||||||||||||||||||||||||
| % | June 30, | June 30, | Variance | |||||||||||||||||||||||||||||
| SBG | 2020 | 2019 | 2020 vs 2019 | |||||||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||||||||
| End of period installed base (# of terminals) | 32,084 | 33,194 | (1,110 | ) | (3.3 | )% | 32,972 | 35,077 | (2,105 | ) | (6.0 | )% | ||||||||||||||||||||
| Average installed base (# of terminals) | 34,764 | 32,911 | 1,854 | 5.6 | % | 32,961 | 35,241 | (2,280 | ) | (6.5 | )% | |||||||||||||||||||||
| Customer Gross Win per unit per day(1) | £ | 74.06 | £ | 109.14 | £ | (35.08 | ) | (32.1 | )% | |||||||||||||||||||||||
| Customer Net Win per unit per day(1) | £ | 53.10 | £ | 77.80 | £ | (24.70 | ) | (31.7 | )% | |||||||||||||||||||||||
| Customer Gross Win per unit per day (1)(2) | £ | 11.18 | £ | 72.57 | £ | (61.38 | ) | (84.6 | )% | |||||||||||||||||||||||
| Customer Net Win per unit per day (1)(2) | £ | 8.16 | £ | 51.68 | £ | (43.52 | ) | (84.2 | )% | |||||||||||||||||||||||
| Inspired Blended Participation Rate | 6.3 | % | 6.2 | % | 0.1 | % | 6.6 | % | 6.4 | % | 0.3 | % | ||||||||||||||||||||
| (1) | Includes all SBG terminals in which the company takes a participation revenue share across all territories | |
| (2) | Includes all days of the quarter, including the days during which the SBG terminals were not operating due to COVID-19. As a result, performance reflects this complete shutdown for the bulk of the period. |
In the table above:
“End of Period Installed Base” is equal to the number of deployed SBG terminals at the end of each period that have been placed on a participation basis. SBG participation revenue, which comprises the majority of SBG service revenue, is directly related to the terminal installed base. This is the medium by which customers generate revenue and distribute a revenue share to the Company. To the extent all other “KPI “andKPIs and certain other factors” being equal”factors remain constant, the larger the installed base, the higher the Company’s revenue will be for that period. Management gives careful consideration to this KPI in terms of driving growth across the segment.
Revenue is derived from the performance of the installed base as described by the Gross and Net Win KPIs.
If the End of Period Installed Base is materially different from the Average Installed Base (described below), we believe this gives an indication as to potential future performance. The End of Period Installed Base is particularly useful for assessing new customers or markets, to indicate the progress being made with respect to entering new territories or jurisdictions.
“Average Installed Base” is the average number of deployed SBG terminals during the period. Therefore, it is more closely aligned to revenue in the period. This measure is particularly useful for assessing existing customers or markets to provide comparisons of historical size and performance.
“Customer Gross Win per unit per day” is a KPI used by our internal decision makers to (i) assess impact on the Company’s revenue, (ii) determine changes in the strength of the overall market and (iii) evaluate the impacts of regulatory change and our new content releases on our customers. Customer Gross Win per unit per day is the average per unit cash generated across all SBG terminals in which the Company takes a participation revenue share across all territories in the period, defined as the difference between the amounts staked less winnings to players divided by the Average Installed Base in the period, then divided by the number of days in the period.
SBG revenue share income accrued in the period is derived from Customer Gross Win accrued in the period after deducting gaming taxes (defined as a regulatory levy paid by the Customer to government bodies) and applying the Company’s contractual revenue share percentage.
Our internal decision makers believe Customer Gross Win measures are meaningful because they represent a view of customer operating performance that is unaffected by our revenue share percentage and allow management to (1) readily view operating trends, (2) perform analytical comparisons and benchmarking between customers and (3) identify strategies to improve operating performance in the different markets in which we operate.
“Customer Net Win per unit per day” is Customer Gross Win per unit per day after giving effect to the deduction of gaming taxes.
“Inspired Blended Participation Rate” is the Company’s average revenue share percentage across all terminals where revenue is earned on a participation basis, weighted by Customer Net Win per unit per day.
Our overall SBG revenue from terminals placed on a participation basis can therefore be described as the product of the Average Installed Base, the Customer Net Win per unit per day, the number of days in the period, and the Inspired Blended Participation Rate, to give “participation revenue”.
SBG Segment, key events that affected results for the Three Months ended SeptemberJune 30, 20192020
During the period the Customer Gross Win per unit per day forin the total UK market (including non-LBO UK markets) decreased by 34.0%84.1%. This was due mainly to the reduction in maximum permitted betsimpact of COVID-19, with retail venues closed through April, May, and approximately half of June 2020. A significant number of retail venues reopened on B2 gaming machinesor around June 15, 2020, with over 80% of shops (based on pre-COVID-19 shop count) open at the end of June 2020 and showing strong performance. Due to the shutdown period in the UK, effective assecond quarter of April 1, 2019. The revenue2020, Triennial impact of this regulatory change continues to trackwas minimal, with improved Customer Gross Win per unit per day in line with our expectations. Our end of period installed base of terminals showed a decrease of 1,110, or 3.3%,2020, versus the prior period. This was due tocomparable period last year, being offset by 700 shop closures by a major customer in the UK LBO market due to the aforementioned regulatory change, however this happened at the very end of the period and so had no impact on the average installed base. The UK LBO installed base does remain in line with expectation. The period end SBG installed base decline includes an increase of 2,260 in the Greek market which partly offsets the reduction in the UK LBO base.customer.
During the period, the Company secured an extension to supply hardware, platform, content and service into the UK LBO market with our largest customer for an additional three years. This agreement runs to the end of 2022 and includes minimal capital expenditure in exchange for a slight reduction in revenue share versus current terms.
During the period, an additional 441 SSBTs were sold and deployed in the UK LBO market with further orders already secured for the fourth quarter of 2019. In addition to the hardware sale margin, these terminals also generate a recurring service fee.
In the UK Casino / Adult Gaming Centre (“AGC”) market, we sold 108 “Flex” B3 terminals split between two major customers. These terminals were all installed by the end of September 2019 and will also generate a recurring platform rental fee and content revenue share to the Company in future periods.
In the UK Electronic Table Games (ETG) market, we sold 20 “Sabre HydraTM” terminals to a major Casino customer with a further 80 contracted to the same customer in the fourth quarter of 2019.
The total installed base of our contracted 8,940 terminals in Greece increased by 400 to 7,754 during the period ended September 30, 2019. A further 606 are expected to be installed and live by the end of 2019 followed by another 580 in early 2020 (including 380 of our new “Valor VIP” cabinets).
In Italy, customerCustomer Net Win per unit per day (in EUR) decreased by €15,93.5% due mainly to the shutdown of retail venues throughout April, May and part of June 2020 as a result of COVID-19. Approximately 50% of venues reopened on or 33.1%, due to an increase in revenue tax of 1.8% from an average of 6.9% in 2018 to 8.7% in 2019.around June 15, 2020.
OurGreece Customer Gross Win per unit per day (in EUR) decreased by 73.2%, due solely to the closure of retail venues throughout April, May and part of June 2020 due to COVID-19. All retail venues reopened on June 8, 2020 and performance through the end of period Installed Base of terminals showed a decrease of 1,110 or 3.3% to 32,084. Thisthe quarter was due to 700 shop closures by a major customer in the UK LBO market resulting from the Triennial Implementation.strong.
Customer Gross Win per unit per day (in our functional currency, GBP) decreased by 32.1%£61 or 84.6% across the entire estate drivendue to the impact of COVID-19 (as described by the reduction in maximum permitted bets on B2 gaming machines in the UK, effective as of April 1, 2019. Net Win per unit per day decreased by 31.7% which included a tax increase in Italy offset by a tax reduction in the UK market on B2 gaming machines.
Ourabove). The blended participation rate increased from 6.4% to 6.3% from 6.2% from the prior period. Due to the Triennial Implementation, non-UK LBO revenue is now a greater proportion of our overall participation revenue, which generates a higher average participation rate than the UK LBO market.6.6%.
SBG Segment, Three Months ended SeptemberJune 30, 20192020 compared to Three Months ended SeptemberJune 30, 20182019
Server Based Gaming
| For the Three-Month | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Period ended | Variance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unaudited | Unaudited | Functional | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the Three-Month Period ended | Variance | June 30, | June 30, | Variance | Currency at | Functional | Currency | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | Functional Currency at Constant rate | Functional Currency | Currency Movement | 2020 | 2019 | 2020 vs 2019 | Constant rate | Currency | Movement | ||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Service | $ | 15.5 | $ | 23.2 | $ | (7.7 | ) | (33.2 | )% | $ | (6.9 | ) | (29.5 | )% | $ | (0.9 | ) | $ | 3.6 | $ | 16.4 | $ | (12.7 | ) | (77.8 | )% | $ | (12.6 | ) | (77.1 | )% | $ | (0.1 | ) | ||||||||||||||||||||||
| Hardware | 2.8 | 2.8 | (0.0 | ) | (1.0 | )% | 0.2 | 7.5 | % | (0.2 | ) | 0.4 | 1.1 | (0.7 | ) | (66.7 | )% | (0.7 | ) | (67.8 | )% | (0.0 | ) | |||||||||||||||||||||||||||||||||
| Total revenue | 18.3 | 26.1 | (7.8 | ) | (29.7 | )% | (6.6 | ) | (25.5 | )% | (1.1 | ) | 4.0 | 17.5 | (13.5 | ) | (77.1 | )% | (13.4 | ) | (76.5 | )% | (0.1 | ) | ||||||||||||||||||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of service | (4.1 | ) | (4.6 | ) | 0.5 | (11.0 | )% | 0.3 | (5.7 | )% | 0.2 | (1.0 | ) | (4.4 | ) | 3.4 | (76.8 | )% | 3.4 | (76.1 | )% | 0.0 | ||||||||||||||||||||||||||||||||||
| Cost of hardware | (2.3 | ) | (1.1 | ) | (1.1 | ) | 100.5 | % | (1.2 | ) | 108.7 | % | 0.1 | (0.3 | ) | (1.0 | ) | 0.7 | (71.2 | )% | 0.7 | (70.0 | )% | 0.0 | ||||||||||||||||||||||||||||||||
| Total cost of sales | (6.4 | ) | (5.7 | ) | (0.6 | ) | 10.8 | % | (1.0 | ) | 16.6 | % | 0.3 | (1.3 | ) | (5.4 | ) | 4.1 | (75.8 | )% | 4.1 | (75.0 | )% | 0.0 | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (5.7 | ) | (7.2 | ) | 1.5 | (20.8 | )% | 1.1 | (16.0 | )% | 0.4 | (2.0 | ) | (6.0 | ) | 4.0 | (67.5 | )% | 3.8 | (65.4 | )% | 0.2 | ||||||||||||||||||||||||||||||||||
| Impairment expense | - | (4.7 | ) | 4.7 | (100.0 | )% | 4.7 | (100.0 | )% | (0.0 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | (0.4 | ) | (0.2 | ) | (0.2 | ) | 100.0 | % | (0.2 | ) | 71.1 | % | (0.0 | ) | (0.1 | ) | (0.5 | ) | 0.4 | (70.1 | )% | 0.3 | (61.8 | )% | 0.1 | |||||||||||||||||||||||||||||||
| Depreciation and amortization | (6.8 | ) | (9.0 | ) | 2.2 | (24.1 | )% | 1.7 | (19.4 | )% | 0.4 | (6.0 | ) | (7.2 | ) | 1.2 | (17.3 | )% | 1.1 | (15.0 | )% | 0.2 | ||||||||||||||||||||||||||||||||||
| Net operating Income (Loss) | $ | (1.0 | ) | $ | (0.7 | ) | $ | (0.2 | ) | 28.1 | % | $ | (0.2 | ) | 27.4 | % | $ | (0.0 | ) | $ | (5.4 | ) | $ | (1.6 | ) | $ | (3.7 | ) | 224.8 | % | $ | (4.1 | ) | 278.3 | % | $ | 0.4 | |||||||||||||||||||
| Exchange Rate - $ to £ | 1.23 | 1.30 | 1.25 | 1.29 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
SBG Segment revenue.Revenue
In the period revenue, decreased by $7.8$13.5 million, to $18.3$4.0 million, on a reported basis. ThisA small part of this decrease was due in part to adverse currency movements of $1.1$0.1 million. On a functional currency at constant rate basis, SBG revenue decreased by $6.6$13.4 million, or 25.5%76.5%.
Service revenue decreased by $7.7$12.7 million on a reported basis, which includedand adverse currency movements accounted for $0.1 million of $0.9 million.the decrease. On a functional currency at constant rate basis, SBG service revenue decreased by $6.9$12.6 million, or 29.5%77.1%, to $15.5$3.6 million. This was primarily due to athe impact of COVID-19. The decrease in revenueby region showed $8.9 million in the UK, LBO market of $5.2$1.7 million which was driven by the impact of the Triennial Implementation, however this was in line with our previous expectations. Additionally, there wasGreece and $1.6 million in Italy. Further adverse movements came in Italy from a decrease in revenue in the Italian market of $1.1 million primarily due to a 1.8% increase in the tax rate on gross stakes and a decrease in the Greek market of $0.4 million driven by a reduction inone-off software license sales of $1.3 million partly offset by the rollout of terminals, which drove additional income of $0.9 million.
The continued terminal rollout into the Greek market drove additional participation revenue of $0.6 million and other recurring revenuesale of $0.3 million. This was offset by a $1.3 million reduction in software license sales compared to the prior period.
UK LBO Customer Gross Win per unit per day declined by 37.5%. This was due to the impact of the Triennial Implementation, which was in line with our expectations. The decline in Gross Win per unit per day has improved by 3.6% from the prior quarter.during 2019.
Hardware revenue remained consistent at $2.8decreased by $0.7 million to $0.4 million on a reported basis. On a functional currency at constant rate basis, SBG hardwarethe revenue increased by $0.2decrease was $0.7 million or 67.8% with a small amount accounting for adverse currency movements. The decrease was due to higher SSBT salesthe sale of 60 SSBTs (Self Service Betting Terminals) in the UK LBO market of $1.9for $0.3 million and higher Flex terminal sales of $0.990 “Flex Cabinets” in the UK Leisure market for $0.7 million in 2019. These were partly offset by lower Electronic Table Game (“ETG”)spares sales in Italy of the Sabre HydraTM terminal of $2.0$0.3 million and lower Italy sales of $0.4 million.during 2020.
SBG Segment operating income.Operating Income
Cost of sales (excluding depreciation and amortization) increaseddecreased by $0.6$4.1 million or 75% to $1.3 million, on both a reported and functional currency at constant rate basis.
Service cost of sales decreased by $3.4 million or 76.8% to $1.0 million on both a reported basis and functional currency basis. This reduction was due mainly to the impact of retail venue closures attributable to COVID-19. UK LBO retail shops accounted for $2.0 million of the decrease with significant savings on consumable and third party content costs, a further $1.0 million was attributable to Greece and $0.4 million from Italy on the same basis.
Hardware cost of sales decreased by $0.7 million to $6.4$0.3 million on a reported basis and functional currency basis, decreasing on a similar basis as hardware sales.
SBG SG&A expense declined by $4.0 million on a reported basis. This variancedecrease includes the impact of favorable currency movements of $0.4$0.2 million. On a functional currency at constant rate basis, costSG&A decreased by $3.8 million, reflecting ongoing restructuring, as well as synergies associated with the acquisition of sales increased by $1.0 million. This was principally duethe Acquired Businesses. Of this reduction, $3.2 million is attributable to an increase in hardwarereduced staffing costs, of $1.2which $1.7 million driven by higher hardware sales in inis related to furloughs arising from the UK market and the mixture of sales, partly offset by $0.3 million lower service costs. The lower service costs were driven by lower UK consumable service costs of $0.3 million.COVID-19 pandemic.
SG&A expenses decreasedDepreciation declined by $1.5 million to $5.7$1.2 million on a reported basis. Of this variance, $0.4 million arose from favorable currency movements. This resulted in a functional currency at constant rate decrease of $1.1 million driven by staff-related cost savings of $1.5 million (of which $1.6 million was made in conjunction with the Triennial Implementation), lower other cost savings of $0.3 million and facilities cost savings of $0.2 million. This was partly offset by an increase in costs of group restructure of $0.5 million and $0.4 million lower labor capitalization and manufacturing recoveries due to lower headcount, mix of projects and lower factory throughput as a result of fewer machines being built in the quarter.
An impairment expense in the prior period, considered to be outside of the normal course of business, amounted to $4.7 million, due to the review of key strategic areas by the Office of the Executive Chairman. This resulted in a functional currency at constant rate decrease of $4.7 million.
Depreciation and amortization decreased by $2.2 million, to $6.8 million on a reported basis. Of this amount, $0.4 million was due to favorable currency movements.basis, or 17.3%. On a functional currency at constant rate basis, depreciation declined by $1.1 million, reflecting $0.2 million in favorable currency impact. The decrease in depreciation expense was due to the decrease was $1.7 million, from lower machine and machine-related depreciation. The lower machine and machine-related depreciation was driven by lower depreciationmachines in the UK ($1.6 million) and Italy ($0.3 million) due to machines beingestate becoming fully depreciated, partly offset by the additional machine and machine-related depreciation in Greece of $0.2 million due to the additional terminalsfrom new machines in the Greek market.estate.
Operating loss increasedincome declined by $0.2$3.7 million year over year, from a $1.6 million reported operating loss of $0.7 million to a loss of $1.0$5.4 million on a reported basis. On a functional currency at constant rate basis, SBG operating loss increased by $0.2 million. This was primarily due toyear over year, as the decreaseimpact of COVID-19 significantly reduced gross profit beyond savings in revenue and higher cost of sales, partly offset by lower SG&A expenses, impairment expense and depreciation and amortization.
SBG Segment, Recurring Revenue
Set forth below is a breakdown of our SBG recurring revenue. SBG recurring revenue consists principally of SBG participation revenue.
| For the Three-Month Period ended | ||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | ||||||||||||||
| (In £ millions) | % | |||||||||||||||
| SBG Recurring Revenue | ||||||||||||||||
| Total SBG Revenue | £ | 14.9 | £ | 20.0 | £ | (5.1 | ) | (25.5 | )% | |||||||
| SBG Participation Revenue | £ | 10.6 | £ | 14.7 | £ | (4.0 | ) | (27.4 | )% | |||||||
| SBG Other Fixed Fee Recurring Revenue | £ | 0.2 | £ | 0.3 | £ | (0.0 | ) | (5.7 | )% | |||||||
| Total SBG Recurring Revenue | £ | 10.9 | £ | 14.9 | £ | (4.0 | ) | (27.0 | )% | |||||||
| SBG Recurring Revenue as a Percentage of Total SBG Revenue | 73.1 | % | 74.6 | % | (1.5 | )% | ||||||||||
| For the Three-Month Period ended | ||||||||||||||||
| Unaudited | Unaudited | |||||||||||||||
| June 30, | June 30, | Variance | ||||||||||||||
| (In £ millions) | 2020 | 2019 | 2020 vs 2019 | % | ||||||||||||
| SBG Recurring Revenue | ||||||||||||||||
| Total SBG Revenue | £ | 3.2 | £ | 13.6 | £ | (10.4 | ) | (76.5 | )% | |||||||
| SBG Participation Revenue | £ | 1.6 | £ | 10.6 | £ | (9.0 | ) | (84.6 | )% | |||||||
| SBG Other Fixed Fee Recurring Revenue | £ | 0.0 | £ | 0.3 | £ | (0.1 | ) | (94.1 | )% | |||||||
| Total SBG Recurring Revenue | £ | 1.6 | £ | 10.9 | £ | (9.3 | ) | (84.9 | )% | |||||||
| SBG Recurring Revenue as a % of Total SBG Revenue | 51.7 | % | 80.4 | % | (28.7 | )% | ||||||||||
In the table above:
“SBG Participation Revenue” includes our share of revenue generated from (i) our SBG terminals placed in gaming and lottery venues; and (ii) licensing of our game content and intellectual property to third parties.
“SBG Other Fixed Fee Recurring Revenue” includes service revenue in which the Company earns a periodic fixed fee on a contracted basis.
“Total SBG Recurring Revenue” is equal to SBG Participation Revenue plus SBG Other Fixed Fee Recurring Revenue.
SBG Segment, Service Revenue by Region
Set forth below is a breakdown of our SBG service revenue by geographic region. SBG service revenue consists principally of SBG participation revenue.
