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. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" has been amended and restated to give effect to the restatement of our financial statements, as more fully described in "Restatement of Previously Reported Information" within Note 1 to our financial statements. For further detail regarding the restatement, see "Explanatory Note" and "Item 9A. Controls and Procedures." Forward-Looking Statements We make forward-looking statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations. For definitions of the term Forward-Looking Statements, see the definitions provided in the Cautionary Note Regarding Forward-Looking Statements at the start of the Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Segment Reporting Recharacterizations
For full information on this, see Part IV, Item 15, 'Exhibits, Financial Statement Schedules' Note 26 'Segment Reporting and Geographic Information'.
Revenue We generate revenue in four principal ways: i) on a participation basis, ii) on a fixed rental fee basis, iii) through product sales and iv) through software license fees. Participation revenue generally includes a right to receive a share of our customers' gaming revenue, typically as a share of net win but sometimes as a share of the handle or "coin in".Geographic Range
Geographically, a majority of our revenue is derived from, and majority of our non-current assets are attributable to ourUK operations. The remainder of our revenue is derived from, and non-current assets attributable to,Italy ,Greece and the rest of the world. 37 For the twelve months endedDecember 31, 2020 , we earned approximately 76.2% of our revenue in theUK , 8.5% inGreece , 4.3% inItaly and the remaining 11.0% across the rest of the world. During the twelve months endedDecember 31, 2019 , we earned approximately 67.6%, 13.5%, 10.6% and 8.3% of our revenue in those regions, respectively.
As of
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, 2020 , we derived approximately 24% of our revenue from sales to customers outside theUK , compared to 32% during the twelve months endedDecember 31, 2019 . In the section "Results of Operations" below, currency impacts shown have been calculated as the current-period average GBP:USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP:USD rate. This is not 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
Our fiscal year begins on
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 ended
In the discussion and analysis below, any reference to organic variances and organic growth refers to variances in the results of operations of the Company excluding results from the NTG Acquisition for the nine-month period endedSeptember 30, 2020 , on a functional currency at constant rate basis. As a result, in order to facilitate a like-for-like comparison between the twelve-month periods endedDecember 31, 2020 andDecember 31, 2019 , respectively, organic variances and organic growth refer to results of operations that only include results from the NTG Acquisition for the three-month period endedDecember 31, 2020 , andDecember 31, 2019 . In addition, certain data may vary from the amounts presented in our consolidated financial statements due to rounding. 38 Twelve Months endedDecember 31, 2020 compared to Twelve Months endedDecember 31, 2019 For the Twelve-Month Period ended Variance Variance Dec 31, Dec 31, Organic Total Functional Total 2020 2019 2020 vs 2019 Variance % Currency % Variance % (In millions) Revenue: Service$ 178.7 $ 134.5 $ 44.2 (0.6 )% 31.5 % 32.9 % Product 21.1 18.9 2.1 (35.3 )% 10.9 % 11.3 % Total revenue 199.8 153.4 46.4 (4.8 )% 29.0 % 30.2 % Cost of sales, excluding depreciation and amortization: Cost of service (30.1 ) (25.4 ) (4.7 ) (17.8 )% 17.0 % 18.3 % Cost of product (14.4 ) (12.9 ) (1.5 ) (42.5 )% 11.3 % 11.7 % Selling, general and administrative expenses (84.8 ) (70.4 ) (14.4 ) (25.4 )% 19.6 % 20.5 % Stock-based compensation (4.8 ) (9.0 ) 4.2 (48.6 )% (47.9 )% (47.0 )% Acquisition and integration related transaction expenses (7.0 ) (6.7 ) (0.3 ) (0.2 )% (0.2 )% 4.1 % Depreciation and amortization (52.3 ) (42.0 )
(10.4 ) (16.6 )% 24.5 % 24.7 % Net operating Income (Loss) 6.4 (13.0 ) 19.4 (237 )% (141 )% (149 )% Other income (expense) Interest income 0.6 0.1 0.5 824 % 823 % Interest expense (30.6 ) (27.8 ) (2.8 ) 9.9 % 9.9 % Change in fair value of earnout liability - (2.3 ) 2.3 (100 )% (100 )% Change in fair value of derivative liability - 3.0 (3.0 ) (100 )% (100 )% Change in fair value of warrant liability (3.2 ) (4.1 ) 0.9 (32.9 )% (21.5 )% Other finance income (expense) (4.7 ) 3.2 (7.9 ) (256 )% (247 )% Loss from equity method investee (0.5 ) (0.1 ) (0.5 ) 967 % 900 % Total other income (expense), net (38.4 ) (28.0 ) (10.4 ) 37.6 % 37.3 % Net loss from continuing operations before income taxes (32.0 ) (41.0 )
9.0 (19.9 )% (21.9 )% Income tax expense (0.4 ) (0.1 ) (0.3 ) 198 % 354 % Net loss$ (32.4 ) $ (41.1 ) $ 8.7 (20.4 )% (21.1 )% Exchange Rate - $ to £ 1.29 1.28 Revenue Total reported revenue for the twelve months endedDecember 31, 2020 increased by$46.4 million , or 30.2%, to$199.8 million on a reported basis. This includes increases from Leisure of$19.8 million , Gaming of$19.0 million and Interactive of$8.6 million , partly offset byVirtual Sports decline of$1.1 million . This growth includes Gaming revenue of$42.2 million remitted to us by two of our majorUK customers, to which we were entitled because of aUK tax ruling, which created a rebate of value added tax that had otherwise been incorrectly applied to certain gaming machines in their estate (the "VAT-related revenue") in the past. As our contracts with these customers are based on a revenue share after appropriate taxes, we are entitled to a pro rata share of this tax rebate, which we have recorded as revenue during the period in line with accounting standards. Favorable currency movements accounted for a$1.9 million impact. On a functional currency at constant rate basis, revenue increased by$44.4 million , or 29.0%, as detailed below:
? Gaming revenue increased by
revenue of
increase in Service revenue was comprised of
including the VAT-related revenue of
rate), and
the nine months of 2020 ended
Excluding the VAT-related revenue, Service revenue would have declined by
million primarily due to COVID-19, as many of our customers' venues were closed
during much of the period. Customer gross win also declined from the
comparative period, reflecting the impact of COVID-19, with shop closures
occurring throughout the year and restrictions in place during much of the time
when venues were open (the "COVID-19 closures"). 39
?
