INSPIRED ENTERTAINMENT, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual future results could differ materially from the historical results discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" included elsewhere in this report. Forward-Looking Statements We make forward-looking statements in this Annual Report on Form 10-K. 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?
? 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 with respect to the potential duration of the pandemic, the
various Government-ordered emergency measures including travel restrictions,
social distancing and/or shelter in place orders and closure of retail venues
and the remediation plans put in place by each Government to potentially
mitigate these effects, the detail, scope and application of which are still
largely unknown;
? 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;
? government regulation of our industries;
? income trends with respect to B2/B3 gaming machines in the
("UK") following a substantial reduction of maximum permitted bets, which came
into effect on April 1, 2019 ;
? our ability to successfully grow by acquisition as well as organically;
32
? 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
sectors around the world;
? changes in local, regional and global economic and political conditions;
? our ability to effectively integrate the operations of businesses we acquire,
and to grow and expand such operations; and
? other factors.
Subsequent Events
Investors and potential investors are advised to review this annual report on
Form 10-K 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 has declared COVID-19 to be a global pandemic.
There have been a number of government-imposed emergency measures in many of the
jurisdictions in which we operate in response to the pandemic. The duration of
these measures are unknown, but include 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. Retail operations of our customers in
Italy , Greece , the U.S and the UK have closed and are no longer generating
revenues for us. Our Interactive business, which includes Virtual Sports
products, to the extent delivered online, remain operational.
Although there have been a number of government-supported initiatives (across our various geographies) proposed to ease the burden on businesses and employees, including employee retention schemes, credit relief and tax deferrals, there is still much uncertainty regarding the scope of these initiatives or their respective impact on our business.
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 ofGBP20.0 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. Most recently, we implemented furloughs, reduced work hours and compensation levels, as well as additional measures across our entire business. The objective of these actions has been to lower our future cash expenditures for the period in which these initiatives remain in place. Additionally, the Board has determined to (i) indefinitely delay the payment of accrued executive bonuses for the year endedDecember 31, 2019 and (ii) waive cash payments of Board retainers due to be disbursed during the second quarter of 2020. The Executive Chairman has also voluntarily withdrawn his Employment Agreement from consideration at our upcoming annual meeting of stockholders and we are examining arrangements with all debtors. In addition, theOffice of the Executive Chairman have consented to temporary reductions in base pay, as described in Item 9B below. Though we have seen an increase in our virtual/interactive business since the government-mandated closures, depending on the duration of the pandemic and government-mandated restrictions, as well as government-sponsored remediation regimes, the effects of these events are potentially catastrophic for the worldwide economy, including our business. 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. Overview We are a global business-to-business gaming technology company, supplying Server Based Gaming ("SBG") andVirtual 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 key strategic priorities are to:
? Extend our strong positions in each of
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 sectors and newly
regulated jurisdictions; and
? Pursue targeted mergers and acquisitions to expand our product portfolio
and/or distribution footprint.
33
Our most recent fiscal year ended on December 31, 2019 . 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 . Subsequent to this change in financial
year, we filed a transition report on Form 10-Q, covering the transition period
of October 1, 2018 to December 31, 2018 . Accordingly, this Form 10-K covers our
financial year as amended, being the period from January 1, 2019 to December 31,
2019 . Comparatives are shown for the calendar year period from January 1, 2018
to December 31, 2018 , as shown in the accompanying reconciliation table.
On
Our business is being and will continue to be adversely affected by the rapidly expanding nature of the coronavirus (COVID-19) pandemic. All venues offering land-based gaming, including our products, are closed for an indeterminate period of time in the jurisdictions in which we operate through governmental mandate. In addition, the extent of a significant economic impact from the pandemic may result in a decrease in the willingness or ability of consumers to engage in gambling activities. Land-based customers globally, andthe United States ,United Kingdom ,Greece andItaly specifically, are impacted by the COVID-19 pandemic due to the closure of venues. There is also a possibility that player behavior may change following any resolution of the pandemic, including that consumers may spend less time or wager smaller amounts at gambling facilities. The pandemic is adversely affecting a broad range of our operations, including our ability to obtain and ship our products, our ability to continue to develop new products and services and the ability of our customers to pay outstanding amounts due to us. As a result of the significant reductions in revenue and other changes to our business, at least in the short term (which also affects other companies in our industry), we are working to protect our existing available liquidity by pro-actively managing capital expenditures and working capital as well as identifying both immediate and longer term opportunities for cost savings. We expect, due to closures of land-based venues, that there could be a meaningful increase in our online revenues from slots and virtual sports but it is not possible to quantify any potential impact at this time. Prior to any COVID-19 impact, we would have expected this part of our business to account for approximately 10% of Company revenue during 2020. As part of these efforts to preserve liquidity, the Company drew all remaining availability (£18.0 million ($23.8 million using rates prevailing atDecember 31, 2019 )) under its £20 million ($26.4 million using rates prevailing atDecember 31, 2019 ) revolving credit facility onMarch 13, 2020 . Business Segments We report our operations in three business segments, SBG,Virtual Sports (which includes Interactive, an operating segment which does not exceed the quantitative thresholds in Accounting Standards Committee ("ASC" 280-10-50-12), and Acquired Businesses (which is comprised of the aforementioned NTG business, acquired onOctober 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 includeUK licensed betting offices ("LBOs"), casinos, gaming hall operators, bingo operators and regulated operators of lotteries, as well as government-affiliated operators. OurVirtual Sports business segment designs, develops, markets and distributes ultra-high-definition games that create an always-on sports wagering experience. OurVirtual Sports customers include virtual sports retail and digital operators, including regulated betting operators, lotteries, casinos, online operators and other gaming and lottery operators in theUK , continentalEurope ,Africa ,Asia andNorth America . Our Interactive business segment (reported as part ofVirtual Sports ) comprises the offering of our SBG andVirtual Sports content via our remote gaming servers. Our Acquired Businesses design, develop, market and distribute a broad portfolio of games through our digital network architecture. In addition, it operates analog gaming and amusement machines for certain customers, includingUK pubs, adult gaming centers, motorway service stations and holiday resorts. 34 Revenue
We generate revenue in three principal ways: on a participation basis, on a fixed rental fee basis and through product sales and software license fees. Participation revenue includes a right to receive a share of revenue generated from (i) ourVirtual 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. The revenue recognition processes we 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. 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. Acquired Businesses
Revenue from gaming and amusement 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, particularly in the pub rental sector, 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.Geographic Range Geographically, more than half of our revenue is derived from, and more than half of our non-current assets are attributed to, ourUK 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 twelve months endedDecember 31, 2019 , we earned approximately 68% of our revenue in theUK , 13% inGreece , 11% inItaly and the remaining 8% across the rest of the world. During the twelve months endedDecember 31, 2018 , we earned approximately 63%, 17%, 13% and 7% of our revenue in those regions,
respectively.
35
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 theUK and the British pound ("GBP") is considered to be our functional currency. Our reporting currency is theU.S. dollar ("USD"). Our results are translated from our functional currency of GBP into the reporting currency of USD using average rates for profit and loss transactions and applicable spot rates for period-end balances. The effect of translating our functional currency into our reporting currency, as well as translating the results of foreign subsidiaries that have a different functional currency into our functional currency, is reported separately in Accumulated Other Comprehensive Income. During the twelve months endedDecember 31, 2019 , we derived approximately 32% of our revenue from sales to customers outside theUK , compared to 37% during the twelve months endedDecember 31, 2018 . 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 aU.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 withU.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 comparableU.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
year ended December 31, 2019 , compared to the twelve-month period ended
December 31, 2018 ; and
? a discussion and analysis of the results of operations of our SBG and
Virtual Sports business segments for the twelve-month period ended
KPI analysis; and
? a discussion and analysis of the results of operations of our Acquired
Business segments for the period commencing with the consummation of the
acquisition on
? a discussion and analysis of the Company's results of operations for the
three-month period ended
2017; and
? a discussion and analysis of the results of operations of our SBG and
31, 2018, compared to the same period in 2017, including KPI analysis.
We changed our financial year-end fromSeptember 30 to December 31 , effective for the fiscal year endedDecember 31, 2019 , with our previous fiscal year-end wasSeptember 30, 2018 . Subsequent to this change in financial year, we filed a transition report on Form 10-Q, covering the transition period ofOctober 1, 2018 toDecember 31, 2018 . As a result, we have provided results for the twelve-month period endedDecember 31, 2018 for comparative purposes. The results for the twelve months endedDecember 31, 2018 are unaudited. The three-month financial periods presented consist of a 92-day period for each of 2018 and 2017. The balance sheet date for both 2018 and 2017 isDecember 31 . Each of the foregoing periods is herein referred to as a "three-month period." Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). In the twelve-month periods endedDecember 31, 2019 and 2018, the average GBP:USD rates were 1.28 and 1.34, respectively. In the three-month periods endedDecember 31, 2018 and 2017, the average GBP: USD rate was 1.29 and 1.34, respectively.
In the discussion and analysis below, certain data may vary from the amounts presented in our consolidated financial statements due to rounding.