Server Based Gaming Service Revenue by Region
| For the Three-Month Period ended | Variance | |||||||||||||||||||||||||||
| Unaudited | Unaudited | Functional | ||||||||||||||||||||||||||
| June 30, | June 30, | Variance | Currency at | Functional | Currency | |||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 vs 2019 | Constant rate | Currency | Movement | ||||||||||||||||||||||
| Service Revenue: | ||||||||||||||||||||||||||||
| UK LBO | $ | 1.0 | $ | 8.7 | $ | (7.6 | ) | (87.9 | )% | $ | (7.6 | ) | (87.6 | )% | $ | (0.0 | ) | |||||||||||
| UK Other | $ | 0.0 | $ | 1.3 | (1.3 | ) | (98.1 | )% | (1.3 | ) | (98.1 | )% | (0.0 | ) | ||||||||||||||
| Italy | $ | 0.2 | $ | 2.3 | (2.1 | ) | (92.1 | )% | (2.1 | ) | (91.8 | )% | (0.0 | ) | ||||||||||||||
| Greece | $ | 2.3 | $ | 4.0 | (1.7 | ) | (41.5 | )% | (1.6 | ) | (39.6 | )% | (0.0 | ) | ||||||||||||||
| Rest of the World | $ | 0.1 | $ | 0.2 | (0.1 | ) | (67.6 | )% | (0.1 | ) | (66.5 | )% | (0.0 | ) | ||||||||||||||
| Total service revenue | $ | 3.6 | $ | 16.4 | $ | (12.7 | ) | (77.8 | )% | $ | (12.6 | ) | (77.1 | )% | $ | (0.1 | ) | |||||||||||
| Exchange Rate - $ to £ | 1.24 | 1.29 | ||||||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD total service revenue by the GBP total service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
| For the Three-Month | ||||||||||||||||||||||||||||
| Period ended | Variance | |||||||||||||||||||||||||||
| Unaudited Sept 30,2019 | Unaudited Sept 30,2018 | Variance 2019 vs 2018 | Functional Currency at Constant rate | Functional Currency | Currency Movement | |||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Service Revenue: | ||||||||||||||||||||||||||||
| UK LBO | $ | 8.3 | $ | 14.0 | $ | (5.7 | ) | (40.6 | )% | $ | (5.2 | ) | (37.4 | )% | $ | (0.4 | ) | |||||||||||
| UK Other | 1.3 | 1.5 | (0.2 | ) | (12.3 | )% | (0.1 | ) | (7.3 | )% | (0.1 | ) | ||||||||||||||||
| Italy | 1.7 | 2.9 | (1.2 | ) | (39.8 | )% | (1.1 | ) | (36.3 | )% | (0.1 | ) | ||||||||||||||||
| Greece | 4.0 | 4.7 | (0.7 | ) | (14.1 | )% | (0.4 | ) | (9.2 | )% | (0.2 | ) | ||||||||||||||||
| Rest of the World | 0.1 | 0.2 | (0.0 | ) | (25.4 | )% | (0.0 | ) | (21.6 | )% | (0.0 | ) | ||||||||||||||||
| Total service revenue | $ | 15.5 | $ | 23.2 | $ | (7.7 | ) | (33.2 | )% | $ | (6.9 | ) | (29.5 | )% | $ | (0.9 | ) | |||||||||||
| Exchange Rate - $ to £ | 1.23 | 1.30 | ||||||||||||||||||||||||||
Virtual Sports Segment,Three Months ended SeptemberJune 30, 20192020 compared to Three Months ended SeptemberJune 30, 20182019
Our Virtual Sports products create a form of simulated sports betting in both a streaming and on-demand environment, overcoming the relative infrequency of live sporting events on which players can wager. We generate revenue from our Virtual Sports segment by licensing to our operator customers the software related to our Virtual Sports products, which consists of a complex graphics and networking software package that provides fixed-odds wagering on an ultra-high definition computer rendering of a virtual sporting event, such as soccer or boxing. Our customers pay us for the use of this software through either a fixed license fee per period, or on a participation basis based on the volume of customer net win. We also generate revenue by providing upfront services to our customers. Revenue growth for our Virtual Sports segment is driven by the number of customers, the number of player end-points and the customer net win attributable to our products.
Our customers for Virtual Sports include regulated betting operators, lotteries, casinos, online operators and other gaming and lottery operators in the UK, continental Europe, Africa, Asia and North America. Virtual Sports can be adapted to function in a sports betting, lottery, or gaming environment and is therefore available to a wide range of customers in both public and private implementations.
Virtual Sports Segment, Key Performance Indicators
| For the Three-Month Period ended | ||||||||||||||||
| Unaudited | Unaudited | |||||||||||||||
| June 30, | June 30, | Variance | ||||||||||||||
| Virtuals | 2020 | 2019 | 2020 vs 2019 | |||||||||||||
| % | ||||||||||||||||
| No. of Live Customers at the end of the period | 125 | 105 | 20 | 19.0 | % | |||||||||||
| Average No. of Live Customers | 125 | 105 | 20 | 19.0 | % | |||||||||||
| Total Revenue (£‘m) | £ | 8.0 | £ | 7.2 | £ | 0.8 | 10.5 | % | ||||||||
| Total Virtual Sports Recurring Revenue (£‘m) | £ | 7.0 | £ | 6.5 | £ | 0.5 | 7.6 | % | ||||||||
| Total Revenue £‘m - Retail | £ | 1.0 | £ | 4.0 | £ | (3.1 | ) | (76.0 | )% | |||||||
| Total Revenue £‘m - Scheduled Online Virtuals | £ | 5.2 | £ | 2.4 | £ | 2.8 | 114.4 | % | ||||||||
| Total Revenue £‘m - Interactive | £ | 1.8 | £ | 0.7 | £ | 1.1 | 145.1 | % | ||||||||
| Average Revenue Per Customer per day (£) | £ | 699 | £ | 753 | £ | (54 | ) | (7.2 | )% | |||||||
Virtuals
| For the Three-Month Period ended | ||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | ||||||||||||||
| % | ||||||||||||||||
| No. of Live Customers at the end of the period | 102 | 97 | 5 | 5.2 | % | |||||||||||
| Average No. of Live Customers | 101 | 87 | 14 | 16.6 | % | |||||||||||
| Total Revenue (£‘m) | £ | 6.7 | £ | 7.3 | £ | (0.6 | ) | (8.8 | )% | |||||||
| Total Virtual Sports Recurring Revenue (£‘m) | £ | 6.0 | £ | 6.4 | £ | (0.3 | ) | (5.1 | )% | |||||||
| Total Revenue £‘m - Retail | £ | 3.8 | £ | 4.5 | £ | (0.7 | ) | (15.8 | )% | |||||||
| Total Revenue £‘m - Scheduled Online Virtuals | £ | 2.2 | £ | 2.0 | £ | 0.2 | 8.9 | % | ||||||||
| Total Revenue £‘m - Interactive | £ | 0.7 | £ | 0.8 | £ | (0.1 | ) | (15.3 | )% | |||||||
| Average Revenue Per Customer per day (£) | £ | 717 | £ | 920 | £ | (203 | ) | (22.0 | )% | |||||||
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 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 (£000)m)” represents total revenue for the Virtual Sports segment, including recurring and upfront service revenue. Total revenue is also divided between “Total Revenue (£000)m) – Retail,” which consists of revenue earned through players wagering at Virtual Sports venues, “Total Revenue (£000)m) – Scheduled Online Virtuals,” which consists of revenue earned through players wagering on Virtual Sports online, and “Total Revenue (£000)m) – Interactive,” which consists of revenue earned through our Interactive products.product.
“Recurring Revenue” includes our share of revenue generated from (i) our Virtual Sports products placed with operators; (ii) licensing our game content and intellectual property to third parties; and (iii) our games on third-party online gaming platforms that are interoperable with our game servers.
“Average Revenue per Customer per day” represents total revenue for the Virtual Sports segment in the period, divided by the Average No. of Live Customers, divided by the number of days in the period.
Virtual Sports Segment, Recurring Revenue
| For the Three-Month Period ended | ||||||||||||||||||||||||||||||||
| For the Three-Month Period ended | Unaudited | Unaudited | ||||||||||||||||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | June 30, | June 30, | Variance | |||||||||||||||||||||||||||
| (In £ millions) | % | 2020 | 2019 | 2020 vs 2019 | ||||||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||||||||
| Virtual Sports Recurring Revenue | ||||||||||||||||||||||||||||||||
| Total Virtual Sports Revenue | £ | 6.7 | £ | 7.3 | £ | (0.6 | ) | (8.8 | )% | £ | 8.0 | £ | 7.2 | £ | 0.8 | 10.5 | % | |||||||||||||||
| Recurring Revenue - Retail and Scheduled Online Virtuals | £ | 5.4 | £ | 5.7 | £ | (0.3 | ) | (5.7 | )% | |||||||||||||||||||||||
| Recurring Revenue - Retail Virtuals | £ | 0.8 | £ | 3.7 | £ | (2.9 | ) | (79.3 | )% | |||||||||||||||||||||||
| Recurring Revenue - Scheduled Online Virtuals | £ | 4.5 | £ | 2.2 | £ | 2.4 | 109.5 | % | ||||||||||||||||||||||||
| Recurring Revenue - Interactive | £ | 0.7 | £ | 0.7 | £ | (0.0 | ) | (0.0 | )% | £ | 1.7 | £ | 0.7 | £ | 1.0 | 152.7 | % | |||||||||||||||
| Total Virtual Sports Recurring Revenue | £ | 6.0 | £ | 6.4 | £ | (0.3 | ) | (5.1 | )% | £ | 7.0 | £ | 6.5 | £ | 0.5 | 7.6 | % | |||||||||||||||
| Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue | 90.3 | % | 86.8 | % | 3.5 | % | ||||||||||||||||||||||||||
| Virtual Sports Recurring Revenue as a Percentage of Total | 88.1 | % | 90.5 | % | (2.4 | )% | ||||||||||||||||||||||||||
| Virtual Sports Revenue | ||||||||||||||||||||||||||||||||
For definitions of the terms used in the table above, see the definitions provided above.
Virtual Sports Segment, key events that affected results for the Three Months ended SeptemberJune 30, 20192020
In UK Retail, we deployed our new stream-to-venue productDuring the quarter most retail territories were fully offline for April and May with a partial month return for part of June. The exceptions to this were Greece, which reopened in Ladbrokes and Coral, running two channels of Rush Horses Sprints which complement the existing Broadcast channels. In the UKmid-May and Ireland, we launched our Quick 6 Bingowhich reopened at the beginning of July. As a result, Retail Virtuals revenues have declined significantly but both Scheduled Online Virtuals and two-minute Power Spin Roulette products acrossInteractive revenues have seen significant growth. There was a $3.6 million decline in Retail recurring revenue in the full Paddy Power estate of over 750 venues.quarter offset by $2.9 million growth in Online Scheduled Virtuals and $1.3 million growth in Interactive revenues.
InThe Virtual Grand National was broadcast on prime-time UK television to replace the live race due to the COVID-19 pandemic. Over four million viewers tuned in to watch Potters Corner win the Virtual race. The event was run as a charity event, ultimately generating over $3.0 million for the National Health Service (“NHS”) COVID-19 charity from various operators.
The Virtual Kentucky Derby all-time winner race aired on the May 2, 2020 on NBC in the U.S. The race featured the 13 all-time great Triple Crown winners, with Secretariat winning the virtual race. The event was held to raise money for the COVID-19 relief effort.
During the period, OPAP in Greece launched with our brand-new proprietary V-Play soccer product with significantly improved graphics, betting markets and overall design. Performance to date has been strong, with Greece revenues hitting pre-COVID-19 levels shortly after lockdown was lifted.
Our Virtual Interactive we deployeddivision launched V-Play Basketball and our proprietary 1st DownTM and Head 2 HeadNFL Alumni V-Play FootballTM products product with Bet365 New Jersey, both of which have performed well to date. After the end of the period, we launched V-Play Plug & PlayTM, which provides operators with end-to-end online and mobile sportsbook functionality, on two additional channels.social gaming platform FendOff Sports.
We have also signed an exclusive worldwide license deal with the NFL Alumni to utilize the name, brand, image, persona and likeness of the NFLA members to be commercially used in virtual football games.
The Interactive division launched with Lotto Quebec in the period with our proprietary V- Play On-Demand products. We launchedeleven new content, Rainbow CashpotsTMand Mighty Hot WildsTM,customers in the quarter whichincluding Boylesports, Lottoland, Casumo and Harrah’s New Jersey. There were also major new content releases, including Reel King MegawaysTM and Centurion MegawaysTM. Both titles have both performed well.seen strong performance since launch.
The Average Number of Live Customers during the period increased by fourteen,twenty, from 87105 to 101.125. Including the launch of two new Interactive customers in the quarter, our Average Number of Live Interactive Customers for the period increased to 41.67.
Our average revenue per customer declined during the quarter primarily due to the timing of the addition of several one-time adjustments. TheInteractive customers who are on revenue share contracts with us experienced underlying growth in end customer play. The UK and Irish retail markets increased by 75% compared tothat have not fully ramped up volume during the previous period, with mainland Europe excluding Greece increasing by 38% and Interactive Virtual business by 10%.quarter.
Virtual Sports Segment, Three Months ended SeptemberJune 30, 20192020 compared to Three Months ended SeptemberJune 30, 20182019
Virtual Sports
| For the Three-Month Period ended | Variance | |||||||||||||||||||||||||||
| Unaudited | Unaudited | Functional | ||||||||||||||||||||||||||
| June 30, | June 30, | Variance | Currency at | Functional | Currency | |||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 vs 2019 | Constant rate | Currency | Movement | ||||||||||||||||||||||
| Service Revenue | $ | 9.8 | $ | 9.2 | $ | 0.6 | 6.7 | % | $ | 1.0 | 10.5 | % | $ | (0.4 | ) | |||||||||||||
| Cost of Service | (1.2 | ) | (0.9 | ) | (0.3 | ) | 33.6 | % | (0.3 | ) | 38.5 | % | 0.0 | |||||||||||||||
| Selling, general and administrative expenses | (1.1 | ) | (2.1 | ) | 1.0 | (48.3 | )% | 0.7 | (39.2 | )% | 0.3 | |||||||||||||||||
| Stock-based compensation | (0.1 | ) | (0.3 | ) | 0.2 | (64.2 | )% | 0.2 | (69.1 | )% | 0.1 | |||||||||||||||||
| Depreciation and amortization | (1.4 | ) | (1.4 | ) | 0.0 | 2.9 | % | (0.1 | ) | 6.6 | % | 0.1 | ||||||||||||||||
| Net operating Income | $ | 6.0 | $ | 4.5 | $ | 1.5 | 32.6 | % | $ | 1.5 | 31.8 | % | $ | (0.0 | ) | |||||||||||||
| Exchange Rate - $ to £ | 1.24 | 1.29 | ||||||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
| For the Three-Month | ||||||||||||||||||||||||||||
| Virtual Sports | Period ended | Variance | ||||||||||||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | Functional Currency at Constant rate | Functional Currency | Currency Movement | |||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Service Revenue | $ | 8.3 | $ | 9.5 | $ | (1.3 | ) | (13.3 | )% | $ | (0.8 | ) | (8.8 | )% | $ | (0.4 | ) | |||||||||||
| Cost of Service | (0.6 | ) | (0.9 | ) | 0.3 | (32.0 | )% | 0.2 | (28.2 | )% | 0.0 | |||||||||||||||||
| Selling, general and administrative expenses | (1.9 | ) | (2.7 | ) | 0.8 | (29.6 | )% | 0.7 | (24.3 | )% | 0.1 | |||||||||||||||||
| Impairment expense | - | (3.0 | ) | 3.0 | (100.0 | )% | 3.0 | (100.0 | )% | 0.0 | ||||||||||||||||||
| Stock-based compensation | (0.3 | ) | (0.2 | ) | (0.1 | ) | 50.0 | % | (0.1 | ) | 45.7 | % | 0.0 | |||||||||||||||
| Depreciation and amortization | (1.3 | ) | (1.1 | ) | (0.2 | ) | 18.2 | % | (0.1 | ) | 11.9 | % | (0.1 | ) | ||||||||||||||
| Net operating Income (Loss) | $ | 4.2 | $ | 1.6 | $ | 2.5 | 152.8 | % | $ | 2.8 | 171.8 | % | $ | (0.2 | ) | |||||||||||||
| Exchange Rate - $ to £ | 1.23 | 1.30 | ||||||||||||||||||||||||||
Virtual Sports Segment revenue.In the period revenue decreasedincreased by $1.3$0.6 million, or 13.3%6.7%, on a reported basis. This decreaseincrease includes the impact of adverse currency movements of $0.4 million. On a functional currency at constant rate basis, Virtual Sports revenue decreasedincreased by $0.8$1.0 million, or 8.8%10.5%. This decreaseincrease included a $0.3$3.6 million rephasing of the annual contract with a major customer, a $0.3 million decrease due to the expiration of a fixed term contract and $0.3 million from one-time revenue received in the prior period. Virtual Sports revenue was also impacted by a decline in retail recurring revenue from long-term Virtual Sports licenses of $0.2 million which have now been fully amortized and Interactive content sales of $0.2 million. This was partlythe COVID-19 national shutdowns. Declines were offset by growth in the UKScheduled Online Virtuals of $0.3$2.9 million and in the restInteractive of the world of $0.2 million, due to the launch of the Moroccan Lottery. As a result, Virtual Sports underlying revenue increased by $0.5$1.3 million.
Virtual Sports Segment operating income. Cost of service decreasedincreased by $0.3 million to $0.6$1.2 million on a reported basis.
SG&A expenses decreased by $1.0 million on a reported basis. There was minimalThis decrease includes the impact fromof favorable currency movements. On a functional currency at constant rate basis, costmovements of service decreased by $0.2 million, due to lower cost of sales driven by the lower incomes and lower commissions paid in 2019.
SG&A expenses decreased by $0.8 million on a reported basis. Of this decrease, $0.1 million arose from favorable currency movements.$0.3 million. On a functional currency at constant rate basis, SG&A decreased by $0.7 million, driven by staff-related cost savings of $0.3 million and other costs savings of $0.3 million.
An impairment expense in the prior period, considered to be outside of the normal course of business, amounted to $3.0 million, due to the review of key strategic areas by the Office of the Executive Chairman. This resulted in a functional currency at constant rate decrease of $3.0 million.savings.
Depreciation and amortization remained substantially unchanged on a reported basis. There was de minimis impact from currency movements.
Operating profit increased by $0.2 million, to $1.3$1.5 million on a reported basis. Of this increase, $0.1 million arose from adverse currency movements. On aand functional currency at constant rate basis, depreciation and amortization increased by $0.1to $6.0 million.
Operating profit increased by $2.5 million on a reported basis, to $4.2 million, which includes an impact of $0.2 million from adverse currency movements. On a functional currency at constant rate basis, this represented an increase of $2.8 million, or 171.8%. This was primarily due to a decreasean increase in impairment expenses, lower cost of servicerevenues and lowerreduced SG&A expenses, partly offset by lower revenue.expenses.
Acquired Businesses segment, key events that affected results for the Three Months ended June 30, 2020
We generate revenue from our Acquired Businesses segment through the manufacturing, marketing, and rental of our gaming machines and gaming software. We manufacture gaming machines for rental to UK pubs, adult gaming centers, bowling alleys, motorway service stations, and leisure parks, as well as for sale. We receive rental fees for machines, typically on a long-term contract basis, on both a participation and fixed fee basis, with our newer digital pub machines typically contracted on a fixed fee basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming terminals placed in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue growth for our Acquired Businesses is principally driven by the number of operator customers we have, the number of gaming machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
NineAcquired Businesses segment, Key Performance Indicators
| For the Three-Month Period ended | ||||||||||||||||
| Unaudited June 30, | Unaudited June 30, | Variance | ||||||||||||||
| Acquired Businesses | 2020 | 2019 | 2020 vs 2019 | |||||||||||||
| % | ||||||||||||||||
| Pub Digital Cat C Gaming Machines - Average installed base (# of terminals) | 5,773 | 4,633 | 1,140 | 24.6 | % | |||||||||||
| Inspired Pubs Revenue per Digital Cat C Gaming Machine per week | £ | 0.00 | £ | 65.49 | £ | (65.49 | ) | (100.0 | )% | |||||||
| Pub Analogue Digital Cat C Gaming Machines - Average installed base (# of terminals) | 2,690 | 3,744 | (1,054 | ) | (28.2 | )% | ||||||||||
| Inspired Pubs Revenue per Analogue Cat C Gaming Machine per week | £ | 0.00 | £ | 43.44 | £ | (43.44 | ) | (100.0 | )% | |||||||
| End of Period % of Digital Cat C Gaming Machines in Pub Market | 68.2 | % | 57.2 | % | 11.0 | % | ||||||||||
| Total Leisure Parks Revenue (Gaming and Non Gaming) (£‘m) | £ | 0.0 | £ | 8.2 | £ | (8.2 | ) | (100.0 | )% | |||||||
| AGC and MSA Gaming Machines - Average installed base (# of terminals)(1) | 5,170 | 5,773 | (603 | ) | (10.4 | )% | ||||||||||
| Inspired AGC and MSA Revenue per Gaming Machine per week | £ | 0.00 | £ | 66.39 | £ | 66.39 | (100.0 | )% | ||||||||
| (1) | Adult Gaming Centers and Motorway Service Area machines |
In the table above:
End of period installed base and Average installed base represent the number of gaming machines installed from which there is participation or rental revenue at the end of the period or as an average over the period.
Revenue per machine unit per week represents the average weekly participation or rental revenue recognized during the period.
The % Digital Cat C represents the percentage of the Company’s UK pub gaming machine estate located with that is digital.