included a
result of the COVID-19 closures, partially offset by growth in Online Virtuals
of$7.4 million .
? Interactive revenue increased by
comprised of
the addition of the NTG Acquisition for the nine months of 2020 ended September
30 (not reflected in organic growth). Organic growth was driven primarily by
recurring revenue growth due to the increase in online demand as a result of
the COVID-19 closures, the addition of new customers and territories and the
consistent launch of new high-quality content, all of which, we believe, has
led to our enjoying an increase in market share.
? Leisure revenue increased by
revenue of
Service revenue increase was comprised of
addition of the NTG Acquisition for the nine months of 2020 ended
(not reflected in organic growth), offset by a
due to the impact of the COVID-19 closures, as venues were closed during much
of the period.
Cost of sales, excluding depreciation and amortization
Cost of sales, excluding depreciation and amortization, increased by$6.2 million , or 16.1%, on a reported basis, to$44.5 million , including the impact of$0.4 million from unfavorable currency movements. Of this increase,$4.7 million was attributable to cost of Service and$1.5 million was attributable to cost of Product sales. On a functional currency (at constant rate) basis, cost of sales increased by$5.8 million , or 15.1%, as detailed below:
? Gaming cost of sales decreased by
Service costs of
Product costs. The Service cost decrease was driven primarily by a
decrease due to the decline in cost of Service, offset by a
increase attributable to the addition of the NTG Acquisition for the nine
months of 2020 endedSeptember 30 (not reflected in organic growth). ?Virtual Sports cost of sales increased by$0.3 million , or 9.6%. This increase was driven by the organic growth of Online Virtuals.
? Interactive cost of sales increased by
driven by
? Leisure cost of sales increased by
Service costs of
The Service cost increase was comprised of a
to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth), offset by a$1.9 million decrease due to the organic revenue decline.
Selling, general and administrative expenses
SG&A expenses increased by$14.4 million , or 20.5%, on a reported basis, to$84.8 million . This included$0.7 million of unfavorable currency movements. On a functional currency at constant rate basis, SG&A increased by$13.8 million , or 19.6%. This increase was comprised of incremental SG&A expenses of$31.7 million attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth), offset by a$17.9 million decrease driven primarily by temporary furlough savings and permanent synergy savings realized during the period. Stock-based compensation
During the year endedDecember 31, 2020 , the Company recorded an expense of$4.8 million with respect to outstanding awards. Of this expense,$0.2 million related to costs from awards made under a 2016 long term incentive plan,$4.5 million from awards made under the 2018 Plan and$0.1 million related to costs from the vesting of awards inDecember 2020 . All costs related to recurring costs. During the year endedDecember 31, 2019 , the charge for stock-based compensation was$9.0 million . Of this expense,$6.0 million related to costs from awards made under a 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 . 40
Acquisition and integration related transaction expenses
Acquisition related transaction expenses increased by$0.3 million to$7.0 million , on a reported basis. The entirety of the 2019 and the majority of the 2020 expenses were related to the NTG Acquisition and the fees associated with the integration of this transaction. During 2020,$0.6 million of costs incurred related to potential merger and acquisition activity (outside of the NTG Acquisition) which did not come to fruition.