36
Twelve Months ended December 31, 2019 compared to Twelve Months ended December
31, 2018
For the Twelve-Month Variance
Period ended Functional
Audited Unaudited Currency at
Dec 31, Dec 31, Variance Constant Functional Currency
(In millions) 2019 2018 2019 vs 2018 rate Currency Movement
Revenue:
Service $ 134.9 $ 130.6 $ 4.3 3.3 % $ 10.2 7.8 % $ (5.9 )
Hardware 18.5 10.1 8.4 82.7 % 9.2 92.0 % (0.8 )
Total revenue 153.4 140.7 12.7 9.0 % 19.4 13.8 % (6.8 )
Cost of sales, excluding
depreciation and
amortization:
Cost of service (23.5 ) (23.4 ) (0.1 ) 0.4 % (1.2 ) 4.9 % 1.1
Cost of hardware (12.6 ) (7.9 ) (4.7 ) 59.9 % (5.4 ) 69.6 % 0.7
Selling, general and
administrative expenses (72.6 ) (59.0 ) (13.6 ) 23.0 % (16.8 ) 28.4 % 3.2
Stock-based compensation (9.0 ) (5.8 ) (3.2 ) 55.0 % (3.6 ) 61.6 % 0.4
Impairment expense - (7.7 ) 7.7 (100.0 )% 7.9 (100.0 )% (0.2 )
Acquisition and integration
related transaction expenses (6.7 ) (0.3 ) (6.4 ) 1821.9 % (7.0 ) 1973.8 % 0.7
Depreciation and amortization (42.0 ) (41.9 ) (0.1 ) 0.3 % (2.0 ) 4.8 % 1.9
Net operating Income (Loss) (13.0 ) (5.3 ) (7.7) 147.0 % (8.6 ) 159.9 % 0.9 Other income (expense) Interest income 0.1 0.2 (0.1 ) (67.3 )% (0.1 ) (66.4 )% (0.0 ) Interest expense (27.8 ) (19.8 ) (8.0 ) 40.2 % (9.3 ) 47.0 % 1.3 Change in fair value of earnout liability (2.3 ) 5.7 (8.0 ) (139.6 )% (8.0 ) (142.0 )% (0.0 ) Change in fair value of derivative liability 3.0 (4.9 ) 7.9 (160.1 )% 8.3 (161.3 )% (0.4 ) Loss from equity method investee (0.1 ) - (0.1 ) N/A (0.1 ) N/A 0.0 Other finance income (expense) 3.2 3.2 (0.0 ) (0.2 )% 0.1 2.1 % (0.1 ) Total other income (expense), net (23.9 ) (15.6 ) (8.2 ) 52.6 % (9.0 ) 56.9 % 0.8 Net loss from continuing operations before income taxes (36.9 ) (20.9 ) (16.0 ) 76.5 % (17.6 ) 83.1 % 1.7 Income tax expense (0.1) (0.2 ) 0.1 (57.0 )% 0.1 (48.1 )% 0.0 Net loss$ (37.0 ) $ (21.1 ) $ (15.9 ) 75.2 %$ (17.5 ) 81.8 %$ 1.7 Exchange Rate - $ to £ 1.28 1.34 Revenue Total reported revenue for the twelve months endedDecember 31, 2019 increased by$12.7 million , or 9.0%, to$153.4 million on a reported basis. Adverse currency movements accounted for$6.8 million . On a functional currency at constant rate basis, revenue increased by$19.4 million , or 13.8%, with service revenue increasing by$10.2 million and hardware revenue increasing by$9.2 million . The change in total reported revenue was comprised of a decrease of$18.8 million in SBG revenue, a decrease of$0.4 million inVirtual Sports revenue, offset by an increase in revenue of$32.9 million from the new Acquired Businesses segment. This was offset by$1.0 million in intercompany eliminations. SBG revenue, which is included in total reported revenue, above, decreased by$15.0 million on a functional currency at constant rate basis, or 14.5%, comprised of a reduction in service revenue of$19.0 million and a$4.0 million increase in hardware sales. SBG service revenue decreased by$22.1 million on a reported basis, of which$3.1 million was attributable to adverse currency movements. On a functional currency at constant rate basis, SBG service revenue decreased by$19.0 million , or 20.4%, to$71.0 million . This was primarily due to a decrease in revenue in theUK LBO sector of$16.2 million , of which$15.6 million was driven by the Triennial Implementation and$0.5 million due to the expiry of a service contract. Additionally, there was a revenue reduction in the Greek sector of$0.9 million driven by a reduction in software license sales of$6.0 million , partly offset by the continued terminal rollout which drove additional income of$5.1 million . Revenue in the Italian sector decreased by$2.2 million due mainly to a 1.7% tax rate increase on gross stakes driving a$2.9 million reduction as well as a decline in gross win per unit per day that resulted in a$0.2 million revenue decline. This was partly offset by$0.5 million from additional unit volume,$0.3 million from an increase in license sales and$0.2 million from a full year of revenue share terms changes with two major customers. SBG hardware revenue increased by$3.4 million to$13.5 million , on a reported basis, despite adverse currency movements of$0.7 million . On a functional currency at constant rate basis, SBG hardware revenue increased by$4.0 million . The increase in hardware revenue was driven by 328 "Flex" cabinet sales to two major customers in theUK Bingo & AGC sectors of$2.5 million , the sale of 116 ValorTM terminals in the North American sector of$1.7 million , additional sales of 467 SSBTs in theUK LBO sector of$2.0 million , the sale of 32 Flex terminals to aUK LBO customer of$0.3 million and 75 Sabre HydraTM sales to a major customer in theUK ETG sector of$1.3 million . These were partly offset by nil margin sales of 600 "Flex" cabinet sales to a majorUK LBO customer of$4.0
million.
37
Virtual Sports reported revenue decreased by $0.4 million . A $1.7 million
decrease occurred due to adverse currency movements. On a constant currency
basis, Virtual Sports revenue increased by $1.3 million , or 3.5%, of which $2.1
million was driven by an increase in Virtual Sports land-based and Scheduled
Online Virtual recurring revenue and $0.4 million was driven by an increase in
Interactive recurring revenue. There was an additional $0.9 million increase
from non-recurring revenue. This was partly offset by $1.3 million from a major
customer that experienced a decline in retail venues, the rephasing of an annual
contract and a decline in general trading as well as $0.8 million due to a
reduction in revenue from long-term Virtual Sports licenses that have now come
to an end.
Acquired Businesses revenue accounted for$27.6 million of service revenue and$5.3 million of hardware revenue, reflecting its ownership by the Company for the period fromOctober 1, 2019 throughDecember 31, 2019 .$8.6 million was generated from rental fees from Category C gaming machines within the Pub business in theUK , which includes 8,590 Category C digital and analog gaming machines. An additional$5.6 million in revenue was generated through theUK leisure parks business and$6.2 million generated from machine rentals toUK MSAs and AGCs.
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, increased by$4.8 million , or 15.4%, on a reported basis, to$36.1 million . On a functional currency at constant rate basis, cost of sales increased by$6.5 million , or 20.9%. Of this increase,$1.5 million was attributable to an increase in SBG hardware; gross margin for SBG hardware increased from 22.3% to 32.5% in the period, primarily due to sales of the ValorTM cabinet and additional ETGs, which yield higher gross profits per machine,$7.3 million was attributable to the acquisition of the Acquired Businesses (comprised of$3.5 million in service costs and$3.8 million in hardware costs), offset by a decrease in cost of service forVirtual Sports of$1.3 million . This was partly offset by favorable currency movements of$1.7 million .
Selling, general and administrative expenses
SG&A expenses increased by$13.6 million , or 23.0%, on a reported basis, to$72.6 million , This included$3.2 million of favorable currency movements. On a functional currency at constant rate basis, SG&A increased by$16.8 million , or 28.4%. This increase was driven by incremental selling, general and administrative expenses of$20.1 million from Acquired Businesses. This was partly offset by labor savings of$4.0 million (of which$4.9 million was made in conjunction with Post Triennial Implementation), facilities cost savings of$1.1 million , IT-related cost savings of$0.5 million and other cost savings of$0.2 million . This was partly offset by an increase in the costs of group restructure of$0.5 million (removed from Adjusted EBITDA) and a decrease in net labor capitalization and manufacturing recoveries of$1.7 million due to mix of projects and lower factory throughput as a result of fewer machines being built. Stock-based compensation
During the year endedDecember 31, 2019 , the Company recorded an expense of$9.0 million with respect to outstanding awards. Of this expense,$6.0 million related to costs from awards made under the 2016 Long Term Incentive Plan,$2.8 million from awards made under the 2018 Plan and$0.3 million related to costs from the vesting of awards inDecember 2019 . The entirety of this cost related to recurring costs, with the 2018 Plan awards impacted by movements in the stock price between the award granting date andMay 14, 2019 , the date the scheme was formally approved by stockholders. Following approval, the cost was no longer impacted by stock price movements being charged by the same method as all other award plans. During the year endedDecember 31, 2018 , the charge for stock-based compensation was$5.8 million . Of this expense,$5.6 million related to costs from awards made under the 2016 Long Term Incentive Plan and$0.2 million from awards made under the 2018 Plan. The entirety of this cost is related to recurring costs. 38
Acquisition and integration related transaction expenses
Acquisition related transaction expenses increased by
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 plans and therefore future priority areas by theOffice 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 increased by
On a functional currency at constant rate basis, depreciation and amortization increased by$2.0 million , or 4.8%. This increase was driven by incremental depreciation and amortization of$5.9 million from Acquired Businesses. This was partially offset by a$4.2 million decrease of depreciation and amortization in SBG andVirtual Sports . This was driven by lower machine and machine-related depreciation of$3.8 million and lower amortization of$0.4 million , driven by lower amortization of platforms and games. The machine and machine-related depreciation decrease was driven by lower depreciation in theUK ($4.3 million ) andItaly ($1.2 million ) due to machines being fully depreciated, which was partly offset by additional depreciation inGreece of$1.7 million due to the additional volume of machines. Net operating loss
During the period, net operating loss increased by$7.7 million from a loss of$5.3 million to a loss of$13.0 million on a reported basis. On a functional currency at constant rate basis, net operating loss increased by$8.6 million , mainly due to the increase in revenue, more than offset by increases in cost of sales and SG&A expenses, including a$0.9 million favorable currency movement. The net impact of the Triennial Implementation in theUK for the period (included in the above) was$8.7 million . Interest expense Interest expense increased by$8.1 million in the year, to$27.8 million , on a reported basis. Of the$27.8 million ,$16.4 million related to debt interest and$9.4 million related to the amortization of capitalized debt fees.$5.4 million of the$16.4 million and$0.8 million of the$9.4 million related to the new debt with the remaining amounts relating to the previous debt including a$7.3 million expense writing off the remainder of the debt fees capitalized under the previous debt. Of the$8.1 million increase in the current year,$1.3 million was due to a favorable currency movement. On a functional currency at a constant rate basis, interest expense increased$9.3 million , or 47.0%, compared to the prior year. This was due to higher amortization of capitalized debt fees of$9.0 million (including the expense of$7.3 million as a result of the debt refinancing in connection with the acquisition of the Acquired Businesses in the year), higher debt interest costs of$4.3 million and favorable bank currency movements of$0.5 million were offset by savings of$4.8 million of PIK interest (no longer incurred following the debt refinancing inAugust 2018 ).
Change in fair value of earnout liability
Due solely to changes in the share price ($6.51 atMarch 25, 2019 and$4.80 atDecember 31, 2018 ) the charge in the year endedDecember 31, 2019 from a change in the fair value of earnout liability was$2.3 million . OnMarch 25, 2019 , the shares relating to the earnout liability were issued. In the prior year, due to changes in share price, the corresponding figure was a$5.7 million gain. 39
Change in fair value of derivative liability
Change in fair value of derivative liability decreased by$7.9 million , on a reported basis, to a$3.0 million credit for the year endedDecember 31, 2019 , arising from the fair valuing of the cross-currency swaps executed inAugust 2018 in connection with the debt refinancing of the Company. This represents the unhedged amount of the cross-currency swap. For the year endedDecember 31, 2018 , the change in fair value of derivative liability was a$4.9 million charge. Of this,$6.5 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 inMarch 2018 . OnOctober 1, 2019 as part of the refinancing of the group, the cross-currency swaps were terminated. Other finance income Other finance income for the year endedDecember 31, 2019 was a credit of$3.2 million , unchanged from the prior year. Changes in exchange rates resulted in a loss of$3.3 million in retranslating the debt balance. This was offset by a$3.2 million gain 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. Income tax expense
Our effective tax rate for the period ended
Net loss On a reported basis, net loss increased by$15.9 million , from a loss of$21.1 million to a loss of$37.0 million in the period endedDecember 31, 2019 . On a functional currency at constant rate basis net loss increased by$17.5 million , mainly due to the decrease in operating income driven by the increase in acquisition and integration related transaction expenses, plus increases in interest expense and change in fair value of earnout liability. This was partly offset by an$8.3 million positive change in fair value of derivative liabilities.
Twelve Months ended
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.
40
SBG Segment, Key Performance Indicators
For the Twelve-Month Period ended Variance
Audited Unaudited
Dec 31, Dec 31, 2019 vs 2018
SBG 2019 2018 %End of period installed base (# of terminals) (1) 32,698 34,577 (1,879 ) (5.4 )% Average installed base (# of terminals) (2) 34,151 32,371 1,780 5.5 % Customer Gross Win per unit per day (3) £ 84.05 £ 111.34 £ (27.29 ) (24.5 )% Customer Net Win per unit per day (3) £ 59.69 £ 79.28 £ (19.59 ) (24.7 )% Inspired Blended Participation Rate 6.2 %
6.1 % 0.1 %
(1) Includes 1,341 machines operated by the Acquired Businesses in twelve-month
period ended
ended
from these machines became intercompany and is thus eliminated on
consolidation.
(2) Includes 1,848 machines operated by the Acquired Businesses in twelve-month
period ended
ended
from these machines became intercompany and is thus eliminated on
consolidation.