Acquired Businesses segment, key events that affected results for the Three Months ended SeptemberJune 30, 2020
On October 1, 2019, compared to Ninethe Company completed the acquisition of the Gaming Technology Group (“NTG”) of Novomatic UK Ltd., a division of Novomatic Group, a leading international supplier of gaming equipment and solutions. As per ASC 280, the Company reports the results of this acquisition as a business segment denoted as “Acquired Businesses.” Because the Company completed the transaction on October 1, 2019, it can only report the results since that date.
Acquired Businesses segment, Three Months ended SeptemberJune 30, 20182020
Acquired Business
| For the Three- | ||||
| Month Period | ||||
| ended | ||||
| Unaudited | ||||
| June 30, | ||||
| (In millions) | 2020 | |||
| Revenue: | ||||
| Service | $ | 1.8 | ||
| Hardware | - | |||
| Total revenue | 1.8 | |||
| Cost of sales, excluding depreciation and amortization: | ||||
| Cost of service | (0.9 | ) | ||
| Cost of hardware | - | |||
| Total cost of sales | (0.9 | ) | ||
| Selling, general and administrative expenses | (3.6 | ) | ||
| Depreciation and amortization | (5.6 | ) | ||
| Net operating Income (Loss) | $ | (8.3 | ) | |
| Exchange Rate - $ to £ | 1.24 | |||
Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Acquired Businesses Segment Revenue
| For the Nine-Month | ||||||||||||||||||||||||||||
| Period ended | Variance | |||||||||||||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, | Variance 2019 vs 2018 | Functional Currency at Constant rate | Functional Currency | Currency Movement | |||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||
| Service | $ | 80.2 | $ | 100.6 | $ | (20.4 | ) | (20.3 | )% | $ | (15.5 | ) | (15.5 | )% | $ | (4.8 | ) | |||||||||||
| Hardware | 6.8 | 9.4 | (2.6 | ) | (27.7 | )% | (2.2 | ) | (23.1 | )% | (0.4 | ) | ||||||||||||||||
| Total revenue | 87.0 | 110.0 | (23.0 | ) | (20.9 | )% | (17.7 | ) | (16.1 | )% | (5.3 | ) | ||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||||||
| Cost of service | (15.4 | ) | (17.4 | ) | 2.0 | (11.3 | )% | 1.0 | (5.8 | )% | 1.0 | |||||||||||||||||
| Cost of hardware | (4.9 | ) | (7.3 | ) | 2.4 | (33.1 | )% | 2.0 | (27.9 | )% | 0.4 | |||||||||||||||||
| Selling, general and administrative expenses | (39.0 | ) | (43.7 | ) | 4.7 | (10.8 | )% | 2.3 | (5.2 | )% | 2.5 | |||||||||||||||||
| Stock-based compensation | (6.6 | ) | (4.2 | ) | (2.4 | ) | 56.2 | % | (2.8 | ) | 65.7 | % | 0.4 | |||||||||||||||
| Acquisition and integration related transaction expenses | (4.9 | ) | (0.3 | ) | (4.6 | ) | 1574.9 | % | (5.0 | ) | 1766.5 | % | 0.4 | |||||||||||||||
| Impairment expense | - | (7.7 | ) | 7.7 | (100.0 | )% | 8.0 | (100.0 | )% | (0.3 | ) | |||||||||||||||||
| Depreciation and amortization | (27.1 | ) | (32.3 | ) | 5.2 | (16.2 | )% | 3.5 | (11.0 | )% | 1.7 | |||||||||||||||||
| Net operating Income (Loss) | (10.9 | ) | (2.9 | ) | (8.0 | ) | 275.6 | % | (8.7 | ) | 294.8 | % | 0.7 | |||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||
| Interest income | 0.1 | 0.2 | (0.1 | ) | (68.8 | )% | (0.1 | ) | (80.7 | )% | 0.0 | |||||||||||||||||
| Interest expense | (12.9 | ) | (15.7 | ) | 2.8 | (18.0 | )% | 2.0 | (12.6 | )% | 0.9 | |||||||||||||||||
| Change in fair value of earnout liability | (2.3 | ) | 4.0 | (6.3 | ) | (155.9 | )% | (6.3 | ) | (161.0 | )% | (0.0 | ) | |||||||||||||||
| Change in fair value of derivative liability | 2.8 | (5.8 | ) | 8.6 | (148.6 | )% | 9.2 | (149.7 | )% | (0.5 | ) | |||||||||||||||||
| Other finance income (expense) | (0.9 | ) | 3.9 | (4.9 | ) | (123.9 | )% | (5.1 | ) | (126.3 | )% | 0.2 | ||||||||||||||||
| Total other income (expense), net | (13.2 | ) | (13.4 | ) | 0.2 | (1.3 | )% | (0.4 | ) | 2.8 | % | 0.6 | ||||||||||||||||
| Net loss from continuing operations before income taxes | (24.1 | ) | (16.3 | ) | (7.8 | ) | 47.8 | % | (9.1 | ) | 54.6 | % | 1.3 | |||||||||||||||
| Income tax expense | (0.1 | ) | (0.1 | ) | 0.0 | (10.2 | )% | 0.0 | (28.9 | )% | (0.0 | ) | ||||||||||||||||
| Net loss | $ | (24.2 | ) | $ | (16.4 | ) | $ | (7.8 | ) | 47.5 | % | $ | (9.1 | ) | 53.9 | % | $ | 1.3 | ||||||||||
| Exchange Rate - $ to £ | 1.28 | 1.35 | ||||||||||||||||||||||||||
Acquired Businesses service revenue was $1.8 million in the first quarter. The shutdown of the UK market because of the COVID-19 pandemic led to revenues in the pub sector reducing to zero during the period. As a result, revenue was comprised primarily of $1.2 million in online revenue and $0.2 million from servicing self-service betting terminals (“SSBTs”).
The Company’s average installed base within the Pub business included 8,463 Category C gaming machines. Digital gaming machines accounted for 68.2% of the total Category C gaming machines at the end of the period, which was an increase from 57.2% at the end of the comparable period in 2019.This represents a 24.6% increase over the prior year’s installed base of digital Category C gaming machines.
In addition, Acquired Businesses includes services to Leisure Parks, motorway service areas (“MSAs”), adult gaming centers (“AGCs”) and bowling alleys as well as software license fees associated with one-time hardware sales. The shutdown of the UK market because of the COVID-19 pandemic led to all leisure parks, MSAs, AGCs and bowling alleys being closed for the whole period and associated revenue reducing to zero during the period.
Acquired Businesses Segment Operating Income
Acquired Businesses operating income reflects cost of sales of $0.9 million (comprised of manufacturing costs, content royalties, spare parts, distribution costs, and certain gaming taxes), SG&A expenses of $3.6 million including service network costs, facilities, and staffing, and depreciation and amortization of $5.6 million, reflecting capitalized game development and machine deployment levels. SG&A expenses for the quarter were impacted by furloughs of all operations staff, effected to reflect the cessation of revenue from gaming operations.
Six Months ended June 30, 2020 compared to Six Months ended June 30, 2019
| For the Six-Month Period ended | Variance | |||||||||||||||||||||||||||
| Unaudited | Unaudited | Functional | ||||||||||||||||||||||||||
| June 30, | June 30, | Variance | Currency at | Functional | Currency | |||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 vs 2019 | Constant rate | Currency | Movement | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||
| Service | $ | 58.4 | $ | 56.4 | $ | 2.0 | 3.5 | % | $ | 3.0 | 5.3 | % | $ | (1.0 | ) | |||||||||||||
| Hardware | 9.5 | 4.0 | 5.5 | 139.8 | % | 5.7 | 146.0 | % | (0.2 | ) | ||||||||||||||||||
| Total revenue | 67.9 | 60.4 | 7.5 | 12.4 | % | 8.7 | 14.4 | % | (1.2 | ) | ||||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||||||
| Cost of service | (9.7 | ) | (10.7 | ) | 1.0 | (9.2 | )% | 0.8 | (7.4 | )% | 0.2 | |||||||||||||||||
| Cost of hardware | (7.3 | ) | (2.6 | ) | (4.7 | ) | 175.7 | % | (4.8 | ) | 183.1 | % | 0.2 | |||||||||||||||
| Selling, general and administrative expenses | (39.7 | ) | (27.5 | ) | (12.2 | ) | 44.2 | % | (12.8 | ) | 46.5 | % | 0.7 | |||||||||||||||
| Stock-based compensation | (2.0 | ) | (4.4 | ) | 2.4 | (54.8 | )% | 2.4 | (53.8 | )% | 0.0 | |||||||||||||||||
| Acquisition and integration related transaction expenses | (4.4 | ) | (1.6 | ) | (2.8 | ) | 177.8 | % | (3.0 | ) | 189.6 | % | 0.2 | |||||||||||||||
| Depreciation and amortization | (25.9 | ) | (18.8 | ) | (7.1 | ) | 37.9 | % | (7.9 | ) | 41.9 | % | 0.8 | |||||||||||||||
| Net operating Income (Loss) | (21.1 | ) | (5.2 | ) | (15.8 | ) | 305.3 | % | (16.6 | ) | 319.1 | % | 0.8 | |||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||
| Interest income | 0.4 | 0.1 | 0.3 | 477.8 | % | 0.3 | 500.4 | % | 0.0 | |||||||||||||||||||
| Interest expense | (14.2 | ) | (8.5 | ) | (5.7 | ) | 66.9 | % | (6.1 | ) | 71.6 | % | 0.4 | |||||||||||||||
| Change in fair value of earnout liability | - | (2.3 | ) | 2.3 | (100.0 | )% | 2.3 | (100.0 | )% | (0.0 | ) | |||||||||||||||||
| Change in fair value of derivative liability | - | (0.1 | ) | 0.1 | (100.0 | )% | 0.1 | (100.0 | )% | (0.0 | ) | |||||||||||||||||
| Other finance income (expense) | (6.2 | ) | 0.3 | (6.5 | ) | (2120.4 | )% | (6.8 | ) | (2132.7 | )% | 0.3 | ||||||||||||||||
| Loss from equity method investee | (0.5 | ) | - | (0.5 | ) | N/A | (0.5 | ) | N/A | 0.0 | ||||||||||||||||||
| Total other income (expense), net | (20.5 | ) | (10.5 | ) | (10.0 | ) | 95.2 | % | (10.7 | ) | 100.6 | % | 0.6 | |||||||||||||||
| Net loss from continuing operations before income taxes | (41.6 | ) | (15.7 | ) | (25.8 | ) | 164.5 | % | (27.3 | ) | 172.7 | % | 1.4 | |||||||||||||||
| Income tax expense | (0.3 | ) | 0.0 | (0.3 | ) | N/A | (0.3 | ) | N/A | 0.0 | ||||||||||||||||||
| Net loss | $ | (41.9 | ) | $ | (15.7 | ) | $ | (26.1 | ) | 166.3 | % | $ | (27.6 | ) | 174.6 | % | $ | 1.4 | ||||||||||
| Exchange Rate - $ to £ | 1.27 | 1.30 | ||||||||||||||||||||||||||
Revenue
Total reported revenue for the periodsix months ended SeptemberJune 30, 2019 decreased2020 increased by $23.0$7.5 million, or 20.9%12.4%, to $87.0 million.$67.9 million on a reported basis. Revenue was significantly impacted by the shutdown of non-essential businesses most of the second quarter in all of the jurisdictions in which the Company operates, due to the ongoing COVID-19 pandemic. Adverse currency movements accounted for $5.3a $1.2 million of the decrease.impact. On a functional currency at constant rate basis, revenue decreasedincreased by $17.7$8.7 million, or 16.1%14.4%, with service revenue decreasingincreasing by $15.5$3.0 million and hardware revenue decreasingincreasing by $2.2$5.7 million. The change in total reported revenue was comprised of a decrease of $20.5 million in SBG revenue, a decrease of $0.4 million in Virtual Sports revenue, offset by an increase in revenue of $29.2 million from the Acquired Businesses segment. This was offset by $0.8 million in intercompany eliminations.
SBG revenue, which is included in total reported revenue, above, decreased by $17.7$20.5 million, to $20.7 million, on a reported basis. A small part of this decrease was due to adverse currency movements of $0.3 million. On a functional currency at constant rate basis, SBG revenue decreased by $20.2 million, or 21.9%, comprised of a reduction in service revenue of $15.5 million and a $2.2 million reduction in hardware sales.49.0%.
The decrease in SBG service revenue was primarily due to a decrease in revenue in the UK LBO market of $11.4 million, $10.7 million driven by the Triennial Implementation and $0.5 million due to the expiring of a service contract. The impact of the Triennial Implementation reduced UK LBO Customer Gross Win per unit per day by 26.2% across the period. However, the decline in Gross Win per unit per day improved by 3.6% from the second quarter to the third quarter from 41.1% to 37.5%. Additionally, there was a reduction in the Greek market of $2.4 million driven by a reduction in software license sales of $6.1 million partly offset by the continued terminal rollout which drove additional income of $3.7 million. Revenue in the Italian market decreased by $1.2$20.2 million due to the 1.7% tax rate increase on gross stakesa reported basis, and $0.3 million from lower sales of machine parts, this was partly offset by $0.3 million of license sales. Revenue in UK Other decreased by $0.4 million due to lower ad hoc service work in the period.
The decrease in hardware revenue was driven by a decrease in hardware sales in the UK market of $1.8 million, due to $2.0 million lower Flex terminal sales ($4.0adverse currency movements accounted for $0.2 million of the prior period sales were at nil margin) and lower hardware sales in the Italian market of $0.4 million. This was partly offset by $0.1 million higher SSBT sales in the UK market.
Virtual Sports revenue remained unchanged ondecrease. On a functional currency at constant rate basis, drivenSBG service revenue decreased by growth in the UK of $1.0$20.0 million, and growth in other existing customers and new customer launches in the rest of the world of $0.9or 53.7%, to $17.0 million. Additionally, we generated one-off income during the period from historic recurring revenue previously unreported to us of $0.8 million across Virtual and Interactive customers. This was offset by a reduction of $0.7 million fromThe major driver for the decrease in long-term was the impact of COVID-19.
SBG hardware revenue decreased by $0.3 million to $3.7 million on a reported basis. On a functional currency at constant rate basis, the revenue decrease was $0.2 million with adverse currency movements accounting for decreased revenue of $0.1 million.
Virtual Sports contracts which have now been fully amortized, $0.7reported revenue decreased by $0.4 million, due toor 2.0%, on a reported basis. This decrease includes the rephasingimpact of the annual contract withadverse currency movements of $0.5 million. On a major customer, $0.3 million from the expiration of a fixed term contract, $0.3 million from one-time revenue in the prior period and $0.2 million from one-time content sales in the prior period. Excluding thesefunctional currency at constant rate basis, Virtual Sports revenue increased by $1.4$0.1 million, or 0.8%. This increase included a $4.6 million decline in retail recurring revenue from the COVID-19 national shutdowns. Declines were offset by growth in Scheduled Online Virtuals of $2.8 million and Interactive of $1.7 million.
Acquired Businesses revenue accounted for $23.2 million in service revenue and $6.0 million in hardware revenue. $9.7 million was generated from UK Pub gaming machines and other rental products, including 8,483 Category C gaming machines. An additional $1.9 million in revenue was generated through the UK leisure parks business, with $5.8 million generated from machine rentals to UK motorway services and adult gaming centers. $2.1 million was generated from online gaming and $1.8 million from self-service betting terminals.
Cost of sales, excluding depreciation and amortization
Cost of sales, excluding depreciation and amortization, which includes machine cost of sales, consumables, content royalties and connectivity costs, decreasedincreased by $4.4$3.7 million, or 17.8%27.5%, to $17.0 million on a reported basis, to $20.3 million. Of this decrease, $1.4including the impact of $0.4 million arose from favorable currency movements. On a functional currency at constant rate basis, cost of sales decreasedincreased by $3.0$4.0 million, or 12.3%30.2%.
Of this increase, $8.8 million was attributable the Acquired Businesses, comprised of $3.6 million in service costs and $5.2 million in hardware costs. This was offset by a $4.8 million decrease wasin SBG costs of sales due to a decreasereduced consumable usage in cost of hardware of $2.0 million, or 27.9%,line with reduced machine estate due to lower hardware sales in the UKTriennial and Italian markets, as well as a decrease in cost of service of $1.0 million, or 5.8%, due to a decrease in Virtual Sports service costs of $0.9 million.COVID-19 impacts.
Selling, general and administrative expenses
SG&A expenses decreasedincreased by $4.7$12.2 million, or 10.8%44.2%, on a reported basis, to $39.0$39.7 million. This included $0.7 million Of this decrease, $2.5 million arose fromof favorable currency movements. On a functional currency at constant rate basis, SG&A decreasedincreased by $2.3$12.8 million, or 5.2%46.5%. ThisThe reported increase was driven by staff-related cost savingsincremental SG&A expenses of $4.0$20.5 million (of which $3.3 million was made in conjunction with Post Triennial Implementation), facilities cost savings of $0.6 million, IT-related cost savings of $0.4 million and legal cost savings of $0.3 million. This wasfrom the Acquired Businesses, offset by an increase in the costs of group restructure of $1.1a $6.1 million (removed from Adjusted EBITDA) and a decrease in net labor capitalizationselling, general and manufacturing recoveries of $2.0 millionadministrative expenses in SBG and Virtual Sports, due to mix of projects and lower factory throughput as a result of fewer machines being built.staff furloughs attributable to the COVID-19 pandemic.
Stock-based compensation
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company recorded an expense of $6.6$2.0 million with respect to outstanding awards. Of this expense, $4.5$0.2 million related to costs from awards made under the 2016 Long Term Incentive Plan and $2.1$1.8 million from awards made under the 2018 Plan. The entirety of this cost related to recurring costs. During the six months ended June 30, 2019, the charge for stock-based compensation was $4.4 million. Of this expense, $3.0 million related to costs from awards made under the 2016 Long Term Incentive Plan and $1.4 million from awards made under the 2018 Plan with some of the 2018 Plan awards impacted by movements in the stock price between the award granting date and May 14, 2019, the date the scheme was formally approved by stockholders. Following approval, the cost was no longer impacted by stock price movements and wasbeing charged by the same method as all other award plans. During the nine months ended September 30, 2018, the charge for stock-based compensation was $4.2 million, all of which related to awards made under the 2016 Long Term Incentive Plan and to recurring costs.
Acquisition and integration related transaction expenses
Acquisition related transaction expenses increased by $4.6$2.8 million to $4.4 million, on a reported basis, to $4.9 million.basis. The entirety of the 20192020 and 20182019 period expenses were related to work in respect of potential acquisitions with the 2019 expenses relating to the acquisition and third party integration fees linked exclusively to the acquisition and integration of Novomatic UK’s Gaming Technology Group.Group and the 2020 expenses relating to the group reorganization and integration costs following the acquisition.
Impairment expense
Impairment expense decreased by $7.7 million as there was no charge in the current period, but a $7.7 million expense in the prior period. This expense in the prior period was considered to be outside the normal course of business. Following a review of key strategic areas and therefore future priority areas by the Office of the Executive Chairman, the carrying value of these assets were deemed to be in excess of their current fair value.
Depreciation and amortization
Depreciation and amortization decreasedincreased by $5.2$7.1 million, or 16.2%37.9%, to $25.9 million on a reported basis, to $27.1 million.basis. This included the impact of favorable currency movements of $1.7$0.8 million.
On a functional currency at constant rate basis, depreciation and amortization decreasedincreased by $3.5$7.9 million, or 11.0%41.9%. This decreaseincrease was driven by lower machineincremental depreciation and machine-related depreciation of $3.3 million and lower amortization of $0.2$10.4 million drivenfrom the Acquired Businesses. This was partially offset by lowera $2.8 million decrease of depreciation and amortization of platformsin SBG and games. The machine and machine-related depreciation decrease was driven by lower depreciation in theVirtual Sports, due primarily to UK ($4.0 million) and Italy ($0.8 million) due to machines being fully depreciated, which was partly offset by additionalmachine estates reaching full depreciation in Greece of $1.7 million due to the additional volume of machines.status.
Net operating loss
During the period on a reported basis, net operating loss increased by $8.0$15.8 million from a loss of $2.9$5.2 million to a loss of $10.9$21.1 million. On a functional currency at constant rate basis, net operating loss increased by $8.7$16.6 million, mainly due to the reduction in revenue and increases in stock-based compensation and acquisitionimpact of shutdowns related transaction expenses. This wasto COVID-19, increased SG&A expenses attributable to the Acquired Businesses, as well as a $0.8 million adverse currency movement, partly offset by savings in cost of sales, impairment expenses, depreciation and amortization and SG&A expenses as well as by a $0.8 million favorable currency movement. The net impact ofhigher revenues attributable to the Triennial Implementation in the UK for the period (included in the $10.9 million) was $6.8 million.Acquired Businesses.