Depreciation and amortization
Depreciation and amortization increased by$10.4 million , or 24.7%, to$52.3 million on a reported basis. This included the impact of unfavorable currency movements of$0.1 million . On a functional currency at constant rate basis, depreciation and amortization increased by$10.3 million , or 24.5%, driven primarily by the addition of$17.3 million in depreciation and amortization attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth), offset by a reduction in depreciation and amortization of$7.0 million due to machines in theUK estate andItaly , each within our Gaming segment, reaching fully depreciated status. Our future growth initiatives are focused on expanding our digital and online gaming. Accordingly, we expect that depreciation and amortization expense will be reduced in future periods as our investments in digital and online gaming are less capital intensive than our investments in gaming terminals. Net operating profit
During the period, net operating income was$6.4 million compared to a net operating loss of$13.0 million in the prior period. The increase of$19.4 million in operating profit was attributable to an increase of$31.8 million in operating profit from organic growth, largely attributable to the VAT-related income as well as growth in our Interactive segment, along with cost savings across our segments on an organic basis. This was offset by a decrease of$12.9 million in operating income in businesses acquired through the NTG Acquisition. This increase also included a$0.4 million favorable impact from foreign currency translation. Interest expense Net interest expense increased by$2.2 million in the year endedDecember 31, 2020 to$30.0 million , on a reported basis due to a$8.7 million increase in debt interest offset by a$0.6 million decrease in bank interest paid and a$5.8 million decrease in debt fee amortization following the write-off of$7.3 million of debt fees in the year endedDecember 31, 2019 following the refinancing inOctober 2019 .
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 year endedDecember 31, 2020 , no gain or loss was recognized.
Change in fair value of derivative liability
Following the termination of the cross-currency swaps onOctober 1, 2019 , there was no change in the fair values of derivative liabilities in the year endedDecember 31, 2020 . The current swaps qualify for hedge accounting and accordingly are not shown as derivative liability movements. For the year endedDecember 31, 2019 , the change in fair value of derivative liability was a$3.0 million credit.
Change in fair value of warrant liability
Due to changes in the valuation of the warrant liability, the expense recorded
in the year reduced from
Other finance income Other finance income for the year endedDecember 31, 2020 resulted in a$4.7 million charge compared to a$3.2 million credit in the year endedDecember 31, 2019 . This variance was driven by movements in the retranslation with respect to the principal balance of our senior debt facilities. In addition, the year endedDecember 31, 2019 also included a$3.2 million benefit from the GBP:USD cross-currency swap which was terminated onOctober 1, 2019 . Income tax expense
Our effective tax rate for the period ended
Net loss During the period, net loss was$32.4 million compared to a net loss of$41.1 million in the prior period. On a functional currency at constant rate basis, net loss improved by$8.4 million , primarily due to the VAT-related income and growth in Interactive revenue. 41
Twelve Months ended
We generate revenue from our Gaming segment through the selling and rental of our gaming machines. We receive rental fees for machines, typically on a long-term contract basis, on both a participation and fixed fee basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming terminals placed in our customers' facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract. Revenue growth for our Gaming business is principally driven by the number of operator customers we have, the number of Gaming machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
Gaming Segment, Key Performance Indicators
For the Twelve-Month
Period ended Variance
Dec 31, Dec 31,
2020 2019 2020 vs 2019 %
Gaming
End of period installed base (# of
terminals) 31,515 32,520 (1,005 ) (3.1 )%
Total Gaming - Average installed base (#
of terminals) 32,069 34,966 (2,897 ) (8.3 )%
Participation - Average installed
base (# of terminals) 30,165 33,297 (3,131 ) (9.4 )%
Fixed Rental - Average installed base (#
of terminals) 1,903 1,670 234 14.0 %
Service Only - Average installed base (#
of terminals) 21,015 6,681 14,334 214.6 %
Customer Gross Win per unit per day (1)
(2) £ 46.69 £ 82.69 £ (36.00 ) (43.5 )%
Customer Net Win per unit per day (1)
(2) £ 34.57 £ 58.41 £ (23.84 ) (40.8 )%
Inspired Blended Participation Rate 6.5 % 6.4 % 0.1 % 1.5 %
Inspired Fixed Rental Revenue per Gaming
Machine per week £ 26.33 £ 11.51 £ 15 128.8 %
Inspired Service Rental Revenue per
Gaming Machine per week £ 3.30 £ 4.01 £ (1 ) (17.7 )%
Gaming Long term license amortization
£('m) £ 5.1 £ 4.6 £ 0.5 11.6 %
Number of Machine sales 2,832 2,521 311 12.3 % Average selling price per terminal £ 4,337 £ 4,588 £ (251 ) (5.5 )%
(1) Includes all Gaming terminals in which the company takes a participation
revenue share across all territories (2) Includes all days of the year, including the days during which the Gaming
terminals were not operating due to COVID-19 closures.
In the table above:
"End of Period Installed Base" is equal to the number of deployed Gaming
terminals at the end of each period that have been placed on a participation or
fixed rental basis. Gaming participation revenue, which comprises the majority
of Gaming Service revenue, is directly related to the participation terminal
installed base. This is the medium by which our customers generate revenue and
distribute a revenue share to the Company. To the extent all other KPIs and
certain other factors remain constant, the larger the installed base, the higher
the Company's revenue would be for a given period. Management gives careful
consideration to this KPI in terms of driving growth across the segment. This
does not include Service Only terminals.
Revenue is derived from the performance of the installed base as described by the Gross and Net Win KPIs.
If the End of Period Installed Base is materially different from the Average Installed Base (described below), we believe this gives an indication as to potential future performance. We believe the End of Period Installed Base is particularly useful for assessing new customers or markets, to indicate the progress being made with respect to entering new territories or jurisdictions. "Total Gaming - Average Installed Base" is the average number of deployed Gaming terminals during the period split by Participation terminals and Fixed Rental terminals. Therefore, it is more closely aligned to revenue in the period. We believe this measure is particularly useful for assessing existing customers or markets to provide comparisons of historical size and performance. This does not include Service Only terminals.