(3) Includes all SBG terminals in which the company takes a participation revenue
share across all territories
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 "and certain other factors" being equal" 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 sectors, 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 sectors 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 sectors in which we operate.
"Customer
41
"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
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
SBG Segment, key events that affected results for the Twelve Months ended
During the period Customer Gross Win per unit per day in the totalUK sector (including non-LBOUK sectors) decreased by 24.9%. This was due mainly to the Triennial Implementation in theUK . The revenue impact of this regulatory change was in line with our expectations.
During the period, an additional 1,152 SSBTs were sold and deployed in the
During the third quarter of 2019, the Company secured an extension to supply hardware, platform, content and service into theUK LBO sector 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 theUK Casino sector, we sold 278 "Flex" B3 terminals split between two major customers. These terminals will also generate a recurring software rental fee and content revenue share to the Company in future periods.
In the
During the period, first time sales were recorded in the North American sector.
Hardware sales of 116 ValorTM terminals were made in
We were awarded a further 580 contracted terminals inGreece , 380 of which are our new "Valor VIP" cabinet bringing the total number of our contracted terminals inGreece to 8,940. Our SBG rollout into the Greek sector continued with a further 2,106 terminals being deployed on site.. Despite increased density, the performance of our Greek terminals continues to be strong relative to our competitors.
InItaly , customerNet Win per unit per day (in EUR) decreased by €13, or 29.3%, primarily due to an increase in the average revenue tax of 1.7% from 6.9% in 2018 to 8.6% in 2019 as well as a decline in Gross Win per unit per day (EUR). Our end of period Installed Base of terminals showed a decrease of 1,879, or 5.4%, to 32,698. This was due to 700 shop closures (representing a decrease of 2,800 terminals) by a major customer in theUK LBO sector resulting from the Triennial Implementation, however this happened in the third and fourth quarters and therefore had less of an impact on the average installed base. Growth of over 2,100 VLT's in the Greek sector partly offset the decline in theUK . Customer Gross Win per unit per day (in our functional currency, GBP) decreased by 24.5% across the entire estate, driven mainly by the reduction in maximum permitted bets on B2 gaming machines in theUK and the impact of our SBG installations inGreece , as our Greek machines return a lower daily Customer Gross Win compared to ourUK machines. These impacts, along with a 1.7% average increase in the Italian revenue tax rate, partly offset by reduced tax in theUK LBO sector post triennial, led to aNet Win per unit per day decrease on total SBG of 24.7%. Our blended participation rate increased by 0.1% to 6.2% in 2019. 42
SBG Segment, Twelve Months ended
Server Based Gaming
For the Twelve-Month Variance
Period ended Functional
Audited Unaudited Currency at
Dec 31, Dec 31, Variance Constant Functional Currency
(In millions) 2019 2018 2019 vs 2018 rate Currency Movement
Revenue:Service$ 71.0 $ 93.2 $ (22.1 ) (23.8 )%$ (19.0 ) (20.4 )%$ (3.1 ) Hardware 13.5 10.1 3.4 33.5 % 4.0 40.4 % (0.7 ) Total revenue 84.5 103.3 (18.8 ) (18.2 )% (15.0 ) (14.5 )% (3.8 ) Cost of sales, excluding depreciation and amortization: Cost of service (17.6 ) (18.8 ) 1.2 (6.6 )% 0.1 (0.7 )% 1.1 Cost of hardware (9.1 ) (7.9 ) (1.2 ) 15.9 % (1.5 ) 18.8 % 0.2 Total cost of sales (26.7 ) (26.7 ) (0.0 ) 0.0 % (1.3 ) 5.0 % 1.3
Selling,
general and administrative expenses (23.6 ) (30.8 ) 7.2 (23.2
)% 6.0 (19.5 )% 1.1 Impairment expense - (4.7 ) 4.7 (100.0 )% 4.8 (100.0 )% (0.1 ) Stock-based
compensation (1.7 ) (1.1 ) (0.6 ) 56.3 % (0.7 ) 63.1 % 0.1
Depreciation
and
amortization (29.1 ) (34.3 ) 5.2 (15.1
)% 3.8 (11.2 )% 1.3 Net operating Income (Loss)$ 3.4 $ 5.7 $ (2.3 ) (41.0 )%$ (2.3 ) (40.7 )%$ (0.0 ) Exchange Rate - $ to £ 1.28 1.34 SBG segment revenue
In the period revenue decreased by
Service revenue decreased by$22.1 million on a reported basis, of which$3.1 million was attributable to adverse currency movements. On a functional currency at constant rate basis, SBG service revenue decreased by$19.0 million , or 20.4%, to$71.0 million . This was primarily due to a decrease in revenue in theUK LBO sector of$16.2 million , of which$15.6 million was driven by the Triennial Implementation and$0.5 million due to the expiring of a service contract. Additionally, there was a reduction in the Greek sector of$0.9 million driven by a reduction in software license sales of$6.0 million , partly offset by the continued terminal rollout which drove additional income of$5.2 million . Revenue in the Italian sector decreased by$2.2 million on a functional currency at constant rate basis due mainly to a 1.7% tax rate increase on gross stakes driving a$2.9 million reduction as well as a decline in gross win per unit per day that resulted in a$0.2 million revenue decline. This was partly offset by$0.5 million from additional unit volume,$0.3 million from an increase in license sales and$0.2 million from a full year of revenue share terms changes with two major customers. Revenue inUK Other increased by$0.5 million due to a one-off contract sale during the period of$0.7 million and additional revenue of$0.2 million driven by terminal upgrades with one customer, partly offset by an expiry of a service contract of$0.2 million and lower ETG software sales of$0.2 million .UK LBO Customer Gross Win per unit per day decreased by 24.9% due to the Triennial Implementation. The revenue impact of this regulatory change was in line with our expectations, improving consecutively each quarter since the Triennial Implementation launched onApril 1, 2019 . The decline in Gross Win for the fourth quarter was 21.1%, a significant improvement over the third quarter impact of 37.5% and the second quarter impact of 41.1%. The vast improvement in the fourth quarter is a result of 700 closures of the lower end shops in our largest customer and new game content going live across the fullUK LBO estate. Hardware revenue increased by$3.4 million to$13.5 million , on a reported basis, despite adverse currency movements of$0.7 million . On a functional currency at constant rate basis, SBG hardware revenue increased by$4.0 million . The increase in hardware revenue was driven by 328 "Flex" cabinet sales to two major customers in theUK Bingo & AGC sectors of$2.5 million , our first 116 terminal sale of the ValorTMcabinet in the North American sector of$1.7 million , additional sales of 467 SSBTs in theUK LBO sector of$2.0 million , the sale of 32 Flex terminals to aUK LBO customer of$0.3 million and 75 "Sabre Hydra" sales to a major customer in theUK ETG sector of$1.3 million . These are partly offset by nil margin sales of 600 "Flex" cabinet sales to a majorUK
LBO of$4.0 million . 43 SBG segment operating income. Cost of sales (excluding depreciation and amortization) remained flat, on a reported basis. Favorable currency movements of$1.3 million offset a$1.3 million increase in cost of sales on a functional currency at constant rate basis. The above was driven by an increase in hardware cost of sales of$1.5 million due to Flex sales in theUK Bingo & AGC sectors of$2.2 million , SSBT & Flex sales in theUK LBO sector of$1.9 million , ValorTM sales inNorth America of$0.9 million and Sabre HydraTM sales in the ETG sector of$0.6 million . These were partly offset by nil margin Flex sales in theUK LBO sector of$4.0 million from the previous period that did not recur in 2019. Service costs decreased by$0.1 million on a functional currency at constant rate basis. This was driven by a reduction inUK consumables of$1.0 million due to the Triennial Implementation and lower spares costs and content costs inItaly of$0.6 million , mostly offset by an increase in Greek SBG service costs of$1.0 million driven by the increase in terminals as theGreece rollout continued and increasedUK LBO content costs of$0.5 million . SG&A expenses decreased by$7.2 million to$23.6 million , on a reported basis. This included$1.1 million of favorable currency movements. This resulted in a functional currency at constant rate decrease of$6.0 million attributable to staff-related cost savings of$5.8 million (of which approximately$4.4 million was made in conjunction with the Triennial Implementation), facilities cost savings of$0.5 million , 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$1.9 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 period.
An impairment expense in the prior period, considered to be outside of the
normal course of business, amounted to
Depreciation and amortization decreased by$5.2 million , to$29.1 million on a reported basis. Of this amount,$1.3 million was due to favorable currency movements. On a functional currency at constant rate basis, the decrease was$3.8 million , from lower machine and machine-related depreciation. The lower machine and machine-related depreciation was driven by lower depreciation in theUK ($4.3 million ) andItaly ($1.2 million ) due to machines being fully depreciated, partly offset by the additional machine and machine-related depreciation inGreece of$1.7 million due to the additional terminals in the Greek sector.
Operating income decreased by$2.3 million , to$3.4 million , on a reported basis. On a functional currency at constant rate basis, SBG operating income increased by$2.3 million . This was primarily due to the decrease in revenue, partly offset by lower SG&A expenses, impairment expense and depreciation and amortization. 44
SBG Segment, Recurring Revenue
Set forth below is a breakdown of our SBG recurring revenue. SBG recurring revenue consists principally of SBG participation revenue.
For the Twelve-Month Period ended
Audited Unaudited Variance
Dec 31, Dec 31, 2019 vs 2018
(In £ millions) 2019 2018 %
SBG Recurring Revenue £ 66.0 £ 77.2 £ (11.2 ) (14.5 )%
Total SBG Revenue
SBG Participation Revenue £ 46.2 £ 57.5 £ (11.3 ) (19.6 )%
SBG Other Fixed Fee Recurring Revenue £ 1.3 £ 1.9 £ (0.5 ) (27.6 )%
Total SBG Recurring Revenue £ 47.6 £ 59.4 £ (11.8 ) (19.9 )%
SBG Recurring Revenue as a Percentage of Total
SBG Revenue 72.1 % 76.9 % (4.8 )%
In the table above:
"SBG Participation Revenue" includes our share of revenue generated from (i) our
SBG terminals placed in gaming and lottery venues; and (ii) licensing of our
game content and intellectual property to third parties.
"SBG Other Fixed Fee Recurring Revenue" includes service revenue in which the Company earns a periodic fixed fee on a contracted basis.
"Total SBG Recurring Revenue" is equal to SBG Participation Revenue plus SBG Other Fixed Fee Recurring Revenue.
SBG Segment, Service Revenue by Region
Set forth below is a breakdown of our SBG service revenue by geographic region. SBG service revenue consists principally of SBG participation revenue.