Interest expense
Interest expense decreasedincreased by $2.8$5.4 million in the period, to $12.9$13.9 million, on a reported basis. Of this variance $0.9$0.4 million was due to a favorablean adverse currency movement. On a functional currency at a constant rate basis, interest expense was $2.0$5.8 million or 12.6%, lower(68.3%) higher than the prior period. Savingsyear due to increases of $4.9 million of PIK interest (no longer incurred following the debt refinancing in August 2018), lower revolver interest of $0.4 million and a $0.6 million exchange rate movement were offset by an increase of $2.5$4.7 million of cash interest charge due to a higher debt balance amount and a $1.2after the acquisition of Novomatic UK’s Gaming Technology Group in October 2019, $0.7 million being the corresponding increase in the amortization of capitalized debt fees.fees, $1.0 million relating to fees incurred for the debt restructure and $0.5 million due to a higher revolver draw as a result of the COVID-19 pandemic. These were partly offset by higher levels of interest receivable of $0.5 million.
Change in fair value of earnout liability
Due solely to changes in the share price ($6.51 at March 25, 2019 and $4.80 at December 31, 2018) the charge in the ninesix months ended SeptemberJune 30, 2019 from a change in the fair value of earnout liability was $2.3 million. On March 25, 2019, the shares relating to the earnout liability were issued. InThere were no such liabilities in the prior period, due to changes in share price, the corresponding figure was a $4.0 million gain.six months ended June 30, 2020.
Change in fair value of derivative liability
Change in fair value of derivative liability decreased by $8.6 million, on a reported basis, to a $2.8 million credit forFollowing the nine months ended September 30, 2019 arising from the fair valuingtermination of the cross-currency swaps executedon October 1, 2019, there was no change in August 2018the fair values of derivative liabilities in connection with the debt refinancing of the Company. This represents the unhedged amount of the cross-currency swap.six months ended June 30, 2020. For the ninesix months ended SeptemberJune 30, 2018,2019, the change in fair value of derivative liability was a $5.8$0.1 million charge. Of this, $7.4 million represented the unhedged amount of the cross-currency swap with a $1.6 million gain for derivative awards which were converted to stock-based compensation awards in March 2018.
Other finance income
Other finance income for the ninesix months ended SeptemberJune 30, 20192020 was a charge of $0.9$6.2 million $4.9compared to a $0.3 million more thancredit in the prior period which had a creditsix months ended June 30, 2019. This was primarily due to an adverse foreign exchange impact of $3.9 million. Changes in exchange rates resulted in a loss of $8.3$6.2 million in retranslating the debt balance. This was partly offset bybalance and a $3.2$0.2 million gain in the six months ended June 30, 2019 from the GBP:USD cross-currency swap entered into to mitigate this impact, accounted for under hedge accounting, and a $0.1 million higher pension interest gain.which was terminated on October 1, 2019.
Income tax expense
Our effective tax rate for the period ended SeptemberJune 30, 20192020 was 0.4%,0.7% and our effective tax rate for the period ended September 30, 2018March 31, 2019 was 0.6%0.0%.
Net loss
On a reported basis, net loss increased by $7.8$26.1 million, from a loss of $16.4$15.7 million to a loss of $24.2$41.9 million in the periodsix months ended SeptemberJune 30, 2019.2020. On a functional currency at constant rate basis, net loss increased by $9.1$27.6 million, mainly due to the increaseimpact of the Triennial Implementation and the shutdowns associated with COVID-19, as well as increases in net operating lossexpenses attributable to the Acquired Businesses, in addition to increases in interest expense and a $5.1 million increase in other finance costs. This was partlycosts, offset by a $2.9 million changereduction in fair value of earnout and derivative liabilities as well as by a favorable currency movement of $1.3 million.liability.
NineSix Months ended SeptemberJune 30, 20192020 compared to NineSix Months ended SeptemberJune 30, 20182019 – Server Based Gaming Segment
Revenue growth for our SBG business is principally driven by the number of operator customers we have, the number of SBG machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
SBG Segment, Key Performance Indicators
SBG
| For the Nine-Month Period ended | ||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | ||||||||||||||
| % | ||||||||||||||||
| End of period installed base (# of terminals) | 32,084 | 33,194 | (1,110 | ) | (3.3 | )% | ||||||||||
| Average installed base (# of terminals) | 34,967 | 31,877 | 3,090 | 9.7 | % | |||||||||||
| Customer Gross Win per unit per day(1) | £ | 83.78 | £ | 111.99 | £ | (28.21 | ) | (25.2 | )% | |||||||
| Customer Net Win per unit per day(1) | £ | 59.29 | £ | 79.86 | £ | (20.58 | ) | (25.8 | )% | |||||||
| Inspired Blended Participation Rate | 6.2 | % | 6.1 | % | 0.1 | % | ||||||||||
| For the Six-Month Period ended | ||||||||||||||||
| Unaudited | Unaudited | |||||||||||||||
| June 30, | June 30, | Variance | ||||||||||||||
| SBG | 2020 | 2019 | 2020 vs 2019 | |||||||||||||
| % | ||||||||||||||||
| End of period installed base (# of terminals) | 32,972 | 35,077 | (2,105 | ) | (6.0 | )% | ||||||||||
| Average installed base (# of terminals) | 32,971 | 35.099 | (2,128 | ) | (6.1 | )% | ||||||||||
| Customer Gross Win per unit per day (1) | £ | 37.97 | £ | 88.61 | £ | (50.64 | ) | (57.1 | )% | |||||||
| Customer Net Win per unit per day (1) | £ | 28.17 | £ | 62.36 | £ | (34.18 | ) | (54.8 | )% | |||||||
| Inspired Blended Participation Rate | 6.1 | % | 6.2 | % | (0.1 | )% | ||||||||||
| (1) | Includes all SBG terminals in which the company takes a participation revenue share across all territories |
SBG Segment, key events that affected results for the NineSix Months ended SeptemberJune 30, 20192020
During the period Customer Gross Win per unit per day in the total UK market (including non-LBO UK markets) decreased by 24.0%50.0%. This was due mainly to both the Triennial Implementation outcome in the UK. The revenueUK and COVID-19 impact, with retail venues closing from March 21, 2020 through to June 15, 2020, with over 80% of this regulatory change was in line with our expectations.venues reopened at June 30, 2020.
During the period, an additional 62694 SSBTs (Self Service Betting Terminals) were sold and deployed in the UK LBO market. There is alsoThese are part of a strongconfirmed 170 terminal order book for this product for the fourth quarter of the year.due to be completed in July and August 2020 now that retail venues have reopened. In addition to hardware sale margin, these terminals also generate a recurring service fee.
During the third quarterperiod, new market sales continued in North America, which we entered in December 2019. Hardware sales of 2019, the Company secured an extension to supply hardware, platform, content and service into the UK LBO market with our largest customer for an additional three years. This agreement runs to the end of 2022 and includes minimal capital expenditure in exchange for a slight reduction in revenue share versus current terms.
In the UK Casino market, we sold 246 “Flex” B3 terminals split between two major customers. Thesefurther 161 “Valor” terminals were all installed during the months of Maysold to September 2019 and will also generate a recurring software rental fee and content revenue share to the Companymultiple customers in future periods.
In the UK Electronic Table Games (ETG) market, we sold 134 “Sabre HydraTM” terminals to a major Casino customer with a further 80 contracted to the same customer in the fourth quarter of 2019.
Our SBG rollout into the Greek market continued during the period with a further 923 being deployed on site and live. The total installed base of our contracted terminals in Greece is now 7,754 as of September 30, 2019. During the period, Inspired was awarded a further 580 contracted terminals, 380 of which will be our new “Valor VIP” cabinet. This brings the total number of our contracted terminals in Greece to 8,940. Despite increased density, the performance of our Greek terminals continues to be strong against our competitors.Illinois.
In Italy, customerCustomer Net Win per unit per day decreased by 77.1% (in EUR), due to the closure of retail venues due to COVID-19 from March 9, 2020 through to June 15, 2020, when 50% of venues reopened, as well as an increase in the average revenue tax of 0.9% from 8.4% in 2019 to 9.3% in 2020, and the impact of card reader implementation on January 1, 2020.
Greece Customer Gross Win per unit per day (in EUR) decreased by €12, or 27.4%73.2%, due solely to an increase in the average revenue taxclosure of 1.7%retail venues as a result of COVID-19, from 6.8% in 2018March 14 through to 8.5% in 2019.
Our end of period Installed Base of terminals showed a decrease of 1,110 or 3.3% to 32,084. This was due to 700 shop closures by a major customer in the UK LBO market resulting from the Triennial Implementation, however this happened at the very end of the period and so had no impact on the average installed base. The overall UK LBO installed base remains in line with expectation. Significant growth in the Greek market over the past twelve months partly offsets the UK LBO decline.June 8, 2020 when all venues reopened.
Customer Gross Win per unit per day (in our functional currency, GBP) decreased by 25.2%£51 or 57.1% across the entire estate, driven mainly by the impact of COVID-19 with the mandated shutdown of retail venues during March, April, May and part of June 2020. The overall decrease was further effected by the reduction in maximum permitted bets on B2 gaming machines in the UK andin accordance with the impact of our SBG installations in Greece, as our Greek machines return a lower daily Customer Gross Win compared to our UK machines.Triennial Implementation, These impacts, along with the reduced tax in the UK LBO market post Triennial, partly offset by a 1.7%0.9% average increase in the ItalianItaly tax rate, led toresulted in a Net Win per unit per day decrease on total SBG of 25.8%£34 or 54.8%. Our blended participation rate increasedreduced by 0.1% to 6.2% from 6.1.% from the prior period.6.1%.
SBG Segment, NineSix Months ended SeptemberJune 30, 20192020 compared to NineSix Months ended SeptemberJune 30, 20182019
Server Based Gaming
| For the Nine-Month | For the Six-Month Period ended | Variance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Period ended | Variance | Unaudited | Unaudited | Functional | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | Functional Currency at Constant rate | Functional Currency | Currency Movement | June 30, | June 30, | Variance | Currency at | Functional | Currency | |||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 vs 2019 | Constant rate | Currency | Movement | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Service | $ | 52.7 | $ | 71.4 | $ | (18.7 | ) | (26.2 | )% | $ | (15.5 | ) | (21.7 | )% | $ | (3.1 | ) | $ | 17.0 | $ | 37.2 | $ | (20.2 | ) | (54.3 | )% | $ | (20.0 | ) | (53.7 | )% | $ | (0.2 | ) | ||||||||||||||||||||||
| Hardware | 6.8 | 9.4 | (2.6 | ) | (27.7 | )% | (2.2 | ) | (23.1 | )% | (0.4 | ) | 3.7 | 4.0 | (0.3 | ) | (6.8 | )% | (0.2 | ) | (4.5 | )% | (0.1 | ) | ||||||||||||||||||||||||||||||||
| Total revenue | $ | 59.5 | 80.8 | (21.3 | ) | (26.3 | )% | (17.7 | ) | (21.9 | )% | (3.6 | ) | 20.7 | 41.2 | (20.5 | ) | (49.7 | )% | (20.2 | ) | (49.0 | )% | (0.3 | ) | |||||||||||||||||||||||||||||||
| Cost of sales, excluding depreciation and amortization: | Cost of sales, excluding depreciation and amortization: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of service | $ | (12.9 | ) | (13.9 | ) | 1.0 | (7.1 | )% | 0.2 | (1.1 | )% | 0.8 | (4.6 | ) | (8.8 | ) | 4.1 | (47.4 | )% | 4.2 | (47.0 | )% | (0.0 | ) | ||||||||||||||||||||||||||||||||
| Cost of hardware | $ | (4.9 | ) | (7.3 | ) | 2.4 | (32.7 | )% | 2.0 | (27.9 | )% | 0.4 | (2.1 | ) | (2.6 | ) | 0.6 | (21.8 | )% | 0.5 | (20.2 | )% | 0.0 | |||||||||||||||||||||||||||||||||
| Total cost of sales | (17.8 | ) | (21.2 | ) | 3.4 | (15.9 | )% | 2.2 | (10.2 | )% | 1.2 | (6.7 | ) | (11.4 | ) | 4.7 | (41.4 | )% | 4.7 | (40.9 | )% | 0.0 | ||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (18.3 | ) | (23.9 | ) | 5.6 | (23.4 | )% | 4.5 | (18.8 | )% | 1.1 | (7.0 | ) | (12.6 | ) | 5.6 | (44.7 | )% | 5.5 | (43.6 | )% | 0.2 | ||||||||||||||||||||||||||||||||||
| Impairment expense | - | (4.7 | ) | 4.7 | (100.0 | )% | 4.9 | (100.0 | )% | (0.2 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | (1.3 | ) | (0.8 | ) | (0.5 | ) | 62.5 | % | (0.6 | ) | 71.5 | % | 0.1 | (0.3 | ) | (0.9 | ) | 0.6 | (64.2 | )% | 0.5 | (60.7 | )% | 0.1 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | (21.7 | ) | (26.5 | ) | 4.8 | (18.1 | )% | 3.4 | (12.9 | )% | 1.4 | (12.2 | ) | (14.9 | ) | 2.7 | (18.1 | )% | 2.4 | (16.1 | )% | 0.3 | ||||||||||||||||||||||||||||||||||
| Net operating profit | $ | 0.4 | $ | 3.7 | $ | (3.3 | ) | (89.8 | )% | $ | (3.3 | ) | (90.0 | )% | $ | 0.0 | ||||||||||||||||||||||||||||||||||||||||
| Net operating Income (Loss) | $ | (5.5 | ) | $ | 1.4 | $ | (6.8 | ) | (506.3 | )% | $ | (7.1 | ) | (546.7 | )% | $ | 0.2 | |||||||||||||||||||||||||||||||||||||||
| Exchange Rate - $ to £ | 1.28 | 1.35 | 1.28 | 1.30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
SBG Segment revenue.RevenueIn
During the period, revenue decreased by $21.3$20.5 million, to $59.5$20.7 million, on a reported basis. ThisA small part of this decrease was due in part to adverse currency movements of $3.6$0.3 million. On a functional currency at constant rate basis, SBG revenue decreased by $17.7$20.2 million, or 21.9%49.0%.
Service revenue decreased by $18.7 million onThe major driver for the decrease was the impact of COVID-19. Retail shop closures during the period of March 2020 through to June 2020 drove a reported basis. This was duereduction in part to adverse currency movements of $3.1 million. On a functional currency at constant rate basis, SBG service revenue decreasedof $14.3 million, with revenue by $15.5region decreasing $10.0 million or 21.7%, to $52.7 million. This was primarily due to a decrease in revenuethe UK, $2.3 million in Greece and $1.9 million in Italy. Further declines came from the UK LBO market of $11.4with $4.4 million as a result of which $10.7 million was driven by the Triennial Implementation, andincreased Italy taxes of $0.4 million, the adverse impact of the introduction in Italy of player cards of $0.5 million, due to the expiring2019 one-off Italy sales of a service contract. Additionally, there was a reduction$0.4 million and intercompany UK other revenue of $0.6 million. These negative impacts were partly offset by growth in the Greek market of $2.4$0.8 million driven by a reduction in software license salesbecause of $6.1 million partly offset by the continued terminal rollout which drove additional income of $3.7 million. Revenue in the Italian market decreased by $1.2 million due to the 1.7% tax rate increase on gross stakes and $0.3 million from lower sales of machine parts. This was partly offset by $0.3 million of license sales. Revenue in UK Other decreased by $0.4 million due to lower ad hoc service work in the period.
The continued terminal rollout into the Greek market drove additional participation revenue of $1.8 million and other recurring revenue of $1.9 million. This was offset by a $6.1 million reduction in software license sales compared to the prior period. contracted VLTs.
UK LBO Customer Gross Win per unit per day decreased by 26.2%approximately 50.0%. The impact of COVID-19 and the shutdown of retail venues between March and June 2020 accounted for 46.5% of the decline, the remaining 3.5% stems from the Triennial Implementation, a negative position in the first quarter 2020 due to the Triennial Implementation. The revenue impact of this regulatory change wasApril 1, 2019 implementation from and a recovery in line with our expectations. The decline in Gross Win improved by 3.6% from the second quarter due to the third quarter from 41.1% to 37.5%.content releases and closure of low performing venues.
Hardware revenue decreased by $2.6$0.3 million to $6.8$3.7 million on a reported basis. On a functional currency at constant rate basis, SBG hardwarethe revenue decrease was $0.2 million with adverse currency movements accounting for decreased by $2.2 million, principally due to lower Flex terminal sales (the sales in the prior period were at nil margin) in the UK market and lower Italian hardware sales of $0.4 million. This was partly offset by higher SSBT sales in the UKrevenue of $0.1 million.
SBG Segment operating income.Operating Income
Cost of sales (excluding depreciation and amortization) decreased by $3.4$4.7 million, or 41.4%, to $17.8$6.7 million, on a reported basis. This varianceThere was impacted by favorablede minimis impact from currency movements of $1.2 million. On a functional currency at constant rate basis,movements.
Service cost of sales decreased by $2.2 million.$4.1 million on both a reported and functional currency basis. This reduction was principallydue mainly to the impact of retail venue closures due to COVID-19. UK LBO retail shops accounted for $2.2 million with significant savings on consumable and 3rd party content costs, a further $1.2 million came from Greece and $0.4 million from Italy for the same reasons. The remaining $0.4 million decrease in hardware costs of $2.0 million driven bywas mainly from lower hardware sales in bothconsumables spend during the three months ended March 31, 2020 on the UK and Italian market. Service costs decreased by $0.2 million due to a decrease in UK consumables of $0.7 million, a decrease in cost of service in Italy of $0.4 million, partly offset by an increase in Greek SBG service costs of $0.8 million driven by the increase in terminals as the Greece rollout continued.
SG&A expenses decreased by $5.6 million, to $18.3 million, on a reported basis. Of this variance, $1.1 million arose from favorable currency movements. This resulted in a functional currency at constant rate decrease of $4.5 million driven by staff-related cost savings of $4.8 million (of which $3.0 million was made in conjunction with Post Triennial Implementation), lower IT-related costs of $0.4 million driven by lower headcount, lower costs of group restructure of $0.2 million and other cost savings of $0.8 million. This was partly offset by $2.0 million of lower labor capitalization and manufacturing recoveries due to lower factory throughput.
An impairment expense in the prior period, considered to be outside of the normal course of business, amounted to $4.7 million,LBO estate due to the review of key strategic areas by the Office of the Executive Chairman. This resulted in a functional currency at constant rate decrease of $4.7 million.Triennial Implementation.
Depreciation and amortizationHardware cost of sales decreased by $4.8$0.6 million to $21.7 million on a reported basis. Of this amount, $1.4 million was due to favorable currency movements. On a functional currency at constant rate basis, the decrease was $3.4 million, driven by $3.3 million from lower machine and machine-related depreciation and by $0.1 million of lower amortization. The lower machine and machine-related depreciation was driven by lower depreciation in the UK ($4.0 million) and Italy ($0.8 million) due to machines being fully depreciated, partly offset by the additional machine and machine-related depreciation in Greece of $1.7 million due to the additional terminals in the Greek market.
Operating profit decreased by $3.3 million, to $0.4$2.1 million on a reported basis. On a functional currency at constant rate basis, SBG operating profithardware cost of sales decreased by $3.3 million. This$0.5 million with some small favorable currency movements.
SBG SG&A expense declined by $5.6 million, reflecting significant staff furloughs due to COVID-19, ongoing restructuring and synergies associated with the acquisition of the Acquired Businesses. Of this reduction, $1.8 million was primarilyattributable to furloughs related to the COVID-19 pandemic and $1.9 million was related to other staff savings.
Depreciation and amortization declined by $2.7 million or 18.1%, on a reported basis. On a functional currency basis, depreciation declined by $2.4 million, reflecting $0.3 million in favorable currency impact. The decrease in depreciation expense was due to the decreasemachines in the UK estate becoming fully depreciated, offset by additional depreciation from new machines in the Greek estate.
Operating income declined by $6.8 million, declining from a $1.4 million reported operating profit to a $5.5 million operating loss year over year, as the decline in revenue and higher stock-based compensation of $0.6 million, partlyrelated to COVID-19 was only partially offset by lowerthe declines in cost of sales, SG&A, expenses, impairment expenses and depreciation and amortization.depreciation.
SBG Segment, Recurring Revenue
Set forth below is a breakdown of our SBG recurring revenue. SBG recurring revenue consists principally of SBG participation revenue.
| For the Six-Month Period ended | ||||||||||||||||||||||||||||||||
| For the Nine-Month Period ended | Unaudited | Unaudited | ||||||||||||||||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | June 30, | June 30, | Variance | |||||||||||||||||||||||||||
| (In £ millions) | % | 2020 | 2019 | 2020 vs 2019 | % | |||||||||||||||||||||||||||
| SBG Recurring Revenue | ||||||||||||||||||||||||||||||||
| Total SBG Revenue | £ | 46.6 | £ | 59.7 | £ | (13.1 | ) | (21.9 | )% | £ | 16.2 | £ | 31.7 | £ | (15.6 | ) | (49.0 | )% | ||||||||||||||
| SBG Participation Revenue | £ | 35.2 | £ | 42.4 | £ | (7.2 | ) | (17.0 | )% | £ | 10.3 | £ | 24.6 | £ | (14.3 | ) | (58.2 | )% | ||||||||||||||
| SBG Other Fixed Fee Recurring Revenue | £ | 0.7 | £ | 0.7 | £ | (0.0 | ) | (3.8 | )% | £ | 0.2 | £ | 0.7 | £ | (0.4 | ) | (67.4 | )% | ||||||||||||||
| Total SBG Recurring Revenue | £ | 35.9 | £ | 43.2 | £ | (7.3 | ) | (16.8 | )% | £ | 10.5 | £ | 25.2 | £ | (14.7 | ) | (58.4 | )% | ||||||||||||||
| SBG Recurring Revenue as a Percentage of Total SBG Revenue | 77.0 | % | 72.3 | % | 4.7 | % | ||||||||||||||||||||||||||
| SBG Recurring Revenue as a % of Total SBG Revenue | 64.8 | % | 79.4 | % | (14.6 | )% | ||||||||||||||||||||||||||
For definitions of the terms used in the table above, see the definitions provided under the corresponding “SBG segment, Recurring Revenue” table for the three-month periods ended September 30, 2019 and 2018, set forth earlier in this Management’s Discussion and Analysis section.