"Participation - Average Installed Base" is the average number of deployed Gaming terminals that generated revenue on a participation basis.
"Fixed Rental - Average Installed Base" is the average number of deployed Gaming terminals that generated revenue on a fixed rental basis.
"Service Only - Average Installed Base" is the average number of terminals that generated revenue on a Service only basis.
42 "Customer Gross Win per unit per day" is a KPI used by our management to (i) assess impact on the Company's revenue, (ii) determine changes in the performance of the overall market and (iii) evaluate the impacts of regulatory change and our new content releases on our customers. Customer Gross Win per unit per day is the average per unit cash generated across all Gaming terminals in which the Company takes a participation revenue share across all territories in the period, defined as the difference between the amounts staked less winnings to players divided by the Average Installed Base in the period, then divided by the number of days in the period. Gaming revenue accrued in the period is derived from Customer Gross Win accrued in the period after deducting gaming taxes (defined as a regulatory levy paid by the Customer to government bodies) and applying the Company's contractual revenue share percentage. Our management believes Customer Gross Win measures are meaningful because they represent a view of customer operating performance that is unaffected by our revenue share percentage and allow management to (1) readily view operating trends, (2) perform analytical comparisons and benchmarking between customers and (3) identify strategies to improve operating performance in the different markets in which we operate.
"Customer
"Inspired Blended Participation Rate" is the Company's average revenue share
percentage across all participation terminals where revenue is earned on a
participation basis, weighted by Customer
"Inspired Fixed Rental Revenue per Gaming Machine per week" is the Company's average fixed rental amount across all fixed rental terminals where revenue is generated on a fixed fee basis, per unit per week. "Inspired Service Rental Revenue per Gaming Machine per week" is the Company's average service rental amount across all service only rental terminals where revenue is generated on a service only fixed fee basis, per unit per week.
"Gaming Long term license amortization" is the upfront license fee per terminal which is typically spread over the life of the terminal.
Our overall Gaming revenue from terminals placed on a participation basis can therefore be calculated as the product of the Participation - Average Installed Base, the CustomerNet Win per unit per day, the number of days in the period, and the Inspired Blended Participation Rate, which is equal to "Participation Revenue".
"Number of Machine sales" is the number of terminals sold during the period.
"Average selling price per terminal" is the total revenue in GBP of the Gaming terminals sold divided by the "number of Machine sales".
Gaming Segment, Recurring Revenue
Set forth below is a breakdown of our Gaming recurring revenue. Gaming recurring
revenue consists principally of Gaming participation revenue and fixed rental
revenue.
For the Twelve-Month Period ended Variance
Dec 31, Dec 31,
2020 2019 2020 vs 2019 %
(In £ millions)
Gaming Recurring Revenue
Total Gaming Revenue £ 85.1 £ 71.4 £ 13.7 19.2 %
Gaming Participation Revenue £ 25.1 £ 44.8 £ (19.6 ) (43.8 )%Gaming Other Fixed Fee Recurring Revenue £ 7.5 £ 4.2 £ 3.3 79.6 % Gaming Long term License amortization £ 5.1 £ 4.0 £ 1.1 27.6 % Total Gaming Recurring Revenue * £ 37.8 £ 53.0 £ (15.2 ) (28.6 )% Gaming Recurring Revenue as a % of Total Gaming Revenue † 44.4 % 74.2 % (29.8 )%
* Does not reflect VAT-related revenue
† Total Gaming Revenue for the twelve-month period ended
includes the £32.0 million for one time VAT-related revenue, which is not
reflected in Gaming Recurring Revenue for that period. Excluding VAT-related
revenue, Gaming Recurring Revenue was 71.2% of Total Gaming Revenue for such
period.
43
In the table above:
"Gaming Participation Revenue" includes our share of revenue generated from (i)
our Gaming terminals placed in gaming and lottery venues; and (ii) licensing of
our game content and intellectual property to third parties.
"Gaming Other Fixed Fee Recurring Revenue" includes service revenue in which the Company earns a periodic fixed fee on a contracted basis.
"Gaming Long term license amortization" - see the definition provided above
"Total Gaming Recurring Revenue" is equal to Gaming Participation Revenue plus Gaming Other Fixed Fee Recurring Revenue.
Gaming Segment, Service Revenue by Region
Set forth below is a breakdown of our Gaming service revenue by geographic region. Gaming service revenue consists principally of Gaming participation revenue, Gaming other fixed fee revenue, Gaming long term license amortization and Gaming other non-recurring revenue. See "- Gaming Segment Revenue" below for a discussion of gaming service revenue between the periods under review.