For the Twelve-Month Variance
Period ended Functional
Audited Unaudited CurrencyServer Based Gaming Service Revenue by Region Dec 31, Dec 31, Variance at Constant Functional Currency (In millions) 2019 2018 2019 vs 2018 rate Currency Movement Service Revenue: UK LBO$ 39.1 $ 57.0 $ (17.9 ) (31.5 )%$ (16.2 ) (28.4 )%$ (1.8 ) UK Other 6.0 5.8 0.2 4.0 % 0.5 8.8 % (0.3 ) Italy 7.9 10.5 (2.6 ) (24.4 )% (2.2 ) (21.3 )% (0.3 ) Greece 17.4 19.0 (1.6 ) (8.6 )% (0.9 ) (4.6 )% (0.8 )
Rest of the World 0.7 0.9 (0.2 ) (26.1 )% (0.2 ) (22.6 )% (0.0 ) Total service revenue$ 71.0 $ 93.2 $ (22.1 ) (23.8 )%$ (19.0 ) (20.4 )%$ (3.2 ) Exchange Rate - $ to £ 1.28 1.34 Results of Operations -
Twelve Months ended
Virtual Sports Segment OurVirtual 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 ourVirtual Sports segment by licensing to our operator customers the software related to ourVirtual 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 ourVirtual Sports segment is driven by the number of customers, the number of player end-points and the customer net win attributable to our products. 45 Our customers forVirtual Sports include regulated betting operators, lotteries, casinos, online operators and other gaming and lottery operators in theUK , continentalEurope ,Asia ,Africa andNorth 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 Twelve-Month Period ended
Audited Unaudited Variance
Dec 31, Dec 31, 2019 vs 2018
Virtuals 2019 2018 %No. of Live Customers at the end of the period 111 100 11 11.0 % Average No. of Live Customers 105 93 12 12.7 % Total Revenue (£'m) £ 29.0 £ 28.0 £ 1.0 3.5 % Total Virtual Sports Recurring Revenue (£'m) £ 26.1 £ 25.5 £ 0.7 2.6 % Total Revenue £'m - Retail £ 16.2 £ 17.2 £ (1.0 ) (6.0 )% Total Revenue £'m - Scheduled Online Virtuals £ 10.0 £ 8.3 £ 1.7 20.6 % Total Revenue £'m - Interactive £ 2.8 £ 2.5 £ 0.3 12.5 % Average Revenue Per Customer per day (£) £ 756
£ 823 £ (67 ) (8.2 )% 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 isVirtual Sports revenue at the end of the period and the average number of customers from which there isVirtual Sports revenue during the period, respectively. "Total Revenue (£000)" represents total revenue for theVirtual Sports segment, including recurring and upfront service revenue. Total revenue is also divided between "Total Revenue (£000) - Retail," which consists of revenue earned through players wagering atVirtual Sports venues, "Total Revenue (£000) - Scheduled Virtuals," which consists of revenue earned through players wagering onVirtual Sports online, and "Total Revenue (£000) - Mobile RGS," which consists of revenue earned through our Mobile RGS product.
"Average Revenue per Customer per day" represents total revenue for the
Virtual Sports Segment, Recurring Revenue
For the Twelve-Month Period ended
Audited Unaudited Variance
Dec 31, Dec 31, 2019 vs 2018
(In £ millions) 2019 2018 %
Virtual Sports Recurring Revenue
Total Virtual Sports Revenue £ 29.0 £ 28.0 £ 1.0 3.5 %
Recurring Revenue - Retail and Scheduled Online
Virtuals £ 23.5 £ 22.4 £ 1.1 4.9 %
Recurring Revenue - Interactive £ 2.7 £ 2.4 £ 0.3 12.9 %
Total Virtual Sports Recurring Revenue £ 26.2 £ 24.8 £ 1.4 5.7 %
Virtual Sports Recurring Revenue as a Percentage
of Total Virtual Sports Revenue 90.4 %
88.6 % 1.9 %
For definitions of the terms used in the table above, see the definitions provided above.
US In the second phase of ourPennsylvania strategy we launched our proprietaryDerby CashTM Horse Racing product in over 8,500 venues in November. This has shown significant year on year growth since launch. 46
During the period we signed a new contract with
We have 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
In our Virtual Interactive division, we launched with
In the Interactive division we have deployed our proprietary V-Play On-Demand
and slot content to Caesars and Golden Nugget,
Europe During the year we renewed our contract withBet365 for a further three years to provide scheduled Virtuals online with the world's largest online sports betting company with over 35 million customers worldwide. InUK Retail, we deployed our Rush Bingo product on a dedicated channel to theBetfred estate of approximately 1,600 venues, which has seen significant growth throughout the year.
In
In theUK andIreland , we launched our Quick 6 Bingo and two-minute Power Spin Roulette products across the fullPaddy Power estate of over 750 venues We also renewed theFlutter Group contract for a further three years includingPaddy Power and Betfair brands. Our Virtual Interactive division launched our proprietary V-Play BasketballTM product with Bet Victor which has become very popular. We also deployed our proprietary 1st Down TM and Head 2 Head Football TM products withBet365 on two additional channels and launched two streams of our V Play FootballTM product with The Stars Group brand Betstars. During the second quarter, our Interactive division launched new content, including Bear MoneyTM and Book of the IrishTM, across the estate, which have performed strongly. In the third quarter we launched new content, Rainbow CashpotsTM and Mighty Hot WildsTM, which have both performed well. In the final quarter we launched our first product under the licensing deal withJaromir Jagr , Jagr's Super SlotTM and three additional key titles, Book of ChristmasTM, Desperado's WildTM and Mega CherryTM that have all performed well. Rest of World We launched Rush Football 2TM with theMoroccan Lottery via the Intralot platform in approximately 200 venues and increased to 400 venues by the end of the year. The Moroccan venues are amongst our most successful worldwide and the addition of these extra venues has driven growth in the quarter and is expected to drive growth through 2020. Awards
In February, the
The EGR B2B awards were held in June where Inspired was awarded Virtual Sports Supplier of the Year.
The Average Number of Live Customers during the twelve-month period increased by twelve overall, from 93 to 105, including 17 new Interactive customers.
47
Virtual Sports For the Twelve-Month Variance
Period ended Functional
Audited Unaudited Currency at
Dec 31, Dec 31, Variance Constant Functional Currency
(In millions) 2019 2018 2019 vs 2018 rate Currency Movement
Service Revenue $ 37.0 $ 37.4 $ (0.4 ) (1.0 )% $ 1.3 3.5 % $ (1.7 )
Cost of Service (3.2 ) (4.6 ) 1.4 (30.9 )% 1.3 (27.6 )% 0.2
Selling, general and
administrative expenses (8.7 ) (11.3 ) 2.6 (22.8 )% 2.3 (19.9 )% 0.3
Impairment expense - (3.0 ) 3.0 (100.0 )% 3.0 (100.0 )% (0.0 )
Stock-based compensation (1.4 ) (1.0 ) (0.4 ) 42.9 % (0.5 ) 49.4 % 0.1
Depreciation and
amortization (5.5 ) (6.1 ) 0.7 (10.7 )% 0.4 (6.3 )% 0.3
Net operating Income (Loss) $ 18.2 $ 11.5 $ 6.8 59.5 % $ 7.8 68.4 % $ (1.0 )
Exchange Rate - $ to £ 1.28 1.34
Virtual Sports segment revenue. In the period, on a reported revenue basis, revenue decreased by$0.4 million with a$1.7 million decrease from adverse currency movement. On a functional currency at constant rate basis,Virtual Sports revenue increased by$1.3 million , or 3.5%, driven by a$2.1 increase inVirtual Sports land-based and Schedule Online Virtual recurring revenue. This consisted of growth in Scheduled Online Virtuals of$1.1 million , followed byUK andIreland retail increasing$0.9 million ,$0.3 million fromBelgium andDenmark retail and$0.4 million from new business inMorocco . This was offset by a$0.4 million decline inItaly and a$0.2 million decline inFinland from the changing of a fixed price contract.
Interactive revenue in the period increased by
A further$0.9 million ofVirtual Sports growth in the year was driven by non-recurring revenue consisting of$0.7 million from the recognition of historical revenues previously unreported from a major customer and$0.2 million from an increase in one-time sales. This was partly offset by$1.3 million from a major customer that experienced a decline in retail venues, the rephasing of an annual contract and a decline in trading as well as$0.8 million due to a reduction in revenue from long-termVirtual Sports licenses that have now come to an end.
Virtual Sports segment operating income. Cost of service decreased by$1.4 million to$3.2 million on a reported basis. Of this decrease,$0.2 million arose from favorable currency movements. On a functional currency at constant rate basis, cost of service decreased by$1.3 million , due to lower third party royalty payments primarily driven by lower revenues in the year from a major customer and a decline in royalties. SG&A expenses decreased by$2.6 million , on a reported basis. Of this decrease,$0.3 million arose from favorable currency movements. This resulted in a functional currency at constant rate decrease of$2.3 million in the period largely driven by staff-related cost savings of$0.7 million and lower Italian tax-related costs of$0.5 million . Depreciation and amortization decreased by$0.7 million to$5.5 million , on a reported basis. Of this increase, 0.3 million arose from favorable currency movements. This resulted in a functional currency at constant rate decrease of$0.4 million , driven by additional depreciation of platforms and games going live including Tyson, World Leaders and Rush Bingo. Operating profit increased by$6.8 million on a reported basis to$18.2 million . On a functional currency at constant rate basis, operating profit increased by$7.8 million driven by an increase in revenue, a decrease in cost of service, lower SG&A expenses and lower impairment expense. This was partly offset by a$1.0 million decrease from adverse currency movements. 48
Acquired Businesses segment, key events that affected results for the Three
Months ended
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 toUK pubs, adult gaming centers, bowling alleys, motorway service stations, andUK 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 digital Category C 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. The Acquired Businesses also generate revenue fromUK leisure parks, where we supply gaming arcades, as well as non-gaming amusement machines. In addition, we also supply non-gaming amusement machines in pubs and other facilities on a fixed rental basis. Revenue growth for our Acquired Businesses is principally driven by the number of operator customers we have, the number of gaming machines in operation, and the increase in weekly rental income that we receive pursuant to our contracts with our customers.
Acquired Businesses segment, Key Performance Indicators
For the Three-Month Period ended
Audited Unaudited Variance
Dec 31, Dec 31, 2019 vs 2018Acquired Business 2019 2018 % Pub Digital Cat C Gaming Machines - Average installed base (# of terminals) 5,413 3,769 1,644 43.6 % Inspired Pubs Revenue per Digital Cat C Gaming Machine per week £ 68.46 £ 61.43 £ 7.03 11.4 % Pub Analogue Digital Cat C Gaming Machines - Average installed base (# of terminals) 3,177 4,615 (1,438 ) (31.2 )% Inspired Pubs Revenue per Analogue Cat C Gaming Machine per week £ 42.81 £ 42.14 £ 0.67 1.6 % End of Period % of Digital Cat C Gaming Machines in Pub Market 66.2 % 47.7 % 18.5 % Total Leisure Parks Revenue (Gaming and Non Gaming) (£'m) £ 4.3 £ 3.8 £ 0.6 14.6 % AGC and MSA Gaming Machines - Average installed base (# of terminals)(1) 4,948 5,955 (1,007 ) (16.9 )% Inspired AGC and MSA Revenue per Gaming Machine per week £ 75.09 £
61.26 £ 13.83 22.6 %
(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 by Inspired during the period.
49
The % Digital Cat C represents the percentage of the Company's
Acquired Businesses segment, key events that affected results for the Twelve
Months ended
OnOctober 1, 2019 , the Company completed the acquisition of theGaming Technology Group ("NTG") ofNovomatic UK Ltd. , a division ofNovomatic 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 onOctober 1, 2019 , it can only report the results since that date, which comprises the three months endedDecember 31, 2019 .