SBG Segment, Service Revenue by Region
Set forth below is a breakdown of our SBG service revenue by geographic region. SBG service revenue consists principally of SBG participation revenue.
Server Based Gaming Service Revenue by Region
| For the Six-Month Period ended | Variance | Variance | ||||||||||||||||||||||||||
| (In millions) | Unaudited June 30, 2020 | Unaudited June 30, 2019 | 2020 vs 2019 | Functional Currency at Constant rate | Functional Currency | Currency Movement | ||||||||||||||||||||||
| Service Revenue: | ||||||||||||||||||||||||||||
| UK LBO | $ | 8.4 | $ | 21.9 | $ | (13.5 | ) | (61.6 | )% | $ | (13.4 | ) | (61.2 | )% | $ | (0.1 | ) | |||||||||||
| UK Other | $ | 1.0 | $ | 2.6 | (1.6 | ) | (61.6 | )% | (1.6 | ) | (61.4 | )% | (0.0 | ) | ||||||||||||||
| Italy | $ | 0.9 | $ | 4.3 | (3.4 | ) | (78.0 | )% | (3.4 | ) | (77.9 | )% | (0.0 | ) | ||||||||||||||
| Greece | $ | 6.5 | $ | 8.0 | (1.5 | ) | (19.1 | )% | (1.4 | ) | (17.7 | )% | (0.1 | ) | ||||||||||||||
| Rest of the World | $ | 0.2 | $ | 0.4 | (0.2 | ) | (54.1 | )% | (0.2 | ) | (53.0 | )% | (0.0 | ) | ||||||||||||||
| Total service revenue | $ | 17.0 | $ | 37.2 | $ | (20.2 | ) | (54.3 | )% | $ | (20.0 | ) | (53.7 | )% | $ | (0.2 | ) | |||||||||||
| Exchange Rate - $ to £ | 1.28 | 1.29 | ||||||||||||||||||||||||||
| For the Nine-Month | ||||||||||||||||||||||||||||
| Period ended | Variance | |||||||||||||||||||||||||||
| Unaudited Sept 30,2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | Functional Currency at Constant rate | Functional Currency | Currency Movement | |||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Service Revenue: | ||||||||||||||||||||||||||||
| UK LBO | $ | 30.2 | $ | 43.4 | $ | (13.2 | ) | (30.4 | )% | $ | (11.4 | ) | (26.2 | )% | $ | (1.8 | ) | |||||||||||
| UK Other | 3.9 | 4.5 | (0.6 | ) | (13.4 | )% | (0.4 | ) | (7.8 | )% | (0.3 | ) | ||||||||||||||||
| Italy | 6.0 | 7.6 | (1.5 | ) | (20.3 | )% | (1.2 | ) | (15.5 | )% | (0.4 | ) | ||||||||||||||||
| Greece | 12.0 | 15.1 | (3.1 | ) | (20.6 | )% | (2.4 | ) | (16.0 | )% | (0.7 | ) | ||||||||||||||||
| Rest of the World | 0.5 | 0.8 | (0.2 | ) | (29.7 | )% | (0.2 | ) | (25.4 | )% | (0.0 | ) | ||||||||||||||||
| Total service revenue | $ | 52.7 | $ | 71.4 | $ | (18.6 | ) | (26.1 | )% | $ | (15.5 | ) | (21.7 | )% | $ | (3.1 | ) | |||||||||||
| Exchange Rate - $ to £ | 1.28 | 1.35 | ||||||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD total service revenue by the GBP total service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
46
Virtual Sports Segment,NineSix Months ended SeptemberJune 30, 20192020 compared to NineSix Months ended SeptemberJune 30, 20182019
Virtual Sports Segment, Key Performance Indicators
| For the Six-Month Period ended | Variance | |||||||||||||||
| Virtuals | Unaudited June 30, 2020 | Unaudited June 30, 2019 | 2020 vs 2019 | |||||||||||||
| % | ||||||||||||||||
| No. of Live Customers at the end of the period | 125 | 105 | 20 | 19.0 | % | |||||||||||
| Average No. of Live Customers | 121 | 102 | 19 | 18.9 | % | |||||||||||
| Total Revenue (£‘m) | £ | 15.0 | £ | 14.9 | £ | 0.1 | 0.8 | % | ||||||||
| Total Virtual Sports Recurring Revenue (£‘m) | £ | 13.5 | £ | 13.6 | £ | (0.1 | ) | (0.8 | )% | |||||||
| Total Revenue £‘m - Retail | £ | 4.3 | £ | 8.2 | £ | (3.8 | ) | (47.1 | )% | |||||||
| Total Revenue £‘m - Scheduled Online Virtuals | £ | 7.9 | £ | 5.3 | £ | 2.6 | 48.3 | % | ||||||||
| Total Revenue £‘m - Interactive | £ | 2.8 | £ | 1.4 | £ | 1.4 | 101.5 | % | ||||||||
| Average Revenue Per Customer per day (£) | £ | 679 | £ | 797 | £ | (118 | ) | (14.8 | )% | |||||||
Virtual Sports Segment, Recurring Revenue
| For the Nine-Month Period ended | ||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | ||||||||||||||
| Virtuals | % | |||||||||||||||
| No. of Live Customers at the end of the period | 102 | 97 | 5 | 5.2 | % | |||||||||||
| Average No. of Live Customers | 102 | 91 | 11 | 11.8 | % | |||||||||||
| Total Revenue (£‘m) | £ | 21.5 | £ | 21.6 | £ | (0.0 | ) | (0.1 | )% | |||||||
| Total Virtual Sports Recurring Revenue (£‘m) | £ | 19.6 | £ | 19.0 | £ | 0.6 | 3.4 | % | ||||||||
| Total Revenue £‘m - Retail | £ | 12.0 | £ | 13.4 | £ | (1.4 | ) | (10.5 | )% | |||||||
| Total Revenue £‘m - Scheduled Online Virtuals | £ | 7.5 | £ | 6.2 | £ | 1.4 | 22.4 | % | ||||||||
| Total Revenue £‘m - Interactive | £ | 2.0 | £ | 2.1 | £ | (0.0 | ) | (0.4 | )% | |||||||
| Average Revenue Per Customer per day (£) | £ | 771 | £ | 866 | £ | (95 | ) | (11.0 | )% | |||||||
| For the Six-Month Period ended | Variance | |||||||||||||||
| Unaudited | Unaudited | |||||||||||||||
| (In £ millions) | June 30, 2020 | June 30, 2019 | 2020 vs 2019 | |||||||||||||
| % | ||||||||||||||||
| Virtual Sports Recurring Revenue | ||||||||||||||||
| Total Virtual Sports Revenue | £ | 15.0 | £ | 14.9 | £ | 0.1 | 0.8 | % | ||||||||
| Recurring Revenue - Retail Virtuals | £ | 3.7 | £ | 7.4 | £ | (3.7 | ) | (50.3 | )% | |||||||
| Recurring Revenue - Scheduled Online Virtuals | £ | 7.1 | £ | 4.8 | £ | 2.3 | 47.0 | % | ||||||||
| Recurring Revenue - Interactive | £ | 2.7 | £ | 1.3 | £ | 1.4 | 103.1 | % | ||||||||
| Total Virtual Sports Recurring Revenue | £ | 13.5 | £ | 13.6 | £ | (0.1 | ) | (8.6 | )% | |||||||
| Virtual Sports Recurring Revenue as a Percentage of Total | 89.8 | % | 91.3 | % | (1.4 | )% | ||||||||||
| Virtual Sports Revenue | ||||||||||||||||
For definitions of the terms used in the table above, see the definitions provided under the corresponding “Virtual Sports segment, Key Performance Indicators” table for the three-month periods ended September 30, 2019 and 2018, set forth earlier in this Management’s Discussion and Analysis section.above.
Virtual Sports Segment, Recurring Revenue
| For the Nine-Month Period ended | ||||||||||||||||
| Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | ||||||||||||||
| (In £ millions) | % | |||||||||||||||
| Virtual Sports Recurring Revenue | ||||||||||||||||
| Total Virtual Sports Revenue | £ | 21.5 | £ | 21.6 | £ | (0.0 | ) | (0.1 | )% | |||||||
| Recurring Revenue - Retail and Scheduled Online Virtuals | £ | 17.6 | £ | 17.0 | £ | 0.6 | 3.5 | % | ||||||||
| Recurring Revenue - Interactive | £ | 2.0 | £ | 1.9 | £ | 0.1 | 2.7 | % | ||||||||
| Total Virtual Sports Recurring Revenue | £ | 19.6 | £ | 19.0 | £ | 0.6 | 3.4 | % | ||||||||
| Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue | 91.0 | % | 87.9 | % | 3.1 | % | ||||||||||
For definitions of the terms used in the table above, see the definitions provided under the corresponding “Virtual Sports segment, Recurring Revenue” table for the three-month periods ended September 30, 2019 and 2018, set forth earlier in this Management’s Discussion and Analysis section.
54
Virtual Sports Segment, key events that affected results for the NineSix Months ended SeptemberJune 30, 20192020
DuringThe COVID-19 pandemic significantly impacted retail recurring revenues, partially during the period, wefirst quarter of 2020 and for the entirety of the second quarter of 2020. As a result, Retail Virtuals recurring revenues have declined by $4.6 million but partially offset by growth in both Scheduled Online Virtuals and Interactive revenues of $4.5 million
Bet365 launched with two streams of our Rush Football 2TMnew V-Play Basketball product with The Stars Group brand Betstars. We also launched Rush Football 2 with the Moroccan Lottery via the Intralot platform in approximately 200 venues. In the UK we deployed our Rush Bingo product on a dedicated channeland an additional stream of V-Play Cricket, both have proven to the Betfred estate of approximately 1,600 venues. We also deployed Virtual Horses, Dogs and Football (Soccer) via our proprietary Virtuals Connect platform with Genting Online. In Ireland, we launched a fourth channel of Virtual Horses with Boylesports. In Romania, we launched Rush Football 2 with Superbet. In UK Retail, we deployed our new stream-to-venue product in Ladbrokes and Coral running two channels of Rush Horses Sprints which complement the existing Broadcast channels. In the UK and Ireland, we launched our Quick 6 Bingo and two-minute Power Spin Roulette products across the full Paddy Power estate of over 750 venues.be very successful.
During the period we renewed our contract with Bet365 for an additional three years to provide scheduled Virtuals online with the world’s largest online sports betting company with over 35 million customers worldwide. In Virtual Interactive we deployed our proprietary 1st DownTM and Head 2 Head FootballTM products with Bet365 on two additional channels.
Inspired was named Virtual Supplier of the Year at the Gaming International Awards held at ICE 2019 and at the EGR B2B awards which were held in June 2019. This is the fourth consecutive year we have received this award.
During the period our Interactive division launched with eight new customers from New Jersey, Canada and the UK. We also launched new content, including Bear MoneyTM, Book of the IrishTM, Rainbow CashpotsTMand Mighty Hot WildsTM across the estate, which have performed strongly
During the period we signed a new contract with the British Columbia Lottery Corporation to supply Virtuals on demand, slots and table content via our proprietary Virgo platform. The Interactive division launched with Lotto Quebec infifteen new customers including 888, BCLC, Resorts Casino New Jersey, Harrah’s New Jersey, Casumo, Lottoland and Boylesports during the period with our proprietary V- Play On-Demand productsand added the strong Sky Vegas brand to its portfolio in addition to Sky Bingo. There were also major new content releases, including Reel King MegawaysTM and Centurion MegawaysTM. Both titles have seen strong performance since launch.
The Average Number of Live Customers during the period increased by elevennine, from 91102 to 102. Including the launch of six new Interactive customers, all of which were launched via the NYX platform. This brought our121. Our Average Number of Live Interactive Customers for the period increased to 39.67.
Despite a decrease in Average RevenueOur average revenue per Customer per Daycustomer declined during the quarter primarily due to the rephasingtiming of the annual contract with a major customer, weaddition of several Interactive customers that have extended that contract for an additional two-year term and we should see some benefit innot reached their revenue potential during the fourth quarter. Virtual Sports recurring revenue as a percentage of total Virtual Sports revenue increased by 3.1% to 91.0%.period.
Virtual Sports Segment, NineSix Months ended SeptemberJune 30, 20192020 compared to NineSix Months ended SeptemberJune 30, 20182019
Virtual Sports
| For the Nine-Month | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Period ended | Variance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Virtual Sports | For the Six-Month Period ended | Variance | Variance | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Unaudited Sept 30, 2019 | Unaudited Sept 30, 2018 | Variance 2019 vs 2018 | Functional Currency at Constant rate | Functional Currency | Currency Movement | Unaudited June 30, 2020 | Unaudited June 30, 2019 | 2020 vs 2019 | Functional Currency at Constant rate | Functional Currency | Currency Movement | ||||||||||||||||||||||||||||||||||||||||||||
| Service Revenue | $ | 27.5 | $ | 29.2 | $ | (1.7 | ) | (5.9 | )% | $ | (0.0 | ) | (0.1 | )% | $ | (1.7 | ) | $ | 18.8 | $ | 19.2 | $ | (0.4 | ) | (2.0 | )% | $ | 0.1 | 0.8 | % | $ | (0.5 | ) | |||||||||||||||||||||||
| Cost of Service | (2.5 | ) | (3.5 | ) | 1.0 | (29.2 | )% | 0.9 | (24.7 | )% | 0.2 | (2.1 | ) | (1.9 | ) | (0.2 | ) | 11.4 | % | (0.3 | ) | 14.5 | % | 0.1 | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (6.2 | ) | (8.0 | ) | 1.8 | (22.5 | )% | 1.4 | (17.2 | )% | 0.4 | (2.8 | ) | (4.3 | ) | 1.5 | (34.7 | )% | 1.4 | (33.3 | )% | 0.1 | ||||||||||||||||||||||||||||||||||
| Impairment expense | - | (3.0 | ) | 3.0 | (100.0 | )% | 3.1 | (100.0 | )% | (0.1 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | (1.0 | ) | (0.7 | ) | (0.3 | ) | 42.9 | % | (0.4 | ) | 48.0 | % | 0.1 | (0.2 | ) | (0.6 | ) | 0.4 | (67.3 | )% | 0.5 | (68.5 | )% | (0.0 | ) | |||||||||||||||||||||||||||||||
| Depreciation and amortization | (4.2 | ) | (4.7 | ) | 0.5 | (10.6 | )% | 0.3 | (6.8 | )% | 0.2 | (2.8 | ) | (2.9 | ) | 0.1 | (2.3 | )% | (0.0 | ) | 0.5 | % | 0.1 | |||||||||||||||||||||||||||||||||
| Net operating profit | $ | 13.6 | $ | 9.3 | $ | 4.3 | 46.1 | % | $ | 5.2 | 57.2 | % | $ | (0.9 | ) | |||||||||||||||||||||||||||||||||||||||||
| Net operating Income (Loss) | $ | 10.9 | $ | 9.5 | $ | 1.4 | 14.8 | % | $ | 1.8 | 18.9 | % | $ | (0.4 | ) | |||||||||||||||||||||||||||||||||||||||||
| Exchange Rate - $ to £ | 1.28 | 1.35 | 1.26 | 1.29 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Virtual Sports Segment revenue.In the period revenue decreased by $1.7$0.4 million, or 5.9%2.0%, on a reported basis. This decrease includes the impact of adverse currency movements of $1.7$0.5 million. On a functional currency at constant rate basis, Virtual Sports remained unchanged.
revenue increased by $0.1 million, or 0.8%. This was drivendecrease included a $4.6 million decline in retail recurring revenue from the COVID-19 national shutdowns. Declines were offset by growth in the UKScheduled Online Virtuals of $1.0$2.8 million and growth in other existing customers and new customer launches in the restInteractive of the world of $0.9$1.7 million. Additionally, we generated one-off income during the period from historic recurring revenue previously unreported to us of $0.8 million across Virtual and Interactive customers. This was offset by a reduction of $0.7 million from the decrease in long-term Virtual Sports contracts which have now been fully amortized, $0.7 million due to the rephasing of the annual contract with a major customer, $0.3 million from the expiration of a fixed term contract, $0.3 million from one-time revenue in the prior period and $0.2 million from one-time content sales in the prior period. As a result, underlying Virtual Sports revenue increased by $1.4 million.
Virtual Sports Segment operating income. Cost of service decreasedincreased by $1.0$0.2 million to $2.5$2.1 million, on a reported basis. Of this decrease, $0.2 million arose fromThis increase includes the impact of favorable currency movements.movements of $0.1 million.
SG&A expenses decreased by $1.5 million on a reported basis. This decrease includes the impact of adverse currency movements of $0.1 million. On a functional currency at constant rate basis, cost of serviceSG&A decreased by $0.9 million, driven by lower incomes and lower commissions paid in 2019.
SG&A expenses decreased by $1.8 million on a reported basis. Of this decrease, $0.4 million arose from favorable currency movements. This resulted in a functional currency at constant rate decrease of $1.4 million, largely driven by staff-related cost savings of $1.0 million.
48
Depreciation and amortization decreased by $0.5$0.1 million, to $4.2$2.8 million, on a reported basis. Of this decrease, $0.2 millionThere was due to favorablede minimis impact from currency movements. This resulted in a functional currency at constant rate decrease of $0.3 million, driven by lower amortization of platforms and games due to an impairment of an intangible fixed asset in the prior period.
Operating profit increaseddecreased by $4.3$1.4 million to $10.9 million, on a reported basis, to $13.6 million, which includesincluded an impact of $0.9$0.4 million from adverse currency movements. On a functional currency at constant rate basis, this represented an increase of $5.2$1.8 million, or 57.2%18.9%. This was driven by a decrease in cost of service, lower impairment expenses,primarily due to lower SG&A expenses and lower depreciation and amortization, partly offsetexpenses.
Acquired Businesses segment, key events that affected results for the Six Months ended June 30, 2020
Acquired Businesses segment, Key Performance Indicators
| For the Six-Month Period ended | Variance | |||||||||||||||
| Unaudited June 30, | Unaudited June 30, | |||||||||||||||
| Acquired Businesses | 2020 | 2019 | 2020 vs 2019 | |||||||||||||
| % | ||||||||||||||||
| Pub Digital Cat C Gaming Machines - Average installed base (# of terminals) | 5,760 | 4,400 | 1,360 | 30.9 | % | |||||||||||
| Inspired Pubs Revenue per Digital Cat C Gaming Machine per week | £ | 30.08 | £ | 63.30 | £ | (33.22 | ) | (52.5 | )% | |||||||
| Pub Analogue Digital Cat C Gaming Machines - Average installed base (# of terminals) | 2,714 | 3,924 | (1,210 | ) | (30.8 | )% | ||||||||||
| Inspired Pubs Revenue per Analogue Cat C Gaming Machine per week | £ | 19.10 | £ | 43.69 | £ | (24.58 | ) | (56.3 | )% | |||||||
| End of Period % of Digital Cat C Gaming Machines in Pub Market | 68.2 | % | 57.2 | % | 11.0 | % | ||||||||||
| Total Leisure Parks Revenue (Gaming and Non Gaming) (£‘m) | £ | 1.5 | £ | 9.8 | £ | (8.3 | ) | (85.0 | )% | |||||||
| AGC and MSA Gaming Machines - Average installed base (# of terminals)(1) | 5,106 | 5,843 | (737 | ) | (12.6 | )% | ||||||||||
| Inspired AGC and MSA Revenue per Gaming Machine per week | £ | 26.13 | £ | 63.03 | £ | (36.90 | ) | (58.5 | )% | |||||||
| (1) | Adult Gaming Centers and Motorway Service Area machines |
Acquired Businesses segment, Six Months ended June 30, 2020
| For the Six- | ||||
| Acquired Business | Month Period | |||
| ended | ||||
| Unaudited | ||||
| June 30, | ||||
| (In millions) | 2020 | |||
| Revenue: | ||||
| Service | $ | 23.2 | ||
| Hardware | 6.0 | |||
| Total revenue | 29.2 | |||
| Cost of sales, excluding depreciation and amortization: | ||||
| Cost of service | (3.6 | ) | ||
| Cost of hardware | (5.2 | ) | ||
| Total cost of sales | (8.8 | ) | ||
| Selling, general and administrative expenses | (20.5 | ) | ||
| Depreciation and amortization | (10.4 | ) | ||
| Net operating Income (Loss) | £ | (10.5 | ) | |
| Exchange Rate - $ to £ | 1.28 | |||
Note: Exchange rate in the table is calculated by $0.4 milliondividing 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 higher stock-based compensation.transactions.