Gaming Service Revenue by Region
For the Twelve-Month
Period ended Variance Variance
Dec 31, Dec 31, Organic Total Functional Total
2020 2019 2020 vs 2019 Variance % Currency % Variance %
(In millions)
Service Revenue:
UK Licensed Betting
Offices $ 26.7 $ 40.8 $ (14.1 ) (43.8 )% (34.5 )% (34.5 )%
UK VAT - Related
Revenue $ 42.2 - $ 42.2 - - -
UK Other 6.4 7.0 (0.6 ) (61.4 )% (9.9 )% (8.9 )%
Italy 2.1 7.9 (5.8 ) (73.8 )% (73.8 )% (73.6 )%
Greece 14.3 17.4 (3.0 ) (18.1 )% (18.1 )% (17.5 )%
Rest of the World 0.6 0.7 (0.2 ) (47.6 )% (23.0 )% (22.5 )%
Total service revenue $ 92.2 $ 73.8 $ 18.4 12.8 % 23.1 % 25.0 %
Exchange Rate - $ to
£ 1.30 1.28
Note: Exchange rate in the table is calculated by dividing the USD total service revenue by the GBP total service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Gaming Segment, key events that affected results for the Twelve Months ended
During the period, Customer Gross Win per unit per day in the totalUK market (including non- Licensed Betting Offices markets) declined by 32.9%. This decline was primarily due to the shutdowns and tier restrictions ofUK LBO retail venues related to the COVID-19 closures during the period. Additionally, during the first quarter of 2019, our customers experienced strong performance compared to the first quarter of 2020 because the period pre-dated the reduction in maximum permitted bets on B2 gaming machines in theUK , effective as ofApril 1, 2019 ("the Triennial Implementation"). The recently acquired manufacturing business which we purchased as part of the NTG Acquisition forms part of the new Gaming segment. During the second quarter of 2020, the Gaming group reduced its manufacturing facilities from three to one which has enabled us to achieve significant synergy savings in terms of both staff and non-staff costs. This change is expected to result in a lower cost base and in a more efficient business moving forward. 44
Inspired received VAT-related revenue of$9.7 million and$32.5 million inJuly 2020 andNovember 2020 , respectively, from two majorUK customers. Both payments have been recorded as revenue in our results. During the period, a two-year contract extension was agreed for the supply of product, platform, content and service with a majorUK LBO customer. The agreement includes no requirement for additional machine capital expenditure and represents an improvement in our revenue share terms.
In the
In the Italian market, Inspired sold 774 existing installed VLTs to Sisal in the fourth quarter 2020 with a further 850 existing installed VLTs agreed to be sold in 2021 as part of our strategy to focus on technology and games inItaly rather than on hardware operations. During the period, Inspired sold 313 "Valor™" terminals to a number of customers inIllinois , increasing the total number of North American unit sales since launch inDecember 2019 to 429. Retail venues inIllinois were shut down in the second quarter due to COVID-19, which negatively impacted sales during this period as well as during the third and fourth quarters of 2020. InAugust 2020 , Inspired signed an agreement with theWestern Canada Lottery Corporation ("WCLC") to enter its second jurisdiction inNorth America . Inspired delivered 100 "Valor™" terminals to WCLC. We anticipate recognizing a product sale for these terminals during the second quarter of 2021. InItaly , CustomerNet Win per unit per day (in EUR) decreased by 72.8% vs the comparable period, primarily driven by the impact of COVID-19 closures, an increase in gaming tax on value played of 0.6% and the impact of card readers implemented inJanuary 2020 .
In
Across our entire estate, Customer Gross Win per unit per day (in our functional currency, GBP) decreased by £36.00, or 43.5%, primarily due to COVID-19 closures during the second and fourth quarters, which resulted in the closure of retail venues, along with the introduction of card readers and increased taxes in the Italian market. The blended participation rate increased by 0.1% to 6.5%. Gaming Segment, Twelve Months endedDecember 31, 2020 compared to Twelve Months endedDecember 31, 2019 For the Twelve-Month Period ended Variance Variance Total Organic Functional Total Dec 31, Dec 31, Variance Currency Variance 2020 2019 2020 vs 2019 % % % (In millions) Revenue: Service$ 92.2 $ 73.8 $ 18.4 12.8 % 23.1 % 25.0 % Product$ 18.3 $ 17.7 0.6 (36.3 )% 3.1 % 3.5 % Total revenue$ 110.5 $ 91.5 19.0 3.3 % 19.2 % 20.8 % Cost of sales, excluding depreciation and amortization: Cost of service (15.7 )$ (18.1 ) 2.4 (22.2 )% (14.2 )% (13.2 )% Cost of product (12.4 )$ (12.0 ) (0.4 ) (45.1 )% 2.9 % 3.3 % Total cost of sales (28.1 )$ (30.1 ) 2.0 (31.3 )% (7.4 )% (6.6 )% Selling, general and administrative expenses (24.5 )$ (29.7 ) 5.1 (38.6 )% (18.1 )% (17.3 )% Stock-based compensation (0.8 )$ (1.0 ) 0.3 (15.7 )% (9.4 )% (24.6 )%
Depreciation and amortization (27.6 )$ (30.4 )
2.8 (21.2 )% (9.5 )% (9.1 )% Net operating Income (Loss)$ 29.5 $ 0.3 $ 29.2 10,241 % 9,448 % 10,345 % Exchange Rate - $ to £ 1.30 1.28 Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions. 45 Gaming Segment Revenue
During the period, Gaming revenue increased by
Service revenue increased by$18.4 million on a reported basis. Favorable currency movements accounted for$1.4 million . On a functional currency (at constant rate) basis, Gaming Service revenue increased by$17.0 million , or 23.1%, to$92.2 million . This was driven by a$7.6 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth) and$9.4 million in organic growth. This organic growth was primarily due to the VAT-related revenue of$40.9 million . This was partly offset by a decline inUK LBO of$17.9 million primarily driven by COVID-19 closures throughout the period, and the fact that first quarter 2019 revenue was not impacted by triennial stakes and prizes changes.Italy andGreece had revenue declines of$5.9 million and$3.1 million , respectively, driven by tax and card reader changes inItaly , as well as COVID-19 closures. Product revenue increased by$0.6 million to$18.3 million on a reported basis. On a functional currency (at constant rate) basis, the revenue increase was$0.6 million , or 3.1%. This increase was driven by$6.9 million attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth), partly offset by a decline in Product sales of$6.4 million . This decrease was due to a reduction of Product sales in theUK market of$3.9 million from SSBTs (Self Service Betting Terminals),$1.0 million from "Prismatic" machines,$0.9 million from "AWP" machines and$0.7 million from "Flex Cabinets" as well as the reduction of "Sabre Hydra" sales of$1.1 million . This was partly offset by an increase in North America "Valor™"
sales of$2.6 million .