Acquired Businesses segment, Three Months ended
For the Three-
Month Period
Acquired Business ended
Unaudited
Dec 31,
(In millions) 2019
Revenue:
Service $ 27.6
Hardware 5.3
Total revenue 32.9
Cost of sales, excluding depreciation and amortization:
Cost of service (3.5 )
Cost of hardware (3.8 )
Total cost of sales (7.3 )
Gross Profit
Service 24.1
Hardware 1.5
Total gross profit 25.6
Selling, general and administrative expenses (20.1
) Stock-based compensation - Depreciation and amortization (5.9 ) Net operating Income (Loss) $ (0.4 ) Exchange Rate - $ to £ 1.29
Acquired Businesses Segment Revenue
In the fourth quarter, revenue was$32.9 million , of which$27.6 million was service revenue and$5.3 million was hardware revenue stemming from growth in the digital pub conversion and the strong fourth quarter in the leisure parks. Acquired Businesses Service Revenue was$27.6 million in the fourth quarter, of which approximately$8.6 million was generated from Category C gaming machines within the Pub business. The Company's average installed base within the Pub business included 8,590 Category C gaming machines. Digital gaming machines accounted for 66.2% of the total Category C gaming machines at the end of the quarter, which was an increase from 60.8% at the beginning of the quarter. This reflects the continued conversion of Category C gaming machines from analogue to digital in theUK Pub estate. The increase in the Company's digital machine base continues to drive revenue per gaming machine per week, which has demonstrated sequential growth on a quarterly basis and averaged £59.63 in the quarter, an increase of approximately 13.0% over the prior year comparable period. The Leisure business includes Leisure Parks, MSAs, Adult Gaming Centers ("AGCs") and Bowling Alleys as well as software license fees associated with one-time hardware sales. Leisure parks contributed approximately$5.6 million in revenue, which was strong for the fourth quarter, typically a weaker quarter as the summer holiday park season ends. Revenue from MSAs and AGCs was$6.2 million in the quarter and included 4,948 machines on a rental basis, generating an average of £75.09 per gaming machine per week. This represented an increase of approximately 22.6% over the prior year comparable period. Software license fees associated with hardware sales was$1.6 million in the quarter. 50
Acquired Businesses Hardware Revenue was
Acquired Businesses segment operating income. Operating income reflects cost of goods of$7.3 million (comprised of manufacturing costs, content royalties, spare parts, distribution costs, and certain gaming taxes), SG&A expenses of$20.1 million which includes service network costs, facilities, and staffing, and depreciation and amortization of$5.9 million , reflecting capitalized game development and machine deployment levels.
Capital expenditures for the period totaled
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 standardU.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 withU.S. GAAP. You should consider our non-GAAP financial measures in conjunction with ourU.S. GAAP financial measures.
We define our non-GAAP financial measures as follows:
EBITDA is 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 compensationU.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. 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. 51 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.
Reconciliations from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Loss, to Adjusted EBITDA are shown below.
Reconciliation to Adjusted EBITDA
For the Twelve-Month
Period ended
Unaudited Unaudited
Dec 31, Dec 31,
(In millions) 2019 2018
Net loss $ (37.0 ) $ (21.1 )
Items Relating to Legacy Activities:
Pension charges (1) 0.6 0.5
Costs relating to former operations (2) - 0.0
Litigation Settlement - 1.4
Items outside the normal course of business:
Costs of group restructure (3) 3.3 1.5
Acquisition and integration related transaction expenses (4) 6.7 0.3
Italian tax related costs relating to prior years 0.4 0.9
Stock-based compensation expense 9.0
5.8
Impairment expense - 7.7
Depreciation and amortization 42.0 41.9
Total other expense, net 23.9 15.6
Income tax 0.1 0.2
Adjusted EBITDA $ 49.0 $ 54.7
Adjusted EBITDA £ 38.2 £ 41.0
Exchange Rate - $ to £ (5) 1.28 1.33
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 scheme) and a small amount of associated professional services
expenses. These costs are included within Central Functions.
52
(2) "Litigation Settlement" refers to settlement of an employment related
litigation with the former general counsel of Hydra Industries Acquisition
Corp.
(3) "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.
(4) 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.
(5) 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 Twelve-Month Period ended
Audited Unaudited
Dec 31, Dec 31,
(In millions) 2019 2018
Net revenues $ 153.4 $ 140.7
Less Nil Margin Sales - (4.0 )
Adjusted Revenue $ 153.4 $ 136.7
Adjusted Revenue £ 119.7 £ 102.3
Exchange Rate - $ to £ $ 1.28 $ 1.34
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.
Liquidity and Capital Resources
Year ended
Year Ended Variance
Dec 31, Dec 31,
(in millions) 2019 2018 2019 to 2018
Net loss $ (37.0 ) $ (21.2 ) $ (15.8 )
Non-cash interest expense including amortization
of fees 9.0 5.4 3.6
Change in fair value of derivative and earnout
liabilities and stock-based compensation expense 8.3 5.1 3.2
Impairment expense - 7.7 (7.7 )
Foreign currency translation on senior bank debt
and cross currency swaps (1.3 ) (2.7 ) 1.4
Depreciation and amortization (incl RoU assets) 43.0 41.9 1.1
Other net cash generated/(utilized) by operating
activities 8.7 (0.9 ) 9.6
Net cash provided by operating activities 30.7 35.2 (4.5 )
Net cash used in investing activites (133.4 ) (42.8 ) (90.6 )
Net cash generated by financing activities 113.5 12.4 101.1
Effect of exchange rates on cash 2.3 0.1 2.2
Net increase in cash and cash equivalents $ 13.1 $ 5.0 $ 8.1
Net cash provided by operating activities. In the year, net cash inflow provided
by operating activities was $30.7 million , compared to $35.2 million inflow in
the prior year, representing a $4.5 million decrease in cash generation.
Non-cash interest expense increased by $3.6 million to $9.0 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 and in October 2019 with
the subsequent extinguishment of all unamortized fees from August 2018 following
the October 2019 refinancing. The prior year's expense related to PIK interest
charged on the debt held prior to the refinancing in August 2018 with
amortization of debt fees only from the point of the business refinancing in
August 2018 .
53
Change in fair value of derivative and earnout liabilities and stock-based compensation expense increased by$3.2 million , from an inflow of$5.1 million to an inflow of$8.3 million . Movements in the market value of the stock price resulted in an$8.0 million higher earnout inflow in the current period, a$3.2 million higher inflow relating to stock-based compensation expense and a$1.6 million higher inflow relating to derivative liabilities. These were offset by a$9.5 million higher outflow relating to cross currency swaps. Foreign currency translation on our senior bank debt and cross currency swaps following the refinancing onOctober 1, 2019 resulted in a loss in the year of$1.3 million as a result of the movement in exchange rates during the current period, compared to a loss of$2.7 million in the prior year. Depreciation, amortization and impairment increased by$1.1 million to a charge of$43.0 million due to a$1.0 million amortization charge on operating lease liabilities with small increases in machine and intangible asset charges largely offset by lower amortization on development costs and licenses. The operating lease liability amortization relates to the application of ASC842 and was not applied to the prior year.
Other net cash generated by operating activities increased by$9.6 million , to a$8.7 million inflow. The strong performance compared to the prior year was driven by several factors. Lower capital spending, partly as a result of the Triennial Implementation and favorable timing of supplier payments improved cash inflow by$6.6 million whilst lower inventory levels contributed$3.3 million . Improved collection of accounts receivable in the current year benefitted cash inflow by$3.8 million along with favorable movements in accruals of$8.3m (including timing on the debt interest payments of$6.1 million ). This was partly offset by an expected reversal of the deferred revenue creditor$12.7 million with the prior year benefitting from the build and roll out of the second phase ofGreece machines.
Included within net cash provided by operating activities were
Net cash used in investing activities. Net cash used in investing activities increased by$90.6 million to$133.4 million . The increase was due to the acquisition of NTG inOctober 2019 for$105.9 million including cash acquired, which was offset by a$14.8 million reduction in the level of spend on property and equipment versus the prior year, which included theGreece roll out and
Flex 4k terminal build.
Net cash generated by financing activities. Net cash generated by financing activities was$113.5 million in 2019, compared to$12.4 million in the prior year. The refinancing in the current year produced an inflow of$255.3 million after associated debt fees with repayment of the previous debt of$144.2 million . Movements in the level of revolver drawn resulted in a$2.8 million inflow and a finance lease payment resulted in a$0.4 million outflow. The prior year refinancing generated an inflow of$135.0 million after associated debt fees with a$109.3 million repayment of the previous debt. Revolver repayments led to a$12.8 million outflow with finance leases being a$0.5 million outflow. Funding Needs and Sources As ofDecember 31, 2019 , the Company's cash on hand was$29.1 million and the Company had working capital of$15.7 million . As ofDecember 31, 2019 ,$5.0 million of our cash on hand had arisen from our operations inGreece and was being held in local accounts. In the ordinary course of business, we seek, from time to time, to transfer funds earned inGreece to our accounts outside ofGreece . However,Greece imposes capital controls that can delay or prevent the flow of capital out of the country. The Company recorded net losses of$37.0 million ,$4.7 million and$20.6 million for the year endedDecember 31, 2019 , the three months endedDecember 31, 2018 and the year endedSeptember 30, 2019 , respectively. Net losses include non-cash stock-based compensation of$9.0 million ,$1.6 million and$7.4 million for the year endedDecember 31, 2019 , the three months endedDecember 31, 2018 and the year endedSeptember 30, 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. Working capital of$15.7 million includes a non-cash settled item of$10.1 million of deferred income. Management currently believes that, absent any long term COVID-19 impact, the Company's cash balances on hand, cash flows expected to be generated from operations, ability to control and defer capital projects and amounts available from the Company's external borrowings will be sufficient to fund the Company's net cash requirements throughMarch 2021 . 54
The outbreak of COVID-19 adds uncertainty that may ultimately impact on the Company's ability to meet its covenant compliance and its ability to carry on as a going concern. Management believes that the going concern basis of preparation remains appropriate given the mitigating effect of liquidity preservation actions taken in light of the current COVID-19 control measures which are in place. 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 ofDecember 31, 2019 , we had liquidity of$29.1 million in cash and cash equivalents, plus a further$23.8 million of an undrawn revolver facility. This compares to$16.0 million of cash and cash equivalents plus a further$9.3 million of an undrawn revolver facility at the end of the prior year. We had a working capital inflow of$8.7 million in 2019, compared to a$0.9 million outflow in the prior period. The level of our working capital surplus or deficit varies with the level of machine production we are undertaking and our capitalization. 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 amounts of our cash flows from operations arise from our operations inGreece . As ofDecember 31, 2019 ,$5.0 million of our$29.1 million of cash and cash equivalents had arisen inGreece and was being held in our Greek bank accounts. In the ordinary course of business, we seek from time to time to transfer funds earned inGreece to accounts of ours outsideGreece . However, up untilSeptember 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. SinceSeptember 1, 2019 , capital controls are no longer in place. 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 theUK 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$8.7 million in total, as we expect to incur approximately$3.0 million of capital investment for the new office, and approximately$5.7 million of one-time costs to exit offices. These figures include costs relating to staff redundancy, relocation allowances, travel supplements, dual running costs, recruitment fees of replacement hires and dilapidating old facilities. We expect the majority of these costs to be incurred by the end of the first quarter next year. 55 Long Term and Other Debt (In millions) December 31, 2019 December 31, 2018 Cash held £ 22.0$ 29.1 £ 12.5$ 16.0 Revolver drawn (2.0 ) (2.6 ) - - Original principal senior debt (216.5 ) (286.0 ) (109.6 ) (140.0 ) Cash interest accrued (4.2 ) (5.5 ) - - Finance lease creditors (0.1 ) (0.1 ) (0.3 ) (0.4 ) Total £ (200.8 )$ (265.2 ) £ (97.5 )$ (124.5 ) OnOctober 1, 2019 , pursuant to the Share Purchase Agreement, dated as ofJune 11, 2019 (the "SPA"), by and betweenInspired Gaming (UK) Limited , a subsidiary of the Company (the "Buyer"), andNovomatic 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 ofInnov8 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'sGaming Technology Group . The consideration for the Acquisition totaled approximately €104.6 million (USD$120.0 million )