Acquired Businesses Segment Revenue
Acquired Businesses service revenue was $23.2 million for the six months ended June 30, 2020, of which $9.7 million was generated from Pub customers for gaming machines and other rental products. Online revenue was $2.6 million for the period. The Company’s average installed base within the Pub business included 8,474 Category C gaming machines. Digital gaming machines accounted for 68.2% of the total Category C gaming machines at the end of the period, which was an increase from 57.2% at the end of the comparable period in 2019. This represents a 30.9% increase over the prior year’s installed base of digital Category C gaming machines and reflects the continued conversion of Category C gaming machines from analog to digital in the UK Pub estate. The increase in the Company’s digital machine base was continuing to drive revenue per gaming machine per week until the shutdown of the UK market due to the COVID-19 pandemic, which led to revenues reducing to zero beginning in mid-March, resulting in a reduction in revenue per digital terminal of 52.5% for the period.
In addition, Acquired Businesses includes services to Leisure Parks, MSAs, AGCs and bowling alleys as well as software license fees associated with one-time hardware sales. Leisure parks contributed $1.9 million in revenue, which was $10.3 million lower than the prior year, caused by the closure of all leisure parks from mid-March, as described above. Revenue from MSAs and AGCs was $5.8 million in the quarter and included 5,106 machines on a rental basis, generating an average of £26.13 per week, which was a reduction of 58.5% to the prior year.
Acquired Businesses hardware revenue was $6.0 million and includes the sale of 963 machines as well as spare parts and repairs.
Acquired Businesses Segment Operating Income
Acquired Businesses operating income reflects cost of sales of $8.8 million (comprised of manufacturing costs, content royalties, spare parts, distribution costs, and certain gaming taxes), SG&A expenses of $20.5 million including service network costs, facilities, and staffing, and depreciation and amortization of $10.4 million, reflecting capitalized game development and machine deployment levels. SG&A expenses for the period were impacted by furloughs of all operations staff, effected to reflect the cessation of revenue from gaming operations due to the shutdown from March through June attributable to the COVID-19 pandemic.
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:
EBITDAis defined as net loss excluding depreciation and amortization, interest expense, interest income and income tax expense.
Adjusted EBITDA is defined as net 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.
Adjusted Revenue (Revenue Excluding Nil Margin Hardware Sales) is defined as revenue excluding hardware sales that are sold at nil margin with the intention of securing longer term recurring revenue streams.
Functional Currency at Constant rate. 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, 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. The 2019/2020 EBITDA comparison does not include the Acquired Businesses in the 2019 results.
Reconciliation to Adjusted EBITDA
| For the Three-Month Period ended | ||||||||||||||||
| For the Three-Month Period ended | Unaudited | Unaudited | ||||||||||||||
| Unaudited Sept 30, | Unaudited Sept 30, | June 30, | June 30, | |||||||||||||
| (In millions) | 2019 | 2018 | 2020 | 2019 | ||||||||||||
| Net loss | $ | (8.5 | ) | $ | (11.9 | ) | $ | (24.5 | ) | $ | (10.7 | ) | ||||
| Items Relating to Legacy Activities: | ||||||||||||||||
| Items Relating to Discontinued Activities: | ||||||||||||||||
| Pension charges (1) | 0.1 | 0.1 | 0.2 | 0.1 | ||||||||||||
| Items outside the normal course of business: | ||||||||||||||||
| Costs of group restructure | 0.5 | 0.1 | 0.3 | 1.1 | ||||||||||||
| Acquisition and integration related transaction expenses | 3.3 | 0.1 | 1.2 | 0.7 | ||||||||||||
| Stock-based compensation expense | 2.2 | 1.5 | 1.0 | 2.3 | ||||||||||||
| Impairment expense | - | 7.7 | ||||||||||||||
| Depreciation and amortization | 8.3 | 10.6 | 13.3 | 9.1 | ||||||||||||
| Total other expense, net | 2.7 | 8.2 | 10.5 | 6.1 | ||||||||||||
| Income tax | 0.1 | 0.0 | 0.1 | 0.1 | ||||||||||||
| Adjusted EBITDA | $ | 8.7 | $ | 16.3 | $ | 2.1 | $ | 8.9 | ||||||||
| Adjusted EBITDA | £ | 7.1 | £ | 12.5 | £ | 1.7 | £ | 6.9 | ||||||||
| Exchange Rate - $ to £ (6) | 1.23 | 1.30 | 1.26 | 1.29 | ||||||||||||
| For the Nine-Month Period ended | ||||||||
| Unaudited Sept 30, | Unaudited Sept 30, | |||||||
| (In millions) | 2019 | 2018 | ||||||
| Net loss | $ | (24.2 | ) | $ | (16.4 | ) | ||
| Items Relating to Legacy Activities: | ||||||||
| Pension charges (1) | 0.4 | 0.4 | ||||||
| Litigation Settlement (2) | - | 0.3 | ||||||
| Items outside the normal course of business: | ||||||||
| Costs of group restructure (3) | 3.1 | 2.1 | ||||||
| Acquisition and integration related transaction expenses (4) | 4.9 | 0.3 | ||||||
| Stock-based compensation expense | 6.6 | 4.2 | ||||||
| Impairment expense | - | 7.7 | ||||||
| Depreciation and amortization | 27.1 | 32.3 | ||||||
| Total other expense, net | 13.2 | 13.4 | ||||||
| Income tax | 0.1 | 0.1 | ||||||
| Adjusted EBITDA | $ | 31.3 | $ | 44.3 | ||||
| Adjusted EBITDA | £ | 24.5 | £ | 32.8 | ||||
| Exchange Rate - $ to £ (6) | 1.28 | 1.35 | ||||||
51
| For the Six-Month Period ended | ||||||||
| Unaudited | Unaudited | |||||||
| June 30, | June 30, | |||||||
| (In millions) | 2020 | 2019 | ||||||
| Net loss | $ | (41.9 | ) | $ | (15.7 | ) | ||
| Items Relating to Discontinued Activities: | ||||||||
| Pension charges (1) | 0.4 | 0.3 | ||||||
| Items outside the normal course of business: | ||||||||
| Costs of group restructure (2) | 0.4 | 2.7 | ||||||
| Acquisition and integration related transaction expenses (3) | 4.4 | 1.6 | ||||||
| Impairment on interest in equity method investee(4) | 0.7 | - | ||||||
| Stock-based compensation expense | 2.0 | 4.4 | ||||||
| Depreciation and amortization | 25.9 | 18.8 | ||||||
| Total other expense, net(5) | 20.0 | 10.5 | ||||||
| Income tax | 0.3 | (0.0 | ) | |||||
| Adjusted EBITDA | $ | 12.1 | $ | 22.5 | ||||
| Adjusted EBITDA | £ | 9.5 | £ | 17.4 | ||||
| Exchange Rate - $ to £ (6) | 1.27 | 1.30 | ||||||
Notes to table:
| (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 |
| “Costs of group restructure” include redundancy costs, Payments In Lieu of Notice costs, any associated employer taxes and costs associated with onerous property leases. To qualify as being an adjusting item, costs must be part of a large restructuring project, which will net save ongoing future costs. These costs were primarily incurred in connection with the property consolidation. |
| Acquisition and integration related transaction expenses, Stock-based compensation expense, Depreciation and amortization, Total other expense, net and Income tax are as described above in the Results of Operations line item discussions. Total expense, net includes interest income, interest expense, change in fair value of earnout liability, change in fair value of derivative liability and other finance income. |
| (4) | In April 2020, the Company disposed of its 40% non-controlling equity interest in Innov8 Gaming Limited which resulted in the investment of $0.7 million being written off. |
| (5) | Excludes loss from equity method investee of $0.5 million. |
| (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. |
Reconciliation to Adjusted Revenue
| For the Three-Month Period ended | ||||||||
| Unaudited Sept 30, | Unaudited Sept 30, | |||||||
| 2019 | 2018 | |||||||
| (In millions) | ||||||||
| Net revenues | $ | 26.6 | $ | 35.6 | ||||
| Less Nil Margin Sales | - | - | ||||||
| Adjusted Revenue | $ | 26.6 | $ | 35.6 | ||||
| Adjusted Revenue | £ | 21.6 | £ | 27.3 | ||||
| Exchange Rate - $ to £ | $ | 1.23 | $ | 1.30 | ||||
| For the Nine-Month Period ended | ||||||||
| Unaudited Sept 30, | Unaudited Sept 30, | |||||||
| 2019 | 2018 | |||||||
| (In millions) | ||||||||
| Net revenues | $ | 87.0 | $ | 110.0 | ||||
| Less Nil Margin Sales | - | (4.0 | ) | |||||
| Adjusted Revenue | $ | 87.0 | $ | 106.0 | ||||
| Adjusted Revenue | £ | 68.2 | £ | 78.4 | ||||
| Exchange Rate - $ to £ | $ | 1.28 | $ | 1.35 | ||||
We believe that accounting for nil margin hardware sales in conformance with U.S. GAAP can result in a distorted presentation of our revenue and growth. Therefore, we use Revenue Excluding Nil Margin Sales, or Adjusted Revenue, to internally analyze our operating performance.
59
Liquidity and Capital Resources
NineSix Months ended SeptemberJune 30, 20192020 compared to NineSix Months ended SeptemberJune 30, 20182019
| 6 Months ended | Variance | |||||||||||
| Jun 30, | Jun 30, | 2020 | ||||||||||
| (in millions) | 2020 | 2019 | to 2019 | |||||||||
| Net loss | $ | (41.9 | ) | $ | (15.7 | ) | $ | (26.2 | ) | |||
| Non-cash interest expense including amortization of fees | 1.2 | 0.9 | 0.3 | |||||||||
| Change in fair value of derivative and earnout liabilities and stock-based compensation expense | 2.5 | 6.8 | (4.3 | ) | ||||||||
| Impairment expense | 0.7 | 0.0 | 0.7 | |||||||||
| Foreign currency translation on senior bank debt and cross currency swaps | 6.6 | (0.3 | ) | 6.9 | ||||||||
| Depreciation and amortization (incl RoU assets) | 27.9 | 18.8 | 9.1 | |||||||||
| Other net cash generated/(utilized) by operating activities | 13.2 | 9.2 | 4.0 | |||||||||
| Net cash provided by operating activities | 10.2 | 19.7 | (9.5 | ) | ||||||||
| Net cash used in investing activites | (15.5 | ) | (9.8 | ) | (5.7 | ) | ||||||
| Net cash generated by financing activities | 18.6 | 9.0 | 9.6 | |||||||||
| Effect of exchange rates on cash | (2.5 | ) | (1.2 | ) | (1.3 | ) | ||||||
| Net increase in cash and cash equivalents | $ | 10.8 | $ | 17.7 | $ | (6.9 | ) | |||||
| Period Ended | ||||||||||||
| Sept 30, 2019 | Sept 30, 2018 | Variance 2019 to 2018 | ||||||||||
| (in millions) | ||||||||||||
| Net loss | $ | (24.2 | ) | $ | (16.4 | ) | $ | (7.8 | ) | |||
| Non-cash interest expense including amortization of fees | 1.4 | 4.8 | (3.4 | ) | ||||||||
| Change in fair value of derivative and earnout liabilities and stock-based compensation expense | 6.1 | 6.0 | 0.1 | |||||||||
| Impairment expense | - | 7.7 | (7.7 | ) | ||||||||
| Foreign currency translation on senior bank debt and cross currency swaps | 1.0 | (3.4 | ) | 4.4 | ||||||||
| Depreciation and amortization | 27.1 | 32.3 | (5.2 | ) | ||||||||
| Other net cash generated/(utilized) by operating activities | 11.0 | 3.4 | 7.6 | |||||||||
| Net cash provided by operating activities | 22.4 | 34.4 | (12.0 | ) | ||||||||
| Net cash used in investing activities | (16.5 | ) | (36.1 | ) | 19.6 | |||||||
| Net cash generated by financing activities | 9.0 | 12.9 | (3.9 | ) | ||||||||
| Effect of exchange rates on cash | (1.3 | ) | 0.3 | (1.6 | ) | |||||||
| Net increase in cash and cash equivalents | $ | 13.6 | $ | 11.5 | $ | 2.1 | ||||||
Net cash provided by operating activities. In the period,six months ended June 30, 2020, net cash inflow generatedprovided by operating activities was $22.4$10.2 million, compared to $34.4a $19.7 million inflow in the prior year’s six-month period, representing an $12.0$9.5 million decrease in cash generation.
Non-cash interest expense decreasedincreased by $3.4$0.3 million to $1.4$1.2 million. The current period’s non-cash interest expense related to amortization of debt fees incurred in relation to the business refinancing in August 2018 whereas theOctober 2019. The prior period’syear’s expense related to PIK interest charged on the debt held prior to the refinancing and amortization of debt fees only from the point ofincurred in relation to the business refinancing in August 2018.
Change in fair value of derivative and earnout liabilities and stock-based compensation expense increasedreduced by $0.1$4.3 million, from an inflow of $6.0$6.8 million to an inflow of $6.1$2.5 million. Movements in the market value of the stock price resulted in a $6.3$2.3 million higher earnout inflow in the current periodsix months ended June 30, 2019 and there was a $2.4$1.8 million higher inflow relating to stock-based compensation expense. These were offset by a $8.6 million higher outflow of $8.6 millionexpense also in the prior year. On March 25, 2019, the shares relating to derivative liabilities.the earnout liability were issued resulting in no further inflows or outflows after this date.
Foreign currency translation on senior bank debt and cross currency swaps following the refinancing on August 14, 2018October 1, 2019 resulted in a lossgain in the periodsix months ended June 30, 2020 of $1.8$6.6 million as a result of the movement in exchange rates during the current period, compared to a gainloss of $4.0$0.3 million in the corresponding six months of the prior period.year.
Depreciation, amortization and impairment reducedincreased by $5.2$9.1 million to a charge of $27.1$27.9 million due principally to lowerwith increases of $5.2 million in machine depreciation of $3.3asset charges and $1.7 million and lowerin development costs and licenselicenses following the acquisition of the Acquired Businesses on October 1, 2019. In addition, a $2.0 million charge has been incurred in the six months to June 30, 2020 relating to the amortization of $1.8 million.Right of Use assets under ASC842. This standard was not applied to the prior periods.
Non-cash finance lease addition in the six months ended June 30, 2020 represented the capitalization of the new Station Street UK head office property as a finance lease.
Other net cash generated by operating activities increased by $7.6$4.0 million, to an $11.0a $13.2 million inflow. The strong performanceinflow despite the significant impact in the first ninemost recent four months of the year comparedCOVID-19 pandemic. Strong receipt generation resulted in a $2.9 million favorable movement in accounts receivable and there was a $1.1 million benefit from other current asset levels. Further favorable movements were in accruals, $6.9 million, driven by timing of interest payments. These were partly offset by an outflow relating to accounts payable of $5.9 million as a direct consequence of the COVID-19 pandemic and a $1.6 million outflow relating to operating lease liabilities under ASC842, a standard not applied to the results for the prior year was drivenperiod.
Included within net cash provided by several factors. Improved collection of accounts receivable in the current period ofoperating activities were $5.0 million of payments relating to transaction and reduced capital expenditures resulted in cash growthintegration expenses and $0.4 million of $4.2payments relating to restructuring costs. This compares to $0.5 million also helped by favorable timing of supplier payments of $3.2 million. The prior period included the buildrelating to transaction expenses and roll out of the second phase of Greece machines, and the subsequent inventory requirement impacted the comparative working capital levels, while payroll taxes due on RSU awards vesting in December 2017 had a $1.4 million working capital impact. The Greece roll outrelating to restructuring costs in the prior period also resulted in an increased deferred revenue creditor benefitting the prior period cash generated by operating activities by $3.6 million. The current period has seen an unwind of $4.3 million as the creditor is credited to the profit and loss account.year.
Net cash used in investing activities.Net cash used in investing activities decreasedincreased by $19.6$5.7 million to $16.5 million.$15.5 million in the six months ended June 30, 2020. The decreaseincrease was attributabledue to lower levelsa $6.7 million higher spend on property and equipment following the acquisition of machine spending compared toNovomatic UK’s Gaming Technology Group in October 2019, offset by a $1.1 million reduction in the prior period which includedspend on capitalized software as a direct consequence of the Greece roll out and Flex 4k terminal build.COVID-19 pandemic.
Net cash generated by financing activities.In the current period,six months ended June 30, 2020, net cash generated by financing activities was $9.0$18.6 million, compared to $12.9 million in the prior period. This was due to the prior period including a refinancing of the group which, net of fees paid on previous debt and revolver being repaid, resulted in a $13.0 million cash generation. The current period has seen a $9.0 million increase due to aninflow in the six months ended June 30, 2019. An increase in the level of revolver utilizationdrawn resulted in a $22.3 million inflow offset by a $3.1 million payment of lender fees associated with the changes made to the debt terms and covenant levels as a result of the COVID-19 pandemic and $0.6 million of finance lease payments. The prior year’s inflow was due to a $9.3 million increase in the current period to enable the purchaselevel of Euros to hedge on the Euro purchase pricerevolver drawn offset by $0.3 million of the acquisition of Novomatic UK’s Gaming Technology Group.finance lease payments.
Funding Needs and Sources
To fund our obligations, we have historically relied on a combination of cash flows provided by operations and the incurrence of additional debt or the refinancing of existing debt. As of SeptemberJune 30, 2019,2020, we had liquidity of $29.6$39.9 million in cash and cash equivalents. This compares to $22.5$33.7 million of cash and cash equivalents plus a further $9.5 million of an undrawn revolver facilityas at the end of the prior period.June 30, 2019. We had a working capital inflow of $11.0$13.2 million in 2019,for the six months ended June 30, 2020, compared to a $3.4$9.2 million inflow infor the prior period.six months ended June 30, 2019. The level of our working capital surplus or deficit varies with the level of machine production we are undertaking and our capitalization.capitalization and also with the seasonality evident in some of the companies purchased as part of the acquisition of Novomatic UK’s Gaming Technology Group in October 2019. In periods with minimal machine volumes and capital spend, our working capital is more stable. In periods where significant numbers of machines are being produced, the levels of inventory and creditors are higher than typical and there is a natural timing difference between converting the stock into sellable or capitalized plant and settling payments to suppliers. These factors, along with movements in trading activity levels, 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.
Significant amountsSome of our business operations require cash flows from operations arise from our operations in Greece.to be held within the machines. As of SeptemberJune 30, 2019, $2.42020, $2.6 million of our $29.6$39.9 million of cash and cash equivalents had arisen in Greece andwere held as operational floats within the machines. In addition a further $2.4 million of cash was being held in our Greekwithin a restricted bank accounts. Inaccount. This amount is expected to be released into an unrestricted account before the ordinary courseend of business, we seek from time to time to transfer funds earned in Greece to accounts of ours outside Greece. However, up until September 1, 2019, Greece imposed capital controls that sometimes complicated, delayed or prevented the flow of capital out of that country. Historically, we have always been able to complete such transfers. Since September 1, 2019, capital controls are no longer in place.next quarter.
Management currently believes that despite the reduced trading levels caused by the COVID-19 pandemic, the Company’s cash balances on hand, cash flows expected to be generated from operations, the refinancing of the business following the acquisition of the Novomatic UK’s Gaming Technology Group in October 2019 and the ability to control and defer capital projects will be sufficient to fund the Company’s net cash requirements through November 2020.August 2021.
The Company has undertaken a review of its operations in order to enable it to reduce its global costs and to more effectively align its resources with its business priorities. In connection with this review, the Company is in the process of consolidating and relocating certain of its operations in the UK and has implemented, and expects to continue to implement, a related reduction in headcount. These changes continue the Company’s prior cost control efforts. Office consolidation expenses are expected to amount to approximately $7.9 million in total, as we expect to incur approximately $2.5 million of capital investment for the new office, and approximately $5.4 million of one-time costs to exit offices. These figures include costs relating to staff redundancy, relocation allowances, travel supplements, dual running costs, recruitment fees of replacement hires and dilapidating old facilities. We expect the majority of these costs to be incurred by the end of the first quarter next year.