Gaming Segment Operating Income
Cost of sales (excluding depreciation and amortization) decreased by
Service cost of sales decreased by$2.4 million to$15.7 million on a reported basis, including adverse currency movements of$0.2 million . On a functional currency at constant rate basis, Service cost of sales decreased by$2.6 million , or 14.2%, driven by$4.0 million lower costs due to the decline in Service revenue related to the COVID-19 closures, partly offset by an increase of$1.5 million in costs attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth). Product cost of sales increased by$0.4 million to$12.4 million on a reported basis, which included adverse currency movements of$0.1 million . On a functional currency basis this increase was$0.3 million , due to a$5.7 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth), partially offset by a decline in Product cost of sales of$5.4 million . Gaming SG&A expense declined by$5.1 million on a reported basis. This decrease includes the impact of unfavorable currency movements of$0.2 million . On a functional currency (at constant rate) basis, Gaming SG&A decreased by$5.4 million , or 18.1%. This was driven by an$11.5 million decrease attributable to reduced staffing costs related to both staff reductions and reduced salaries implemented due to the COVID-19 closures as well as cost savings synergies. This was partially offset by an increase of$6.1 million attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth). Depreciation and amortization declined by$2.8 million on a reported basis, or 9.1%. This included the impact of unfavorable currency movements of$0.1 million . On a functional currency at constant rate basis, Gaming depreciation and amortization decreased by$2.9 million , or 9.5%. This was driven by a$6.4 million decrease due to the machines in theUK estate andItaly reaching fully depreciated status, partially offset by additional depreciation from new machines in the Greek estate as well as an increase of$3.6 million attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth).
Operating income increased by
46
Virtual Sports Segment, Twelve Months ended
We generate revenue from ourVirtual Sports segment through the licensing of our products. We receive fees in exchange for the licensing of our products, typically on a long-term contract basis, on a participation basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and other promotional costs and any relevant regulatory levies) fromVirtual Sports content placed on our customers' websites or in our customers' facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue growth for our
Virtual Sports Segment, Key Performance Indicators
For the Twelve-Month
Period ended Variance
Dec 31, Dec 31,
2020 2019 2020 vs 2019 %
Virtuals
No. of Live Customers at the end of the
period 58 60 (2 ) (3.3 )%
Average No. of Live Customers 61 62 (1 ) (2.0 )%
Total Revenue (£'m) £ 25.2 £ 26.1 £ (0.9 ) (3.5 )%
Total Revenue £'m - Retail £ 9.5 £ 16.2 £ (6.7 ) (41.3 )%
Total Revenue £'m - Online Virtuals £ 15.7 £ 10.0 £ 5.8 57.7 % 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 (£m)" represents total revenue for theVirtual Sports segment, including recurring and upfront service revenue. Total revenue is also divided between "Total Revenue (£m) - Retail," which consists of revenue earned through players wagering atVirtual Sports venues, "Total Revenue (£m) - Online Virtuals," which consists of revenue earned through players wagering onVirtual Sports online,
Virtual Sports Segment, Recurring Revenue
Set forth below is a breakdown of our
For the Twelve-Month
Period ended Variance
Dec 31, Dec 31,
2020 2019 2020 vs 2019 %
(In £ millions)
Virtual Sports Recurring Revenue
Total Virtual Sports Revenue £ 25.2 £ 26.1 £ (0.9 ) (3.5 )%
Recurring Revenue - Retail Virtuals £ 8.4 £ 14.4
£ (6.0 ) (41.8 )% Recurring Revenue - Online Virtuals £ 13.8 £ 9.1 £ 4.7 51.6 % Total Virtual Sports Long term -license amortization £ 1.5 £ 1.9 £ (0.3 ) (18.7 )% Total Virtual Sports Recurring Revenue £ 23.7 £ 25.3 £ (1.7 ) (6.6 )% Virtual Sports Recurring Revenue as a Percentage ofTotal Virtual Sports Revenue 93.9 % 97.0 % (3.0 )%
"Recurring Revenue" includes our share of revenue generated from (i) our
"Virtual Sports Long term license amortization" is the upfront license fee which is typically spread over the life of the contract
47
Virtual Sports Segment, key events that affected results for the Twelve Months
ended
Most retail territories, including theUK ,Italy ,Greece andBelgium , were in either full or partial lockdown due to COVID-19 for a portion of the year, resulting in a$7.8 million recurring revenue decline year over year. There was also a decline of$1.0 million from the unwind of historical license fees terminating in 2019 which did not recur in 2020. This decline was offset by an increase in online virtual recurring revenues of$6.1 million and an increase in project revenue of$1.6 million . Virtual Events The Virtual Grand National was broadcast inApril 2020 on prime-timeUK television to replace the live race, which was not held due to the COVID-19 closures. Over four million viewers tuned in to watch the event. The event was run as a charity event, ultimately generating over$3.0 million for the National Health Service ("NHS") COVID-19 charity from various operators. The Virtual Kentucky Derby Triple Crown Showdown race aired onMay 2, 2020 onNBC . The race featured 13 all-time great Triple Crown winners. The event was held to raise money for COVID-19 relief.