in cash. In connection with the Acquisition, onSeptember 27, 2019 ,Gaming Acquisitions Limited , together withInspired Entertainment, Inc. ("Inspired"), and certain other direct and indirect wholly-owned subsidiaries of Inspired, entered into a Senior Facilities Agreement withLucid Agency Services Limited , as agent,Nomura International plc andMacquarie 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-year duration and are repayable in full onOctober 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 untilSeptember 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. In connection with the refinancing onOctober 1, 2019 , the existing three-year, fixed-rate, cross-currency swaps were terminated and the remaining capitalized debt fees totaling$7.3 million expensed. Debt fees of approximately$16.1 million were incurred and capitalized 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. The Company's previous debt which had been in place since the refinancing inAugust 2018 provided the business with debt facilities of senior notes of$140.0 million and a revolving credit facility of £7.5 million (equivalent to approximately$9.9 million ). The senior notes had a 5-year duration, carrying a cash interest rate of 9% plus 3-month LIBOR, and the revolving credit facility had a 3-year duration carrying 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. All the Company's previous debt and cross-currency swaps were terminated and repaid onOctober 1, 2019 when the new debt was put in place. 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 ofDecember 31, 2019 , the Company had bank facilities of £160.0 million and €90.0 million (equivalent to approximately$312.4 million ), consisting of senior term loan facilities of £140.0 million and €90.0 million (equivalent to$184.9 million and$101.1 million respectively) and a revolving credit facility of £20.0 million (equivalent to approximately$26.4 million ). As ofDecember 31, 2019 , the £140.0 million term loan facility had a cash interest rate on outstanding borrowings equal to the base rate margin of 7.25% per annum, plus 3-month LIBOR which atDecember 31, 2019 was the equivalent of 8.08% per annum. The €90.0 million term loan facility had a cash interest rate on outstanding borrowings equal to the base rate margin of 6.75% per annum, plus 3-month EUROLIBOR which atDecember 31, 2019 was the equivalent of 6.75% per annum. Both term loan facilities are scheduled to mature onOctober 1, 2024 . 56
As ofDecember 31, 2018 , the Company had bank facilities of £117.1 million (equivalent to approximately$149.6 million ), consisting of a senior term loan facility of £109.6 million (equivalent to$140.0 million ) and a revolving credit facility of £7.5 million (equivalent to approximately$9.6 million ). As ofDecember 31, 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 atDecember 31, 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 ofDecember 31, 2019 , the Company had aggregate borrowings under the revolving credit facility of £2.0 million (equivalent to$2.6 million ). As ofDecember 31, 2019 , the revolving credit facility imposed a cash interest rate on outstanding borrowings equal to the base rate margin of 5.50% per annum, plus LIBOR, and the current rate at which cash interest accrued was 6.21% 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 onSeptember 1, 2024 . As ofDecember 31, 2018 , the Company had no aggregate borrowings under the revolving credit facility, which at this date carried a cash interest rate on any utilization at 4% plus 3-month LIBOR, with any unutilized amount carrying a 1.4% cash interest cost. This facility was terminated at the time of the refinancing onOctober 1, 2019 . In addition to the revolving credit facility borrowings described above, as ofDecember 31, 2018 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 ofDecember 31, 2018 was$0.2 million . There was no use of the facility atDecember 31, 2019 for the Company's VAT Duty Deferment guarantee or credit card program.
Debt issuance fees were capitalized at the time the debt was issued. As ofDecember 31, 2019 , the amount of debt issuance fees capitalized was$16.3 million , including$12.2 million of original issue discount and$2.3 million of structuring fees with the remainder being professional fees incurred from the refinancing. Of the total debt issuance fees capitalized,$0.8 million had been charged byDecember 31, 2019 . Debt Covenants Under our debt facilities in place as ofDecember 31, 2019 we are subject to covenant testing at quarterly intervals. The covenant testing is set at the level ofInspired 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 underU.S. GAAP. Leverage is tested at quarterly intervals commencing on the period endingJune 30, 2020 and capital expenditure is tested annually commencing
onDecember 31, 2019 .
Under our debt facilities in place as ofDecember 31, 2018 , we were subject to covenant testing at quarterly intervals. The covenant testing is set at the level ofInspired 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 underU.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 onOctober 1, 2019 , these tests were replaced by a revised set of covenant tests and for the period ending30 September, 2019 these tests were not required to be performed.
There were no breaches of the debt covenants in the periods ended
57
Liens and Encumbrances
As of
Contractual Obligations
As of
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 $ 110.3 $ 22.0 $ 44.2$ 44.2 $ - Financing activities Revolver repayment 2.7 2.7 - - -
Senior bank debt - principal repayment 286.0 -
- 286.0 -
Finance lease payments 0.1 0.1 - - -
Operating lease payments 8.9 3.6 3.5 1.7 -Interest on non-utilisation fees 2.2 0.5
0.9 0.8 - Total$ 410.1 $ 28.9 $ 48.6 $ 332.6 $ -
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 endingDecember 31, 2021 due to the location of assets and tax losses brought forward in theUK .
Off-Balance Sheet Arrangements
As of
Three Months endedDecember 31, 2018 compared to Three Months endedDecember 31, 2017 For the Three-Month Period ended Unaudited Unaudited Functional Variance Dec 31, Dec 31, Variance Currency at Functional Currency (In thousands) 2018 2017 2018 vs 2017 Constant rate Currency Movement Revenue: Service $ 30,046 $ 30,367 ($ 321 ) (1.1 %) $ 1,028 3.4 % ($ 1,348 ) Hardware 686 1,020 (334 ) (32.8 %) (294 ) (28.8 %) (41 ) Total revenue 30,732 31,387 (655 ) (2.1 %) 734 2.3 % (1,389 ) Cost of sales, excluding depreciation and amortization: Cost of service (5,977 ) (5,196 ) (780 ) 15.0 % (1,050 ) 20.2 % 270 Cost of hardware (593 ) (906 ) 313 (34.5 %) 277 (30.7 %) 35 Selling, general and administrative expenses (15,267 ) (16,374 ) 1,107 (6.8 %) 431 (2.6 %) 676 Stock-based compensation (1,615 ) (3,198 ) 1,583 (49.5 %) 1,504 (47.1 %) 80 Acquisition related transaction expenses (74 ) (574 ) 500 (87.1 %) 493 (86.3 %) 6 Depreciation and amortization (9,589 ) (9,560 ) (30 ) 0.3 % (448 ) 4.7 % 418 Net operating Income (Loss) (2,383 ) (4,421 ) 2,038 46.1 % 1,941 (43.8 %) 97 Other income (expense) Interest income 32 38 (6 ) (15.7 %) (4 ) (11.5 %) (2 ) Interest expense (4,111 ) (4,906 ) 796 (16.2 %) 705 (14.4 %) 90 Change in fair value of earnout liability 1,668 4,657 (2,990 ) (64.2 %) (2,921 ) (62.5 %) (69 ) Change in fair value of derivative liability 852 319 533 167.3 % 584 182.9 % (51 ) Other finance income (costs) (731 ) 191 (922 ) (482.9 %) (971 ) (507.9 %) 48 Total other income (expense), net (2,290 ) 299 (2,589 ) 865.6 % (2,607 ) (838.1 %) 18 Net loss from continuing operations before income taxes (4,673 ) (4,122 ) (551 ) 13.4 % (666 ) 16.2 % 115 Income tax expense (56 ) (33 ) (23 ) 69.2 % (26 ) 79.3 % 3 Net loss ($ 4,729 ) ($ 4,155 ) ($ 574 ) (13.8 %) ($ 692 ) 16.7 %$ 118 Exchange Rate - $ to £ 1.29 1.34 Effective Tax Rate 1.2 % 0.8 % 58 Revenue Total revenue for the period endedDecember 31, 2018 decreased by$0.7 million , or 2.1%, to$30.7 million . Adverse currency movements accounted for$1.4 million of the decrease. On a functional currency at constant rate basis, revenue increased by$0.7 million , or 2.3% on a functional currency basis, with service revenue increasing$1.0 million and hardware revenue decreasing by$0.3 million . SBG revenue, which is included in total revenue, above, increased by$0.7 million on a functional currency at constant rate basis, or 3.0% on a functional currency basis, comprised of growth in service revenue of$1.0 million offset by a reduction in hardware sales of$0.3 million . On a functional currency at constant rate basis SBG service revenue increased by$1.0 million , or 4.5% on a functional currency basis, due to growth in the Italian sector of$0.9 million . In addition, growth inGreece drove revenue increases of$0.6 million , due to the continued rollout into the Greek sector which drove additional participation revenue of$1.2 million and other recurring revenue of$0.6 million . This was partly offset by a$1.2 million reduction in software license sales compared to the prior period.
The decrease in hardware revenue was driven by lower hardware sales in the
Virtual Sports revenue remained unchanged on a functional currency at constant rate basis, due to growth inFinland andItaly of$0.2 million and$0.2 million , respectively. Growth was negatively affected by$0.2 million due to a reduction in revenue from long-termVirtual Sports licenses that have now expired and$0.1 million from lower interactive game sales.
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, increased by$0.5 million , or 7.7%, on a reported basis, to$6.6 million . Of this increase,$0.3 million arose from favorable currency movements. On a functional currency at constant rate basis, cost of sales increased by$0.8 million , or 12.7% on a functional currency basis. On a functional currency at constant rate basis cost of service increased by$1.1 million , or 20.2% on a functional currency basis, due to increasing SBG costs. This was driven by an increase inGreece SBG service costs of$0.8 million and an increase inItaly SBG service costs of$0.3 million . On a functional currency at constant rate basis cost of hardware decreased by$0.3 million , or 30.7% on a functional currency basis, due to lower hardware sales in theUK sector. 59
Selling, general and administrative expenses
SG&A expenses decreased by$1.1 million , or 6.8%, on a reported basis, to$15.3 million . Of this decrease,$0.7 million arose from favorable currency movements. On a functional currency at constant rate basis, SG&A expenses decreased by$0.4 million , or 2.6% on a functional currency basis. This decrease was driven by staff related cost savings of$1.8 million , facilities and insurance cost savings of$0.1 million and legal cost savings of$0.1 million . These savings were offset by an increase in Italian tax related costs relating to prior years invoicing of$0.9 million (removed from Adjusted EBITDA) and a decrease in net labor capitalization and manufacturing recoveries of$0.8 million due to mix of projects and lower factory throughput as a result of fewer machines being built in the quarter. Stock-based compensation During the three months endedDecember 31, 2018 , the Company recorded an expense of$1.6 million with respect to outstanding awards. Of this cost,$1.7 million related to recurring costs and a$0.1 million credit was due to changes in the stock price from$6.10 atSeptember 30, 2018 to$4.80 atDecember 31, 2018 . During the three months endedDecember 31, 2017 , there was a$3.2 million charge for stock-based compensation which included a$2.1 million charge relating to the cancellation of awards under the Company's First Incentive Plan covering 1,076,272 shares.
Acquisition related transaction expenses
Acquisition related transaction expenses decreased by$0.5 million in the period to$0.1 million . All of the 2018 and 2017 period expenses were related to work with respect to potential acquisitions.