61
Long Term and Other Debt
| (In millions) | June 30, 2020 | June 30, 2019 | ||||||||||||||
| Cash held | £ | 32.3 | $ | 39.9 | £ | 26.5 | $ | 33.7 | ||||||||
| Revolver drawn | (20.0 | ) | (24.7 | ) | (7.3 | ) | (9.3 | ) | ||||||||
| Original principal senior debt | (230.5 | ) | (284.8 | ) | (110.0 | ) | (140.0 | ) | ||||||||
| Cash interest accrued | (4.8 | ) | (6.0 | ) | (0.1 | ) | (0.1 | ) | ||||||||
| Finance lease creditors | (0.8 | ) | (1.1 | ) | (0.1 | ) | (0.2 | ) | ||||||||
| Total | £ | (223.8 | ) | $ | (276.8 | ) | £ | (91.0 | ) | $ | (115.9 | ) | ||||
| September 30, 2019 | September 30, 2018 | |||||||||||||||
| (In millions) | ||||||||||||||||
| Cash held | £ | 24.0 | $ | 29.6 | £ | 17.2 | $ | 22.5 | ||||||||
| Revolver drawn | (7.3 | ) | (9.0 | ) | - | - | ||||||||||
| Original principal senior debt | (113.6 | ) | (140.0 | ) | (107.4 | ) | (140.0 | ) | ||||||||
| Cash interest accrued | - | - | (0.1 | ) | (0.1 | ) | ||||||||||
| Finance lease creditors | (0.1 | ) | (0.1 | ) | (0.4 | ) | (0.5 | ) | ||||||||
| Total | £ | (97.0 | ) | $ | (119.5 | ) | £ | (90.6 | ) | $ | (118.2 | ) | ||||
During August 2018, the Company and certain of its subsidiaries entered into a series of transactions that refinanced the Company’s external borrowings, replacing the Company’s senior term and revolving facilities, originally entered into in 2014, with senior notes of $140.0 million and a revolving credit facility of £7.5 million (equivalent to approximately $9.2 million). The senior notes had a 5-year duration and carried a cash interest rate of 9% plus 3-month LIBOR, and the revolving credit facility had a 3-year duration and carried a cash interest rate on any utilization at 4% plus 3-month LIBOR, any unutilized amount carried a 1.4% cash interest cost. In connection with this refinancing, the Company entered into a three-year, fixed-rate, cross-currency swap. For further information regarding the new external borrowings and the swap, see Note 12 to the Consolidated Financial Statements, “Long Term and Other Debt”.
As of September 30, 2019, the Company had bank facilities of £121.1 million (equivalent to approximately $149.2 million), consisting of a senior term loan facility of £113.6 million (equivalent to $140.0 million) and a revolving credit facility of £7.5 million (equivalent to approximately $9.2 million). As of September 30, 2019, the term loan facility had a cash interest rate on outstanding borrowings equal to the base rate margin of 9.00% per annum, plus 3-month LIBOR which at September 30, 2019 was the equivalent of 11.33% per annum which under the cross-currency swaps executed was reduced to a rate of 10.87%. The term loan facility is scheduled to mature on August 13, 2023 but was terminated on October 1, 2019 (see Acquisition section below).
As of September 30, 2018, the Company had bank facilities of £114.9 million (equivalent to approximately $149.8 million), consisting of a senior term loan facility of £107.4 million (equivalent to $140.0 million) and a revolving credit facility of £7.5 million (equivalent to approximately $9.8 million). As of September 30, 2018, the term loan facility imposed a cash interest rate on outstanding borrowings equal to the base rate margin of 9.00% per annum, plus 3-month LIBOR which at September 30, 2018 was the equivalent of 11.39% per annum which under the cross-currency swaps executed was reduced to a rate of 10.87%.
As of September 30, 2019, the Company had aggregate borrowings under the revolving credit facility of £7.3 million (equivalent to $9.0 million). As of September 30, 2019, the revolving credit facility imposed a cash interest rate on outstanding borrowings equal to the base rate margin of 4.00% per annum, plus LIBOR, and the current rate at which cash interest accrued was 4.70% per annum. In addition, a commitment fee was payable with respect to unutilized borrowing capacity at a rate of 1.40% per annum. The revolving credit facility is scheduled to mature on August 13, 2021. In addition to the revolving credit facility borrowings described above, further amounts under the facility have been used for the Company’s VAT Duty Deferment guarantee and the Company’s credit card program.
As of September 30, 2018, the Company had no aggregate borrowings under the revolving credit facility, the terms and rates of which were identical to the revolving credit facility as of September 30, 2019.
In addition to the revolving credit facility borrowings described above, further amounts under the facility have been used for the Company’s VAT Duty Deferment guarantee and the Company’s credit card program. The amount used as of September 30, 2019 and 2018 was $0.2 million.
Debt issuance fees were capitalized at the time the debt was issued. As of September 30, 2019, the amount of debt issuance fees capitalized was $9.2 million, including $2.8 million of original issue discount and $4.2 million of exit premium and the remainder being professional fees incurred from the refinancing. Of the total debt issuance fees capitalized, $2.1 million had been charged by September 30, 2019.
Refinancing
On October 1, 2019, pursuant to the Share Purchase Agreement, dated as of June 11, 2019 (the “SPA”), by and between Inspired Gaming (UK) Limited, a subsidiary of the Company (the “Buyer”), and Novomatic UK Ltd., (the “Seller”), the Buyer completed its acquisition from the Seller of (i) all of the outstanding equity interests of each of (a) Astra Games Ltd, (b) Bell-Fruit Group Limited, (c) Gamestec Leisure Limited, (d) Harlequin Gaming Limited, and (e) Playnation Limited, and (ii) 40% of the outstanding equity interests of Innov8 Gaming Limited (“Innov8”, and the entities described in clauses (i) and (ii), together with certain of their subsidiaries, the “Acquired Companies” and the transactions contemplated by the SPA, the “Acquisition”). The Acquired Companies comprised the Seller’s Gaming Technology Group. The consideration for the Acquisition totaled approximately €104.6 million (USD $120.0 million) in cash.
In connection with the Acquisition, on September 27, 2019, Gaming Acquisitions Limited, together with Inspired Entertainment, Inc. (“Inspired”), and certain other direct and indirect wholly-owned subsidiaries of Inspired, entered into a Senior Facilities Agreement with Lucid Agency Services Limited, as agent, Nomura International plc and Macquarie Corporate Holdings Pty Limited (UK Branch) as arrangers and/or bookrunners and each lender party thereto (the “Lenders”), pursuant to which the Lenders agreed to provide, subject to certain conditions, two tranches of senior secured term loans (the “Term Loans”), in an original principal amount of £140.0 million and €90.0 million, respectively and a secured revolving facility loan in an original principal amount of £20.0 million. Proceeds from the Term Loans were used, among other things, to pay the purchase price of the Acquisition and to refinance existing indebtedness of the Company.
The new term loans have a 5-yearfive-year duration and are repayable in full on October 1, 2024. The £140.0 million loan carries a cash interest rate of 7.25% plus 3-month LIBOR, the €90.0 million loan carries a cash interest rate of 6.75% plus a 3-month EUROLIBOR. The £20.0 million revolving credit facility is available until September 1, 2024 and carries a cash interest rate on any utilization at 5.50% plus 3-month LIBOR, with any unutilized amount carrying a cash interest cost at 30% of the applicable margin on the revolving credit facility loan. On April 6, 2020, the Company entered into an Extended Grace Period Letter Agreement amendment to the Senior Facilities Agreement that provided for, among other things, an increase in the applicable margin on the term loans and revolving credit facility of 100 bps, as described in the notes to the financial statements – Note 17 Subsequent Events. On June 25, 2020, the Extended Grace Period Letter Agreement amendment became effective with the increase in the applicable margin on the terms loans and revolving credit facility being backdated to April 1, 2020. In addition, the cash interest due on the term loans at this date was capitalized and also attracted interest at the increased margin levels.
In connection with the refinancing on October 1, 2019, the existing three-year, fixed-rate, cross-currency swaps were terminated and the remaining capitalized debt fees totaling $7.2$7.3 million were to be expensed in the next quarter.expensed. Debt fees of approximately $12$16.1 million were expected to be incurred and capitalized in quarter ending December 31, 2019 as part of the refinancing as relating to the costs incurred in obtaining the new term loan facilities. These fees will be amortized over the length of the new term loans. On June 25, 2020 as part of the Extended Grace Period Letter Agreement becoming effective a further $3.1 million of debt fees were incurred and capitalized. These fees will also be amortized over the term loan length.
During August 2018, the Company and certain of its subsidiaries entered into a series of transactions that refinanced the Company’s external borrowings, replacing the Company’s senior term and revolving facilities, originally entered into in 2014, with senior notes of $140.0 million and a revolving credit facility of £7.5 million (equivalent to approximately $9.3 million). The senior notes had a five-year duration and carried a cash interest rate of 9% plus 3-month LIBOR, and the revolving credit facility had a three-year duration and carried a cash interest rate on any utilization at 4% plus 3-month LIBOR, any unutilized amount carried a 1.4% cash interest cost. In connection with this refinancing, the Company entered into a three-year, fixed-rate, cross-currency swap. For further information regarding the new external borrowings and the swap, see Note 12 to the Consolidated Financial Statements, “Long Term and Other Debt”.
As of June 30, 2020, and following the capitalization of the cash interest on April 1, 2020, the Company had bank facilities of £165.8 million and €93.1 million (equivalent to approximately $309.5 million), consisting of senior term loan facilities of £145.8 million and €93.1 million (equivalent to $180.2 million and $104.6 million respectively) and a revolving credit facility of £20.0 million (equivalent to approximately $24.7 million). As of June 30, 2020, the £145.8 million term loan facility had a cash interest rate on outstanding borrowings equal to the base rate margin of 8.25% per annum, plus 3-month LIBOR which at June 30, 2020 was the equivalent of 8.97% per annum. The €93.1 million term loan facility had a cash interest rate on outstanding borrowings equal to the base rate margin of 7.75% per annum, plus 3-month EUROLIBOR which at June 30, 2020 was the equivalent of 7.75% per annum. Both term loan facilities are scheduled to mature on October 1, 2024.
As of June 30, 2019, the Company had bank facilities of £117.5 million (equivalent to approximately $149.5 million), consisting of a senior term loan facility of £110.0 million (equivalent to $140.0 million) and a revolving credit facility of £7.5 million (equivalent to approximately $9.5 million). As of June 30, 2019, the term loan facility imposed a cash interest rate on outstanding borrowings equal to the base rate margin of 9.00% per annum, plus 3-month LIBOR which at June 30, 2019 was the equivalent of 11.33% per annum which under the cross-currency swaps executed was reduced to a rate of 10.87%.
As of June 30, 2020, the Company had aggregate borrowings under the revolving credit facility of £20.0 million (equivalent to $24.7 million). As of June 30, 2020, the revolving credit facility imposed a cash interest rate on outstanding borrowings equal to the base rate margin of 6.50% per annum, plus LIBOR, and the current rate at which cash interest accrued was 6.59% per annum. In addition, a commitment fee was payable with respect to unutilized borrowing capacity at a rate of 1.65% per annum. The revolving credit facility is scheduled to mature on September 1, 2024.
As of June 30, 2019, the Company had aggregate borrowings under the revolving credit facility of £7.3 million (equivalent to $9.3 million). As of June 30, 2019, the revolving credit facility imposed a cash interest rate on outstanding borrowings equal to the base rate margin of 4.00% per annum, plus LIBOR, and the current rate at which cash interest accrued was 4.72% per annum. In addition, a commitment fee was payable with respect to unutilized borrowing capacity at a rate of 1.40% per annum. This facility was terminated at the time of the refinancing on October 1, 2019.
Debt issuance fees were capitalized at the time the debt was issued, with further lender debt fees capitalized on June 25, 2020 as part of the Extended Grace Period Letter Agreement becoming effective. As of June 30, 2020, the amount of debt issuance fees capitalized was $18.7 million, including $11.7 million of original issue discount and $2.2 million of structuring fees with the remainder being professional fees incurred from the refinancing. Of the total debt issuance fees capitalized, $2.4 million had been charged by June 30, 2020.
Debt Covenants
Under our debt facilities in place as of SeptemberJune 30, 2020 we are subject to covenant testing at quarterly intervals. The covenant testing is set at the level of Inspired Entertainment Inc., the ultimate holding company, and consists of a test on Leverage (Consolidated Total Net Debt/Consolidated Pro Forma EBITDA) and a test on the level of capital expenditure. These are measured under U.S. GAAP. Leverage is to be tested at quarterly intervals commencing for the period ending June 30, 2020 and capital expenditure is tested annually commencing on December 31, 2019.
Prior to reaching our first leverage covenant test on June 30, 2020, the covenants were reset as a direct result of the Covid19 pandemic and subsequent loss of trading through the last few months as a result of government lockdowns in many key trading countries around the world. Formal agreement of the revised covenants was achieved on June 25, 2020.
Under our debt facilities in place as of June 30, 2019, and September 30, 2018, we arewere subject to covenant testing at quarterly intervals. The covenant testing is set at the level of Inspired Entertainment Inc., the ultimate holding company, and consists of a test on Leverage (Consolidated Total Debt/Consolidated Adjusted EBITDA) and a test of the Fixed Charge Coverage Ratio (Net Cash Provided by Operating Activities/Calculation of Consolidated Fixed Charges). These are measured under U.S. GAAP. In addition to the quarterly tests, there was the requirement that the minimum liquidity not be less than $5.0 million. With the refinancing of the Company on October 1, 2019, these tests were replaced by a revised set of covenant tests and for the period ending 30 September, 2019 these tests were not required to be performed.tests.
There were no breaches of the debt covenants in the periods ended September 30, 2019 and September 30, 2018.
Debt Covenants for New Debt
Under our new debt facilities, we are subject to covenant testing. The covenant testing is set at the level of Inspired Entertainment Inc., the ultimate holding company, and consists of a test on Leverage (Consolidated Total Net Debt/Consolidated Pro Forma EBITDA) and a test on the level of capital expenditure. These are measured under U.S. GAAP. Leverage is tested at quarterly intervals commencing on the period ending June 30, 2020 and capital expenditure is tested annually commencing on December 31,June 30, 2019.
Liens and Encumbrances
As of SeptemberJune 30, 2019,2020, our senior bank debt was secured by the imposition of a fixed and floating charge in favor of the lender over all the assets of the Company and certain of the Company’s subsidiaries.
Contractual Obligations
As of SeptemberJune 30, 2019,2020, 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 | $ | 107.5 | $ | 21.5 | $ | 43.0 | $ | 43.0 | $ | - | ||||||||||
| Financing activities | ||||||||||||||||||||
| Revolver repayment | 9.0 | 9.0 | - | - | - | |||||||||||||||
| Senior bank debt - principal repayment | 140.0 | - | - | 140.0 | - | |||||||||||||||
| Finance lease payments | 0.1 | 0.1 | - | - | - | |||||||||||||||
| Interest on non-utilisation fees | 1.7 | 0.4 | 0.7 | 0.7 | - | |||||||||||||||
| Total | $ | 258.4 | $ | 31.0 | $ | 43.7 | $ | 183.7 | $ | - | ||||||||||
| Less than | More than | |||||||||||||||||||
| Contractual Obligations (in millions) | Total | 1 yr | 1-3 years | 3-5 years | 5 yrs | |||||||||||||||
| Operating activities | ||||||||||||||||||||
| Interest on long term debt | $ | 109.6 | $ | 24.1 | $ | 48.8 | $ | 36.7 | $ | - | ||||||||||
| Financing activities | ||||||||||||||||||||
| Revolver repayment | 24.9 | 24.9 | - | - | - | |||||||||||||||
| Senior bank debt - principal repayment | 284.8 | - | - | 284.8 | - | |||||||||||||||
| Operating lease payments | 12.6 | 3.2 | 4.4 | 2.4 | 2.6 | |||||||||||||||
| Interest on non-utilisation fees | 1.7 | 0.3 | 0.8 | 0.6 | - | |||||||||||||||
| Total | $ | 434.6 | $ | 53.0 | $ | 54.4 | $ | 324.6 | $ | 2.6 | ||||||||||
Recent US Tax Law Changes
In light of the recent US tax reforms and specifically those around GILTI (Global Intangible Low Taxed Income), we may be required to pay additional US corporate income tax beginning in the year ending December 31, 2021 due to the location of assets and tax losses brought forward in the UK.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2019,2020, there were no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, promulgated by the U.S. Securities and Exchange Commission.
Critical Accounting Policies
The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenue and expenses, and our disclosure of commitments and contingencies at the date of the consolidated financial statements. On an on-going basis, we evaluate our estimates and judgments. We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business and industry and current and expected economic conditions, that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
For a discussion of other recently issued accounting standards, and assessments as to their impacts on the Company, see Nature of Operations, Management’s Plans and Summary of Significant Accounting Policies, Note 1 to the consolidated financial statements included elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal market risks are our exposure to changes in interest rates and foreign currency exchange rates.
Interest Rate Risk
We have external borrowings that are subject to the risk of higher interest charges associated with increases in interest rates. As of SeptemberJune 30, 2019,2020, we had £113.6£145.8 million ($140.0180.2 million) and €93.1 million ($104.6 million) of senior bank debt that is subject to a floating interest rate charge that can vary with the 3-month LIBOR rate.and the 3-month EUROLIBOR rates. If the floating interest rates increased by 1%, the additional interest charge would be approximately $1.1$1.4 million. If the floating interest rates increased by 5%, the additional interest charge would be approximately $5.3$7.0 million.
InThe above additional interest charges do not consider the interest rate swaps that the Company has entered into in connection with its August 2018the refinancing. These swaps, which are effective until October 1, 2023 cover approximately 2/3rds of the debt refinancing, the Company also entered into a three-year, fixed-rate, cross-currency swap which islevel and have been designed to negate the impact of any interest rate increases. For further information regardingincreases and should the new external borrowings andinterest rates move as above, then the swap, see Note 12 to the Consolidated Financial Statements, “Long Term and Other Debt”.actual additional interest charge would be significantly less than shown.
Foreign Currency Exchange Rate Risk
Our operations are conducted in various countries around the world and we receive revenue and pay expenses from these operations in a number of different currencies. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in (i) currencies other than GBP, which is our functional currency, or (ii) the functional currencies of our subsidiaries, which is not necessarily GBP. Excluding intercompany balances, our Euro functional currency net assetsliabilities total approximately $22.7$90.6 million and our US Dollar functional currency net liabilitiesassets total approximately $137.8$1.9 million. We use a sensitivity analysis model to measure the impact of a 10% adverse movement of foreign currency exchange rates against the US Dollar. A hypothetical 10% adverse change in the value of the Euro and the US Dollar relative to GBP as of SeptemberJune 30, 20192020 would result in translation adjustments of approximately $2.1$8.1 million and $13.8$0.2 million, respectively, recorded in other comprehensive loss. Of the $137.8 million, cross-currency swaps have been executed on $140.0 million to mitigate the risk of adverse movements in the value of the US Dollar relative to GBP which would reduce the translation adjustment impact.
Included within our trading results are earnings outside of our functional currency. Retained earnings earned in Euros and in US Dollars in the period ended SeptemberJune 30, 20192020 were €0.1€0.6 million and $12.6a loss of $4.3 million, respectively. A hypothetical 10% adverse change in the value of the Euro and the US Dollar relative to GBP as of SeptemberJune 30, 20192020 would result in translation adjustments of approximately $0.0$0.1 million and $1.1$0.4 million, respectively, recorded in trading operations.
The majority of the Company’s trading is in GBP, the functional currency, although the reporting currency of the Company is the US Dollar. As such, changes in the GBP:USD exchange rate have an effect on the Company’s results. A 10% weakening of GBP against the US Dollar would change the trading operational results by approximately $1.2$3.5 million and would result in translation adjustments of approximately $8.6$0.1 million, recorded in other comprehensive loss.
In connection with its August 2018 debt refinancing, the Company also entered into a three-year, fixed-rate, cross-currency swap.
For further information regarding the new external borrowings, and the swap, see Note 12 to the Consolidated Financial Statements, “Long Term and Other Debt”.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer (together, the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of SeptemberJune 30, 2019,2020 due to the endmaterial weakness described in Item 9A of the Annual Report on Form 10-K filed with the SEC on March 30, 2020. Management has implemented additional controls designed to remediate this material weakness; however, these controls have not operated effectively over a sufficient period covered byof time in order to conclude that the material weakness has been fully remediated.
Notwithstanding the identified material weakness and management’s assessment that our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2020, management believes that the interim consolidated financial statements and footnote disclosures included in this Report.
Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations, cash flows and disclosures as of and for the periods presented in accordance with generally accepted accounting principles.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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From time to time, we may become involved in lawsuits and legal proceedings arising in the ordinary course of business. While we believe that, currently, we have 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 our business, financial condition or results of operations.
TheYou should carefully consider the risk factors set forth below update the corresponding risk factor in our Annual Report on Form 10-K for the year ended September 30, 2018 and sets forth certain additional risk factors. You should carefully consider the risk factors discussed below and in our most recent Annual Report on Form 10-K,December 31, 2019, which could materially affect our business, financial position and results of operations. As used below, references to “we” or “our”In addition, please refer to the Business prior to the acquisition of the Acquired Companies.revised risk factor below.
We are heavily dependent onThe ongoing coronavirus (COVID-19) pandemic is adversely affecting our ability to renew our long-term contracts with our customers and we could lose substantial revenue if we are unable to renew certain of these contracts.