The Virtual "Greatest Ever
On
Customers InApril 2020 , Inspired launched Online Virtual Soccer, Horses and Greyhounds products with Ladbrokes Belgium which was our first launch that utilized our own Cloud platform viaAmazon Web Services .
In
During the third quarter of 2020, Online Virtuals were deployed with several GVC websites including BWIN, Sportingbet and Partypoker.
In
In
In
During 2020, Virtual Plug and Play launched with numerous RGS aggregators
including Scientific Games,
The overall number of live customers declined from 60 to 58 during the period as we re-focused our business on our highest value customers.
Products
In
OPAP subsequently launched our brand-new proprietary V-Play Basketball product
in
Our Virtual Interactive division launched V-Play Basketball and our NFL Alumni V-Play Football product withBet365 inNew Jersey . Our new V-Play Basketball product and an additional stream of V-Play Cricket were also launched with Bet365.com during the year.
In
48
For the Twelve-Month
Period ended Variance Variance
Dec 31, Dec 31, Organic Total Functional Total
2020 2019 2020 vs 2019 Growth % Currency % Growth %
(In millions)
Service Revenue $ 32.4 $ 33.4 $ (1.1 ) (3.5 )% (3.5 )% (3.2 )%
Cost of service (2.9 ) (2.6 ) (0.3 ) 9.6 % 9.6 % 9.7 %
Selling, general and
administrative
expenses (4.4 ) (6.0 ) 1.7 (28.6 )% (28.6 )% (27.7 )%
Stock-based
compensation (0.4 ) (0.6 ) 0.1 (22.1 )% (22.1 )% (22.7 )%
Depreciation and
amortization (3.7 ) (2.6 ) (1.1 ) 44.0 % 44.0 % 43.8 %
Net operating Income
(Loss) $ 21.0 $ 21.6 $ (0.7 ) (3.4 )% (3.4 )% (3.1 )%
Exchange Rate - $ to
£ 1.28 1.28
Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Virtual Sports Segment revenue.
During the period, revenue decreased by$1.1 million , or 3.2%, on a reported basis. This increase includes the impact of favorable currency movements of$0.1 million . On a functional currency (at constant rate) basis, revenue decreased by$1.2 million , or 3.5%. This decrease was driven by an$8.5 million decrease in retail revenue due to COVID-19 closures. This decline was partially offset by growth in Online Virtuals of$7.4 million .
Virtual Sports Segment operating income.
Cost of Service increased by$0.3 million to$2.9 million on a reported basis, with no impact from currency movements. This was driven by the growth of Online Virtuals, in line with the revenue increase for the period. SG&A expenses decreased by$1.7 million on a reported basis, with no impact from currency movements. This decrease was driven by staff-related cost savings from the Covid-19 closures related furlough scheme and reduction in staff salaries. Depreciation and amortization increased by$1.1 million on a reported basis, with no impact from currency movements. This increase was due to new projects going live in the period. Operating profit decreased by$0.7 million on a reported basis which included the impact of favorable currency movements of$0.1 million . On a functional currency (at constant rate) basis operating profit decreased by$0.7 million . This was primarily due to the decrease in revenues resulting from COVID-19 closures and the increase in depreciation and amortization, partly offset by the reduction in SG&A expenses. 49
Interactive Segment, Twelve Months ended
We generate revenue from our Interactive segment through the licensing of our products. We receive fees in exchange for the licensing of our products, typically on a long-term contract basis, on a participation basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and other promotional costs and any relevant regulatory levies) from Interactive content placed on our customers' websites. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract. Revenue growth for our Interactive segment is principally driven by the number of customers we have, the number of live games, the net win performance of the games and the net win percentage that we receive pursuant to our contracts
with our customers.