Depreciation and amortization
Depreciation and amortization remained unchanged in the period at
On a functional currency at constant rate basis, depreciation and amortization increased by$0.4 million , or 4.7% on a functional currency basis. This increase was driven by additional amortization in connection with new platforms and games going live on SBG of$0.4 million . The additional machine depreciation was driven by the continued terminal rollout in the Greek sector of$0.9 million , partly offset by lower depreciation in theUK ($0.6 million ) andItaly ($0.1 million ) due to machines being fully depreciated. Net operating loss During the period on a reported basis, net operating loss improved from a loss of$4.4 million to a loss of$2.4 million . This improvement was partly driven by a$0.1 million favorable currency movement. On a functional currency at constant rate basis, net operating loss decreased by$1.9 million , mainly due to an increase in revenue, a reduction in stock-based compensation, acquisition related transaction and SG&A expenses, partly offset by higher cost of sales and depreciation and amortization. 60 Interest expense
Interest expense decreased by$0.8 million in the period, to$4.1 million , on a reported basis. Of this variance,$1.0 million was due to lower interest charges on the new debt funding following the refinancing inAugust 2018 and a further$0.3 million arose from currency retranslations of bank accounts. These were partly offset by a$0.5 million charge in the current period relating to amortization of debt fees following the refinancing.
Change in fair value of earnout liability
Due solely to changes in the share price ($4.80 atDecember 31, 2018 and$6.10 atSeptember 30, 2018 ) the credit in the three months endedDecember 31, 2018 from a change in the fair value of earnout liability was$1.7 million . In the prior period, due to changes in share price and as a result of changes relating to six specific countries (China ,Colombia ,Greece ,Norway ,Spain andUkraine ) the corresponding figure was a$4.7 million credit.
Change in fair value of derivative liability
Change in fair value of derivative liability increased by$0.5 million , to a$0.9 million credit for the three months endedDecember 31, 2018 arising from the fair valuing of the cross-currency swaps executed inAugust 2018 on the refinancing of the company. For the three months endedDecember 31, 2017 the change in fair value of derivative liability was a$0.3 million credit for derivative awards which were converted to stock-based compensation awards inMarch 2018 . Other finance costs Other finance costs for the period endedDecember 31, 2018 were$0.7 million ,$0.9 million higher than the previous period. Changes in exchange rates resulted in a charge of$2.9 million in retranslating the debt balance. This was offset by a$1.9 million credit from the GBP: USD cross currency swap entered into to mitigate this impact, accounted for under hedge accounting, and a$0.2 million pension interest credit which was in line with the previous period. Income tax expense
Our effective tax rate for the period ending
Net loss
On a reported basis, net loss increased by$0.6 million from a loss of$4.2 million to a loss of$4.7 million in the period endedDecember 31, 2018 . This variance was partly offset by a favorable currency movement of$0.1 million . On a functional currency at constant rate basis net loss increased by$0.7 million , mainly due to the increase in other finance costs and the change in fair value of earnout liability. This was offset by the improvement in net operating loss, the change in fair value of derivative liability and the decrease in interest expense. 61
Three Months ended
Server Based Gaming Segment
SBG segment, Key Performance Indicators
For the Three-Month Period ended
Unaudited Unaudited
Dec 31, Dec 31, Variance
SBG 2018 2017 2018 vs 2017End of period installed base (# of terminals) 34,578 29,985 4,593 15.3 % Average installed base (# of terminals) 33,811 29,310 4,500 15.4 % Customer Gross Win per unit per day (1) £ 109.62 £ 115.92 (£ 6.30 ) (5.4 %) Customer Net Win per unit per day (1) £ 77.71 £ 82.93 (£ 5.21 ) (6.3 %) Inspired Blended Participation Rate 6.2 %
6.1 % 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 Three Months ended
Our SBG rollout into the Greek sector continued during the period with a further 1,300 being deployed on site and live. The total installed base of our contracted 8,360 terminals inGreece is now over 6,800 as ofDecember 31, 2018 . The performance of our Greek terminals continues to be strong against our competitors. InItaly , customer Gross Win per unit per day (in EUR) increased by 16.9% across all customers compared to the same period last year due to new content releases. This was partly offset by a tax that reducedNet Win per unit per day growth to 14.6%. During the period, an additional 125 Self Service Betting Terminals ("SSBTs") were sold and deployed in theUK sector. In addition to the hardware sale margin these terminals also generate an ongoing recurring service fee.
In the
In the
Overall, the size of our Average Installed Base increased 15.4%, to 33,811, due to our continued terminal rollout inGreece and growth from new contract awards in theUK LBO estate. Customer Gross Win per unit per day (in our functional currency, GBP) decreased by 5.4% across the entire estate, driven by the impact of our SBG installations inGreece , as our Greek machines return a lower daily Customer Gross Win compared to ourUK machines. Our blended participation rate increased 0.1% to 6.2% due to an increased proportion ofGreece installed base. 62
SBG segment, key events that affected results for the Three Months ended
Our SBG rollout into the Greek sector continued during this period, with
approximately 3,400 terminals installed as of
During the period, we launched our new SBG cabinet the "Flex 4K" with trials in
two of our major
In addition to the comparable period in 2016, 223 SSBTs were sold and deployed
in the
SBG Segment, Three Months ended
Server Based
Gaming For the Three-Month Period ended Variance
Unaudited Unaudited
Functional
Dec 31, Dec 31, Variance Currency at Functional Currency (In thousands) 2018
2017 2018 vs 2017 Constant rate Currency Movement
Revenue:
Service $ 21,816 $ 21,808.6 $ 8 0.0 % $ 984 4.5 % ($ 976 )
Hardware 686 1,020 (334 ) (32.8 %) (294 ) (28.8 %) (41 )
Total revenue 22,502 22,829 (327 ) (1.4 %) 690 3.0 % (1,017 )
Cost of sales,
excluding
depreciation
and
amortization:
Cost of
service (4,900 ) (4,053 ) (847 ) 20.9 % (1,067 ) 26.3 % 220
Cost of
hardware (593 ) (906 ) 313 (34.5 %) 277 (30.7 %) 35
Total cost of
sales (5,493 ) (4,959 ) (534 ) 10.8 % (789 ) 15.9 % 255
Selling,
general and
administrative
expenses (6,913 ) (8,147 ) 1,234 (15.1 %) 936 (11.5 %) 298
Stock-based
compensation (113 ) (65 ) (48 ) 73.8 % (53 ) 82.0 % 5
Depreciation
and
amortization (7,784 ) (7,607 ) (177 ) 2.3 % (529 ) 7.0 % 352
Net operating
profit $ 2,199 $ 2,051 $ 148 7.2 % $ 254 12.4 % ($ 107 )
Exchange Rate
- $ to £ 1.29 1.34
63
SBG segment revenue. In the period revenue decreased by $0.3 million , to $22.5
million , on a reported basis. This decrease was due to adverse currency
movements of $1.0 million . On a functional currency at constant rate basis, SBG
revenue increased by $0.7 million , or 3.0% on a functional currency basis.
Service revenue remained consistent, on a reported basis. This is due to adverse
currency movements of $1.0 million . On a functional currency at constant rate
basis, SBG service revenue increased by $1.0 million , or 4.5% on a functional
currency basis, to $21.8 million . This was due to an increase in the Italian
sector of $0.9 million due to the growth in both Gross and Net Wins and the
Greek sector of $0.6 million , driven by the continued rollout in Greece . This
was partly offset by a decrease in service revenue in UK LBO of $0.4 million
primarily due to the expiry of a customer service contract.
The continued rollout into the Greek sector drove additional participation
revenue of $1.2 million and other recurring revenue of $0.6 million . This was
partly offset by a $1.2 million reduction in software license sales compared to
the prior period.
During the period there was a small reduction inUK LBO Customer Gross Win per unit per day due to the rollout of 1,200 additional terminals. These machines were placed into lower performing sites, therefore reducing the average Customer Gross Win per unit per day but driving additional revenue. Hardware revenue decreased by$0.3 million to$0.7 million , on a reported basis. On a functional currency at constant rate basis, SBG hardware revenue decreased by$0.3 million , principally due to lower SSBTs terminal sales in theUK sector of$0.3 million . SBG segment operating income. Cost of sales (excluding depreciation and amortization) increased by$0.5 million to$5.5 million , on a reported basis. This variance was impacted by favorable currency movements of$0.3 million . On a functional currency at constant rate basis, cost of sales increased by$0.8 million . This was principally due to an increase in service costs of$1.1 million due to Greek SBG service costs of$0.8 million , driven by the increase in terminals as theGreece rollout continues, and an increase in cost of service inItaly of$0.3 million . SG&A expenses decreased by$1.2 million to$6.9 million , on a reported basis. Of this variance,$0.3 million arose from favorable currency movements. This resulted in a functional currency at constant rate decrease of$0.9 million driven by staff related cost savings of$1.1 million , offset by$0.3 million driven by lower manufacturing recoveries due to lower factory throughput. Depreciation and amortization increased by$0.2 million to$7.8 million on a reported basis. Of this amount,$0.4 million arose due to favorable currency movements. On a functional currency at constant rate basis, the increase was$0.5 million , driven by$0.3 million from additional amortization and$0.1 million of additional machine and machine related depreciation. The additional amortization was driven by new projects going live in theUK and Greek sectors. The additional machine and machine related depreciation was driven by the continued terminal rollout in the Greek sector of$0.9 million , partly offset by lower depreciation in theUK ($0.6 million ) andItaly ($0.1 million ) due to machines being fully depreciated. SBG operating profit increased by$0.1 million to$2.2 million , on a reported basis. Of this variance,$0.1 million arose from adverse currency movements. On a functional currency at constant rate basis, SBG operating profit increased by$0.3 million . This was primarily due to the increase in revenue and decrease in SG&A, partly offset by higher cost of sales and additional depreciation and
amortization.
64
SBG segment, Recurring Revenue
Set forth below is a breakdown of our SBG recurring revenue. SBG recurring revenue consists principally of SBG participation revenue.