Generally, our Virtual Sports contracts are for initial terms of three to five years, but longer in certain territories, with renewals at the customer’s option. Generally, our SBG terminal contracts, and contracts within the Acquired Companies, are for terms of four to six years (although in certain cases they are longer), but certain customers have options for early termination under certain circumstances, or to reduce machine volumes under certain circumstances, and we may face pressure to renew or upgrade terminals during the lives of these contracts, which could adversely affect revenues or our return on capital and leave us with surplus terminals. At any given time, we have multiple substantial customer contracts that have years to run and others that may be nearing expiration or renewal, which we may lose if we cannot compete effectively to retain their business.
There can be no assurance that current contractsOur business has been, and will be, extended or that we will be awarded contract extensions or new contracts as a result of competitive bidding processes or otherwise. The termination, expiration or failure to renew one or more of our contracts could cause us to lose substantial revenue.
Changes in applicable gambling regulations or taxation regimes may affect the revenues or profits generatedaffected by the contracts we enter into with our customers. Many of the contracts have with our customers are on revenue-sharing (net of gaming taxes) terms, and therefore changes which adversely affect our customers may also adversely affect us. In addition, any such changes may cause our customers to seek to renegotiate their contracts, may alter the terms on which such customers are prepared to renew their contracts and may affect their ability or willingness to renew their contracts.
We rely on a relatively small number of customers for a significant portion of our sales, and the loss of, or material reduction in, sales to any of our top customers could have an adverse effect on our business, results of operations, financial condition and prospects.
Certain key customers, including certain UK, Italian and Greek SBG terminal customers and certain Virtual Sports customers, make a significant contribution to our revenues and profitability. Our top ten customers generated approximately 75% of total revenues in the nine months ended September 30, 2019. During the nine months ended September 30, 2019, three customers represented at least 10% of revenues, accounting for 20%, 16% and 10% of the Company’s revenues. We expect that these customers will continue to represent a significant portion of our sales in the future. However, the loss of any of our top customers, whether through contract expiry and non-renewal, breach of contract or other adverse factors could materially adversely affect our revenues or return on capital and leave us with surplus terminals. Moreover, if any of these customers experience reduced revenue, such reduction could adversely affect any revenue-sharing arrangements we have with those customers, reduce our own revenues and adversely affect our financial results.
rapidly expanding coronavirus (COVID-19) pandemic. Our ability to bid on new contracts may be dependent upon our ability to fund any required up-front capital expenditures through our cash from operations,offer land-based gaming generally has been affected by the incurrenceclosures of indebtedness or the raising of additional equity capital.
Our SBG terminal contracts in the UK, Italy and Greece and terminal contracts within the Acquired Companies often require significant up-front capital expenditures for terminal assembly, software customization and implementation, systems and equipment installation and telecommunications configuration. Historically, we have funded these up-front costs through cash flows generated from operations and external borrowings. Our ability to continue to procure new contracts, including in new jurisdictions, will depend upon, among other things, our liquidity levels at the time or our ability to obtain additional debt or equity funding at commercially acceptable terms to finance the initial up-front costs. If we do not have adequate liquidity or are unable to obtain other funding for these up-front costs on favorable terms or at all we may not be able to bid on certain contracts, which could restrict our ability to grow and have an adverse effect on our ability to retain existing contracts and therefore on future profitability. Certain contracts within the Acquired Companies also require injections of capital expenditure during the term for new or replacement hardware.
We operate in an industryvenues that is subject to strict government regulations that could limit our existing operations and have a negative impact on our ability to grow.
In certain jurisdictions, forms of wagering, betting and lottery may be expressly authorized and governed by law and in other jurisdictions forms of wagering, betting and lottery may be expressly prohibited by law. If expressly authorized, such activities are typically subject to extensive and evolving governmental regulation. Gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore, we are subject to a wide range of complexoffer gaming laws, rules and regulations in the jurisdictions in which we are licensedoperate. Although such closures have largely been lifted, they could still partially or may seek to be licensed. Most jurisdictions require that we are licensed or authorized, that our key personnel and certain of our security holders are found to be suitable or are licensed, and that our products are reviewed, tested and certified or approved before placement. If a license, approval, certification or finding of suitability is required by a regulatory or national authority and we fail to seek or do not receive the necessary approval, license, certification or finding of suitability, or if it is revoked, then we may be prohibited from distributing our products for use in the respective jurisdiction. Additionally, such prohibition could trigger reviews of our Company by regulatory bodies in other jurisdictions and adversely affect our ability to obtain or retain the required licenses and approvals in those jurisdictions.
The regulatory environment in any particular jurisdiction is subject to change, and any such change could have an adverse effect on our results of operations or business in general. Moreover, there can be no assurance that the operation of Server Based Gaming terminals, Video Lottery Terminals, or certain other Terminals, Virtual Sports betting, online betting, lottery or other forms of wagering systems, or the content delivered by the means of those systems, will be approved, certified or found suitable by jurisdictions into which we might seek to expand or that those jurisdictions in which these activities are currently permitted will continue to permit such activities in their existing forms (stricter regulations could come into force) or at all. While we believe that we have the means to continue to develop procedures and policies designed to monitor and comply with the requirements of evolving laws, there can be no assurance that law enforcement agencies, governmental agencies or gaming regulatory authorities, whether in existing or new jurisdictions, will not seek to restrict our business or otherwise institute enforcement proceedings or bring other legal claims against the Company. Moreover, in addition to the risk of such enforcement actions or claims, our business reputation may be adversely affectedcompletely reoccur in the event any legalof a “second wave” of COVID-19 or regulatory investigationsother additional periods of increases or proceedings are instituted, whether or notspikes in the number of COVID-19 cases in areas in which we are ultimately subject to any claims or found to have committed any violations.operate.
We supply our products to operators of gaming venues, platforms and websites which typically must themselves be licensed by gaming regulators. If any one of these operators fails to maintain its gaming licenses, or violates gaming laws or regulations, our business may suffer, due to our loss of a viable customer and, in instances where we have a revenue-sharing arrangement withIn addition, the operator, due to our loss of our shareeconomic impact of the revenue generated by that operator’s business.
We supply certain of our products to operators who operate gaming websites. Some of those operatorspandemic may take bets from customers in markets where no gaming laws or regulations exist and where the provision of online gaming is effectively unregulated. Although the Company seeks to ensure that its customers only take bets in markets where online gaming is legal, those operators may potentially be subject to investigatory or enforcement action for operating in jurisdictions where online gaming is not expressly permitted, which could result in the operator suffering interventions ranging from special conditions being appliedpermanent closure of certain venues and/or a decrease in the willingness or ability of consumers to its licenses, license suspension or license loss, orengage in gambling activities, both during and possibly after the operator otherwise withdrawing from or curtailing its activities in any such market. Any such developments couldpandemic. The pandemic may also adversely affect such operator’s revenues and in turn adversely affect our earnings from such operator.
The Company is itself subject to regulatory investigations from time to time, and may be subject to enforcement action. In addition, certain jurisdictions may impose liability on suppliers for the activities of their customers if the use of the products supplied violate applicable law. In addition, we are required from time to time to install technologies or controls in order to comply with new regulations applicable to our business in one or more jurisdictions in which we operate. We seek to protect ourselves against any such liability by reason of the activities of the operators we supply, including by contractually requiring those operators not to operate in certain territories and limiting our operator base to those entities we have reviewed with respect to their standards of regulatory and legal compliance. Nonetheless, there is a risk that we may fail to undertake sufficient due diligence or fail to receive accurate information on which to conduct our due diligence. We may become subject to investigatory or enforcement action should we or anybroad range of our customers be accused of breaching any regulations or laws. Any such action may adversely affect our standing with gaming regulators andoperations, including our ability to obtain and retain required licenses and other approvals in other jurisdictions.
We may be required to obtain and maintain licenses and certifications from various state and local jurisdictions in order to operate certain aspects ofship our business and we and our key personnel and certain security holders may be subject to extensive background investigations and suitability standards. We may also become subject to regulation in any other jurisdiction where our customers are permitted to operate in the future. Licenses and ongoing regulatory compliance can be costly. There can be no assurance that we will be able to obtain new licenses or renew any of our existing licenses, and the loss, denial or non-renewal of any of our licenses could have an adverse effect on our business. Generally, regulatory authorities have broad discretion when granting, renewing or revoking approvals and licenses. Our failure, or the failure of any of our key personnel, systems or machines, in obtaining or retaining a required license or approval in one jurisdiction could have a negative impact onproducts, our ability (orto continue to develop new products and services as well as the ability of any of our key personnel, systems or gaming machines)customers to obtain or retain required licenses and approvals in other jurisdictions. The failurepay outstanding amounts due to obtain or retain a required license or approval in any jurisdiction would decrease the geographic area where we may operate and generate revenues, decrease our share in the gaming marketplace and put us at a disadvantage compared with our competitors.us. In addition, the levy of substantial fines or forfeiture of assets could significantly harmpandemic may have long-term impacts on the global economy, trade relations, consumer behavior, our business, financial condition and results of operations.
Some jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage of equity securities of licensed or regulated businesses. The failure of beneficial owners of our common stock to submit to such background checks and provide required disclosure could jeopardize our business. In light of these regulations and the potential impact on our business, our second amended and restated certificate of incorporation provides for the prohibition of stock ownership by persons or entities who fail to comply with informational or other regulatory requirements under applicable gaming law, who are found unsuitable to hold our stock by gaming authorities or whose stock ownership adversely affects our ability to obtain, maintain, renew or qualify for a license, contract, franchise or other regulatory approval from a gaming authority. The licensing procedures and background investigations of the authorities that regulate our businesses and the proposed amendment may inhibit potential investors from becoming significant stockholders or inhibit existing stockholders from retaining or increasing their ownership.
Our businesses are subject to a number of federal, state, local and foreign laws and regulations governing data privacy and security, including with respect to the collection, storage, use, transmission and protection of personal information and other consumer data. In particular, the EU has adopted strict data privacy regulations. Following recent developments such as the European Court of Justice’s 2015 ruling that the transfer of personal data from the EU to the U.S. under the EU/U.S. Safe Harbor was an invalid mechanism of personal data transfer, the adoption of the EU-U.S. Privacy Shield as a replacement for the Safe Harbor, and the upcoming effective date of the EU’s General Data Protection Regulation, data privacy and security compliance in the EU are increasingly complex and challenging. The scope of data privacy and security regulations continues to evolve, and we believe that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions. Compliance with data privacy and security restrictions could increase the cost of our operations and failure to comply with such restrictions could subject us to criminal and civil sanctions as well as other penalties.
We are subject to the provisions of the UK Bribery Act 2010, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws. The UK Bribery Act generally prohibits giving a financial or other advantage to another person with the intention of inducing that person to improperly perform a relevant function or activity. The U.S. Foreign Corrupt Practices Act generally prohibits U.S. persons and companies and their agents from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business. Certain of these anti-corruption laws also contain provisions that require accurate record keeping and further require companies to devise and maintain an adequate system of internal accounting controls. Because a significant percentage of our revenue derives from foreign sources,industry and our business activities involve continuing relationships with governmental regulators, there exists a risk that certain provisions of these anti-corruption laws may be breached. We are also subject to anti-money laundering and anti-terrorist financing laws and regulations, and to economic and trade sanctions programs administered by the Office of Foreign Assets Control (OFAC) in the United States relating to our ability to engage in transactions with entities that are domiciled in countries or territories subject to comprehensive OFAC trade sanctions (currently, Cuba, Iran, North Korea, Syria, and Crimea), or that are included on OFAC’s list of Specially Designated Nationals and Blocked Persons. Although we have policies and controls in place that are designed to ensure compliance with these laws, if those controls are ineffective or an employee or intermediary fails to comply with the applicable regulations, we may be subject to criminal and civil sanctions as well as other penalties. Any such violation could disrupt our business and adversely affect our reputation, results of operations, cash flows and financial condition.
We review and develop our internal compliance programs in an effort to ensure that we comply with legal requirements imposed in connection with our business activities. The compliance program is run on a day-to-day basis by our in-house legal department with compliance and technical advice provided by our compliance manager and outside professionals. There can be no assurance that such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of administrative, civil and even criminal sanctions, monetary fines or suspension or revocation of one or more of our licenses.
We have operations in a variety of countries, which subjects us to additional risks.
We are a global business and derived substantially all of our revenue outside the United States during the nine months ended September 30, 2019. In the nine months ended September 30, 2019, we earned approximately 62% of our revenue in the UK, 14% in Italy, 17% in Greece and the remaining 7% across the rest of the world. Our business in foreign markets subject us to risks customarily associated with such operations, including:
Our consolidated financial results are significantly affected by foreign currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated transactions denominated in currencies other than U.S. Dollars, and from the translation of foreign currency balance sheet accounts into GBP-denominated or USD-denominated balance sheet accounts. Exposure to currency exchange rate fluctuations exists and will continue because a significant portion of our revenues are denominated in currencies other than the USD, particularly GBP and the Euro. Exchange rate fluctuations have in the past adversely affected operating results and cash flows and may continue to adversely affect results of operations and cash flows and the value of assets.
As a result of the geographic concentration of our operations in the UK, Italy and Greece, our operating results and cash flow depend significantly on economic conditions and the other factors listed above in these market areas. There can be no assurance that we will be able to operate on a continuing successful basis in these markets or in any combination of different geographical markets.
Changes to U.S. tax laws may impose additional costs on the Company.
The U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017. The Tax Act includes significant changes to the U.S. corporate income tax system including, among other things, lowering the U.S. statutory federal tax rate to 21%. The Tax Act also adds many new provisions, including a tax on global intangible low-taxed income (“GILTI”). The changes included in the Tax Act are broad and complex. In light of the changes set forth in the Tax Act, and specifically GILTI, we may be required to pay additional U.S. corporate income tax beginning in the year ending December 31, 2021 due to the location of assets and tax losses brought forward in the UK. There can be no assurance that future changes to U.S. tax laws will not result in additional costs to the Company.
We may be subject to claims arising from the operations of our various businesses for periods prior to the dates we acquired them.
On December 23, 2016, the Business Combination (as defined below) that created the current Inspired Entertainment, Inc. was consummated. Since 2010 and prior to the Business Combination, we have consummated two acquisitions and on October 1, 2019, we acquired the Acquired Companies. We may be subject to claims or liabilities arising from the ownership or operation of acquired businesses for the periods prior to our acquisition of them, including environmental, employee-related and other liabilities and claims not covered by insurance.
We face risks arising from the results of the public referendum held in United Kingdom and its membership in the European Union.
The ongoing developments following from the United Kingdom’s public referendum vote to exit from the European Union could cause disruptions to and create uncertainty surrounding our business, including affecting our relationships with existing and potential customers, suppliers and employees. Negotiations have commenced to determine the terms of the United Kingdom’s future relationship with the European Union, including the terms of trade between the United Kingdom and the European Union. The effects of Brexit will depend upon any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. As with other businesses operating in the UK and Europe, the measures could potentially have corporate structural consequences, adversely affect manufacturing and other costs, adversely change tax benefits or liabilities in these or other jurisdictions and could disrupt some of the markets and jurisdictions in which we operate. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. In addition, the announcement of Brexit has caused significant volatility in global stock markets and currency exchange rate fluctuations, including the strengthening of the USD against some foreign currencies, and the Brexit negotiations may continue to cause significant volatility. The progress and outcomes of Brexit negotiations also may create global economic uncertainty, which may cause customers and potential customers to monitor their costs and reduce their budgets for products and services. Any of these effects of Brexit, among others, could materially adversely affect the business, business opportunities, results of operations, financial condition and cash flows of our Company.
Restrictions in our existing borrowings, including covenants set forth in our existing debt facilities, or any other indebtedness we may incur in the future, could adversely affect our business, financial condition, or results of operations, and our ability to make distributions to stockholders and the value of our common stock.
Our existing borrowings, and any other indebtedness we may enter into, may limit our ability to, among other things:
The provisions of our existing borrowings may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions.
In addition, under our debt facilities in place as of December 31, 2018, we are subject to covenant testing at quarterly intervals, consisting of a test on Leverage (Consolidated Total Debt/Consolidated Adjusted EBITDA). A further covenant test of Fixed Charge Coverage Ratio (Net Cash Provided by Operating Activities/Calculation of Consolidated Fixed Charges) is required, commencing on September 30, 2019. In addition, there is the requirement that the minimum liquidity not be less than $5.0 million.
Failure to comply with the provisions of our existing borrowings or any other indebtedness we may enter into, including the covenants set forth in our existing debt facilities, could result in a default or an event of default that could enable our lenders or other debt holders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. In addition, some of our debt could be subject to cross-acceleration terms, pursuant to which repayment of that debt would be accelerated if the repayment of other debt we owe is accelerated. If the payment of some or all of our debt is accelerated, our assets may be insufficient to repay such debt in full.
In connection with the Acquisition, we refinanced the business with an effective date of October 1, 2019 under a new senior facilities agreement (”SFA”). The new debt consisted of two senior secured five year term loans of £140.0 million and €90.0 million together with a secured revolving facility loan (the “RCF Loan”) in an original principal amount of £20.0 million.
The SFA Loans will bear interest at LIBOR or EURIBOR as applicable, plus a margin (based on Inspired’s consolidated total net leverage ratio) ranging from 5.00% to 7.25%.
With respect to the RCF Loan, a commitment fee of 30% of the then applicable margin accrues on any unutilized portion of the RCF Loan. Any accrued commitment fee is payable quarterly in arrears and, with respect to any commitment under the RCF Loan that is cancelled, at the time the cancellation is effective.
The covenants include restrictions regarding the incurrence of liens, the incurrence of indebtedness by Inspired’s subsidiaries and fundamental changes, subject to certain exceptions in each case. The SFA requires that Inspired maintain a maximum consolidated total net leverage ratio of 4.1x (subject to a step down to 3.0x on and after June 30, 2021). The ratio is calculated based on earnings before interest, taxes, depreciation and amortization, as adjusted pursuant to the SFA. The SFA also restricts capital expenditures based on fixed annual limits, which grow pro rata with respect to consolidated EBITDA acquired pursuant to any permitted acquisition of a company or business, (subject to the ability to carry forward the unused part of such limit in any given year into the immediately following year, to carry back up to 50% of such limit into the then current year from the immediately succeeding year and to fund capital expenditures from certain specified funding sources in which case such expenditure does not count towards the annual limit) applicable from the financial year ending December 31, 2019 to the financial year ending December 31, 2026. The SFA does not include a minimum interest coverage ratio or other financial covenants.
The outstanding principal amount of the Term Loans is payable on October 1, 2024. The outstanding principal amount of each advance under the RCF Loan is payable on the last day of the interest period relating to such advance, unless such advance is rolled over on a cashless basis in accordance with customary rollover provisions contained in the SFA.
Risks Related to the Acquisition of the Novomatic UK Gaming Technology Group
We will incur substantial direct and indirect costs as a result of the acquisition of Gaming Technology Group of Novomatic UK Ltd. (“Novomatic”), which we refer to as the Acquisition.
We have incurred, and will continue to incur, substantial expenses in connection with and as a result of completing the Acquisition and, over a period of time following the completion of the Acquisition, we expect to incur substantial additional expenses in connection with coordinating the businesses, operations, policies and procedures of the combined company. While we have assumed that a certain level of transaction expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately.
Combining the two companies may be more difficult, costly or time consuming than we anticipate and we may not realize the intended benefits of the Acquisition.
The businesses that comprise the Gaming Technology Group have been operated by Novomatic within a number of separate subsidiary entities. These businesses have had their own corporate cultures, location, employees and systems. The success of the Acquisition, including anticipated benefits, will depend, in part, on our ability to successfully combine and integrate our business with the Gaming Technology Group. As a result of the Acquisition, we will operate our existing business, along with the Gaming Technology Group, as one combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices. There may be substantial difficulties, costs and delays involved in the integration of our business with the Gaming Technology Group, including as a result of challenges relating to the diversion of management’s attention from our ongoing business, the possibility of faulty assumptions underlying expectations regarding the integration process, retaining and attracting business and operational relationships, eliminating duplicative operations and inconsistent standards and procedures and increased or unforeseen liabilities or costs relating to the Acquisition or the Gaming Technology Group. If we experience difficulties with the integration process, the anticipated benefits of the Acquisition may not be realized fully or at all, or may take longer to realize than expected, which could materially and adversely affect our business, financial condition and results of operations.
If goodwill or other intangible assets that we record in connection with the Acquisition become impaired, our financial position in future periods could be negatively impacted.
In connection with the accounting for the Acquisition, it is expected that we will record a significant amount of intangible assets and may also record goodwill. Under GAAP, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other indefinite-lived intangible assets has been impaired. Amortizing intangible assets will be assessed for impairment in the event of an impairment indicator. Events giving rise to impairment are an inherent risk in the gaming industry and cannot be predicted. Our results of operations and financial position in future periods could be negatively impacted should future impairments of intangible assets or goodwill occur.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
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The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| * | Filed herewith. |
| ** | Furnished herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| INSPIRED ENTERTAINMENT, INC. | |
| Date: | /s/ A. Lorne Weil |
| Name: A. Lorne Weil | |
| Title: Executive Chairman | |
| (Principal Executive Officer) | |
| Date: | /s/ Stewart F.B. Baker |
| Name: Stewart F.B. Baker | |
| Title: Executive Vice President and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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