For the Three-Month Period ended
Unaudited Unaudited Variance
Dec 31, Dec 31, 2018 vs 2017SBG Recurring Revenue 2018 2017 % Total SBG Revenue £ 17,504 £ 16,991 £ 514 3.0 %
SBG Participation Revenue (£'000) £ 15,055 £ 13,614 £ 1,441 10.6 % SBG Other Fixed Fee Recurring Revenue (£'000) £ 239 £ 253 (£ 14 ) (5.4 %) Total SBG Recurring Revenue (£'000) £ 15,295 £ 13,867 £ 1,427 10.3 % SBG Recurring Revenue as a Percentage of Total SBG Revenue 87.4 % 81.6 % 5.8 %
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
Unaudited Unaudited
Dec 31, Dec 31, Variance Variance
Functional
Currency at Functional Currency
(In thousands) 2018 2017 2018 vs 2017 Constant rate Currency Movement
Service Revenue:
UK LBO $ 13,630 $ 14,281 ($ 651 ) (4.6 %) ($ 57 ) (0.4 %) ($ 594 )
UK Other 1,254 $ 1,719 (465 ) (27.0 %) (408 ) (23.7 %) (57 )
Italy 2,911 $ 2,108 803 38.1 % 937 44.4 % (134 )
Greece 3,834 $ 3,432 402 11.7 % 585 17.1 % (183 )
Rest of the World 187 $ 268 (81 ) (30.4 %) (73 ) (27.3 %) (8 )
Total service
revenue $ 21,816 $ 21,809 $ 8 0.0 % $ 984 4.5 % ($ 976 )
Exchange Rate - $
to £ 1.29 1.34
65
Virtual Sports Segment, Three Months ended
For the Three-Month Period ended
Unaudited Unaudited Variance
Virtuals Dec 31, Dec 31, 2018 vs 2017
2018 2017 %
No. of Live Customers at the end of the
period 100 86 14 16.3 %
Average No. of Live Customers 96 83 13 15.7 %
Total Revenue (£'000) £ 6,404 £ 6,371 £ 33 0.5 %
Total Revenue £'000 - Retail £ 3,831 £ 3,812 £ 19 0.5 %
Total Revenue £'000 - Scheduled Online
Virtuals £ 2,109 £ 1,887 £ 222 11.7 %
Total Revenue £'000 - Interactive £ 464 £ 672 (£ 208 ) (30.9 %)
Average Revenue Per Customer per day (£) £ 725 £
834 (£ 109 ) (13.1 %)
For the Three-Month Period ended
Unaudited Unaudited Variance
Dec 31, Dec 31, 2018 vs 2017
Virtual Sports Recurring Revenue 2018 2017
Total Virtual Sports Revenue (£'000) £ 6,404 £
6,371 £ 33 0.5 %
Recurring Revenue (£'000) - Retail and
Scheduled Online Virtuals £ 5,358 £ 4,976 £ 382 7.7 %
Recurring Revenue (£'000) - Interactive £ 524 £ 572 (£ 48 ) (8.3 %)
Total Virtual Sports Recurring Revenue
(£'000) £ 5,883 £ 5,548 £ 334 6.0 %
Virtual Sports Recurring Revenue as a
Percentage of Total Virtual Sports
Revenue 91.9 % 87.1 % 4.8 %
In
Our largest customer in
The Average Number of Live Customers during the period increased by 13, from 83
to 96. Including the launch of eight new Interactive customers, five of which
were launched via the NYX platform and three via the Playtech platform including
BGO, Buzz Bingo and Sun Bingo, taking our Average Number of Live Interactive
Customers for the period to 31.
Overall revenue per customer has decreased during the period, this is due to a
sharp increase in customers in the quarter with revenues expected to increase
throughout 2019.
66
As of
During the 2017 quarterly period, our
By the end of the 2017 quarterly period, our Interactive business was live with 16 customers, having launched ten new customers sinceDecember 31, 2016 , including Betfair,Grosvenor Casino (part of the Rank Group), Bwin, Sportingbet, VideoSlots, and a variety of Betsson brands.
Virtual Sports For the Three-Month Period ended Variance Variance
Functional
Unaudited Unaudited Currency at Functional
(In thousands) Dec 31, 2018 Dec 31, 2017 2018 vs 2017 Constant rate Currency Currency Movement
Service Revenue $ 8,230 $ 8,558 ($ 328 ) (3.8 %) $ 44 0.5 % ($ 372 )
Cost of Service (1,077 ) (1,143 ) 67 (5.8 %) 16 (1.4 %) 50
Selling, general and
administrative expenses (3,296 ) (2,721 ) (575 ) 21.1 % (735 ) 27.0 % 160
Stock-based compensation (83 ) (79 ) (4 ) 5.1 % (7 ) 9.0 % 3
Depreciation and amortization (1,376 ) (1,600 )
224 (14.0 %) 162 (10.1 %) 62
Net operating profit $ 2,398 $ 3,016 ($ 617 ) (20.5 %) ($ 520 ) (17.2 %) ($ 97 )
Exchange Rate - $ to £ 1.29 1.34
Virtual Sports segment revenue. In the period revenue decreased by $0.3 million
on a reported basis. Of this decrease, $0.4 million arose from adverse currency
movements. On a functional currency at constant rate basis, Virtual Sports
revenue remained unchanged at $8.2 million .
While revenue remained unchanged, $0.4 million was driven by an increase in
Virtual Sports land-based and online recurring revenue, due to new customer
revenue in Finland of $0.2 million as well as continued growth in Italy of $0.2
million . Total revenue growth was negatively affected by $0.2 million due to a
reduction in revenue from long-term Virtual Sports licenses that have now come
to an end and lower Interactive revenue due to lower one-off game sales of$0.1 million . 67
Virtual Sports segment operating income. Cost of service decreased by$0.1 million to$1.1 million , on a reported basis. Of this decrease,$0.1 million arose from favorable currency movements. On a functional currency at constant rate basis, cost of service remained the same as prior period. SG&A expenses increased by$0.6 million , on a reported basis. Of this increase,$0.2 million arose from favorable currency movements. This resulted in a functional currency at constant rate increase of$0.7 million , which was primarily due to$0.9 million higher Italian tax related costs relating to prior years (removed from Adjusted EBITDA). This was partly offset by staff related savings of$0.3 million .
Depreciation and amortization decreased by$0.2 million to$1.4 million , on a reported basis. Of this decrease,$0.1 million arose from favorable currency movements. This resulted in a functional currency at constant rate decrease of$0.2 million , driven by lower depreciation of platforms and games due to fully depreciated games, including Rush Football. Operating profit decreased by$0.6 million on a reported basis to$2.4 million . Of this decrease,$0.1 million arose from adverse currency movements. On a functional currency at constant rate basis, this represented a decrease of$0.5 million . This was primarily due to additional SG&A expenses, offset by lower depreciation and amortization.
Reconciliations from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Loss, to Adjusted EBITDA are shown below.
Reconciliation to Adjusted EBITDA
For the Three-Month Period ended
Unaudited Unaudited
(In thousands) Dec 31, 2018 Dec 31, 2017
Net loss ($ 4,729 ) ($ 4,155 )
Items Relating to Legacy Activities:
Pension charges 88 140
Costs relating to former operations 7 5
Items outside the normal course of business:
Costs of group restructure 605 780
Transaction fees 74 574
Italian tax related costs relating to prior year 875 -
Stock-based compensation expense 1,615 3,198 Depreciation and amortization 9,589 9,560 Total other expense, net 2,290 (299 ) Income tax 56 33 Adjusted EBITDA $ 10,470 $ 9,836 Adjusted EBITDA £ 8,155 £ 7,325 Exchange Rate - $ to £ 1.28 1.34 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 thePension Protection Fund (which were historically borne by the pension scheme) and a small amount of associated professional services expenses. These costs are included within Central Functions. (2) "Costs relating to former operations" refers to gains and losses from our Mexican SBG division, which ceased trading prior to the years shown in the consolidated financial statements included in this report. This affects Server Based Gaming results.
(3) "Costs of group restructure" include redundancy costs, Payments In Lieu of Notice costs and any associated employer taxes. To qualify as being an adjusting item, costs must be part of a large restructuring project, which will net save ongoing future costs.
(4) "Italian tax related costs relating to prior years invoicing" relate to VAT charges and associated costs, relating to prior years, imposed on ourVirtual Sports segment following changes in interpretation of legislation and an ongoing VAT audit.
(5) Transaction fees, 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.
(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
68
Reconciliation to Adjusted Revenue
For the Three-Month Period ended
Unaudited Unaudited
(In thousands) Dec 31, 2018 Dec 31, 2017
Net revenues $ 30,732 $ 31,387
Less Nil Margin Sales - -
Adjusted Revenue $ 30,732 $ 31,387
Adjusted Revenue £ 23,908 £ 23,374
Exchange Rate - $ to £ $ 1.29 $ 1.34
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. A reconciliation from revenue, as
shown in our Consolidated Statements of Operations and Comprehensive Loss
included elsewhere in this report, to Adjusted Revenue is shown above.
Liquidity and Capital Resources
Three Months endedDecember 31, 2018 compared to Three Months endedDecember 31, 2017 Period Ended Variance 2018 to (in thousands) Dec 31, 2018 Dec 31, 2017 2017 Net loss ($ 4,729 ) ($ 4,155 ) ($ 574 ) Non-cash interest expense including amortization of fees 522 1,924 (1,402 ) Change in fair value of derivative and earnout liabilities and (905 ) (2,086 ) 1,181 stock-based compensation expense Foreign currency translation on senior bank debt and cross currency swaps 673 0 673 Depreciation and amortization 9,589 9,560 29 Other net cash utilized by operating activities (4,254 ) (5,352 ) 1,098 Net cash provided by operating activities 896
(109 ) 1,005
Net cash used in investing activities (6,631 ) (6,813 ) 182 Net cash used in financing activities (578 ) (1,810 ) 1,232 Effect of exchange rates on cash (150 ) (307 ) 157 Net (decrease)/increase in cash and cash equivalents ($ 6,463 ) ($ 9,039 )$ 2,576 Net cash provided by operating activities. In the period, net cash inflow generated by operating activities was$0.9 million , compared to a$0.1 million outflow in the prior period, representing a$1.0 million improvement in cash generation. Non-cash interest expense decreased by$1.4 million , to$0.5 million . The current period's non-cash interest expense related to amortization of debt fees incurred in relation to the business refinancing inAugust 2018 whereas the prior period's expense related to PIK interest charged on the debt held prior to the refinancing. 69
Change in fair value of derivative and earnout liabilities and stock-based compensation expense decreased by$1.2 million from an outflow of$2.1 million to an outflow of$0.9 million . Movements in the market value of the stock price resulted in a$3.0 million lower earnout outflow in the current period which was partly offset by a$1.3 million movement in stock-based compensation expense and a$0.9 million movement in the fair valuation of the cross-currency swaps executed inAugust 2018 on the new debt.
Foreign currency translation on senior bank debt and cross currency swaps
following the refinancing of the Group on
Depreciation, amortization and impairment remained constant at
Other net cash utilized by operating activities decreased by$1.1 million , to a$4.3 million outflow. This decrease was largely due to movements in income accruals of$2.0 million and other creditors of$3.2 million which were partly offset by movements in deferred revenue creditor levels of$3.5 million . The movement in income accruals related to a one-off increase at the end of the prior period and the movement in other creditors relates to the unwind in the debt interest accrual in the prior period reflecting the timing of interest payments under the previous debt financing structure. The prior year also showed an increase in deferred revenue creditor levels due to the roll out of machines intoGreece , whereas in the current period it has reduced as it is recognized through the profit and loss account. The current period's outflow contains an additionalUK payroll payment of$1.9 million as compared to the previous period due to timing. This is expected to reverse in the next period. A bonus payment of$0.8 million was also made in the current period. The prior year's quarter had the normal level of payroll runs and no bonus payment. Net cash used in investing activities. Net cash used in investing activities decreased by approximately$0.2 million , to$6.6 million . The decrease was attributable to lower levels of spending on capital software compared to the prior year.
Net cash used by financing activities. In the current period, net cash used by financing activities decreased by$1.2 million , to a$0.6 million outflow. This was due to the prior period making a debt repayment of$7.7 million but also increasing the level of revolver utilization by$6.0 million . The current period has incurred$0.5 million of debt fee payments relating to the refinancing
inAugust 2018 . Long Term and Other Debt (In thousands) December 31, 2018 December 31, 2017 Cash held £ 12,521$ 15,988 £ 8,139$ 10,989 Revolver drawn - - (10,000 ) (13,502 )
Original principal senior debt (109,641 ) (140,000 ) (72,500
) (97,890 ) Compounded PIK interest - - (9,193 ) (12,412 ) PIK interest accrued - - (486 ) (656 ) Cash interest accrued (39 ) (50 ) (636 ) (859 ) Finance lease creditors (338 ) (432 ) (712 ) (962 ) Total (£ 97,497 ) ($ 124,493 ) (£ 85,388 ) ($ 115,292 )
Off-Balance Sheet Arrangements
As of
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Critical Accounting Policies
The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted inthe 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. 71
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