Interactive Segment, Key Performance Indicators
For the Twelve-Month
Period ended Variance
Dec 31, Dec 31,
2020 2019 2020 vs 2019 %
Interactive
No. of Live Customers at the end of the
period 92 54 38 70.4 %
Average No. of Live Customers 80 44 36 82.3 %
No. of Live Games at the end of the
period 208 171 37 21.6 %
Average No. of Live Games 196 162 34 21.3 %
Total Revenue (£'m) £ 10.3 £ 3.7 £ 6.7 181 % In the table above: "No. of Live Customers at the end of the period" and "Average No. of Live Customers" represent the number of customers from which there is Interactive revenue at the end of the period and the average number of customers from which there is Interactive revenue during the period, respectively. "No. of Live Games at the end of the period" and "Average No. of Live Games" represents the number of games from which there is Interactive revenue at the end of the period and the average number of games from which there is Interactive revenue during the period, respectively.
"Total Revenue (£m)" represents total revenue for the Interactive segment, including recurring and upfront service revenue.
Interactive Segment, Recurring Revenue
Set forth below is a breakdown of our Interactive recurring revenue which
consists principally of Interactive participation revenue. See "- Interactive
Segment Revenue" below for a discussion of Interactive service revenue between
the periods under review.
For the Twelve-Month
Period ended Variance
Dec 31, Dec 31,
2020 2019 2020 vs 2019 %
(In £ millions)
Interactive Recurring Revenue
Total Interactive Revenue £ 10.3 £ 3.7 £ 6.7 181 %
Total Recurring Revenue - Interactive £ 10.2 £ 3.6 £ 6.7 187 %
Interactive Recurring Revenue as a
Percentage of Total Interactive Revenue 98.9 % 96.7 %
2.2 %
Interactive Segment, key events that affected results for the Twelve Months
ended
CustomersNorth America
In
In
50Europe
The addition of the Sky Vegas brand and new customers 888 and Kindred have
performed exceptionally well during the year, with 888 launching in Casino,
Bingo,
Launches with OPAP and Stoiximan in
Content During the second quarter, our Summer blockbuster titles, Reel King Megaways and Centurion Megaways were launched, utilizing brands we obtained as part of the NTG Acquisition. Both titles have seen strong performance and contributed significantly to growth in 2020. During the year we had several seasonal content launches that benefitted from priority positioning and promotional activity from our customers. These launches include Chocolate Cashpots, Book of Independence, Book ofHalloween and three Christmas titles: Santa King Megaways, Christmas Cashpots and Santa Stacked Freespins. For the Twelve-Month Period ended Variance Variance Dec 31, Dec 31, Organic Total Functional Total 2020 2019 2020 vs 2019 Variance % Currency % Variance % (In millions) Service Revenue$ 13.3 $ 4.7 $ 8.6 116 % 181 % 182 % Cost of service (1.9 ) (0.7 ) (1.2 ) 159 % 166 % 168 % Selling, general and administrative expenses (3.9 ) (4.0 ) 0.1 (15.2 )% (3.8 )% (1.5 )% Stock-based compensation (0.3 ) (0.2 ) (0.0 ) 19.7 % 27.0 % 9.3 % Depreciation and amortization (2.3 ) (2.9 ) 0.5 (18.7 )% (18.7 )% (18.6 )% Net operating Income (Loss)$ 4.9 $ (3.1 ) $ 8.0 (177 )% (260 )% (261 )% Exchange Rate - $ to £ 1.29 1.28
Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Interactive Segment revenue. During the period, revenue increased by$8.6 million , or 182%, on a reported basis. On a functional currency at constant rate basis, revenue increased by$8.5 million , or 181%. This increase included a$3.1 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth) and$5.5 million from organic growth driven by recurring revenue growth due to the increase in online demand driven by COVID-19 closures, the addition of new customers and territories and from the consistent launch of quality content.
Interactive Segment operating income.
Cost of Service increased by$1.2 million to$1.9 million on a reported basis, with no impact from currency movements.$1.1 million of this increase was due to increased third party platform provider costs, in line with the significant revenue increase for the period.
SG&A expenses decreased by
Depreciation and amortization decreased by
Operating profit increased by$8.0 million on a reported basis. On a functional currency at constant rate basis operating profit increased by$8.0 million . This was primarily due to the increase in revenue. 51
Leisure Segment - Twelve Months ended
We generate revenue from our Leisure segment through the rental of our gaming and amusement machines. We receive rental fees for machines, typically on a long-term contract basis, on both a participation and fixed fee basis, with our newer digital pub machines typically contracted on a fixed fee basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming terminals placed in our customers' facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract. Revenue growth for our Leisure segment is principally driven by the number of customers we have, the number of gaming machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
Leisure segment, Key Performance Indicators
For the Twelve-Month
Period ended Variance
Dec 31, Dec 31,
2020 2019 2020 vs 2019 %
Leisure
End of period installed base Gaming
Machines (# of terminals) 11,667 12,383 (716 ) (5.8 )%
Average installed base Gaming Machines
(# of terminals) 12,083 12,403 (320 ) (2.6 )%
End of period installed base Other (# of
terminals) 7,193 8,368 (1,175 ) (14.0 )%
Average installed base Other (# of
terminals) 7,925 8,400 (475 ) (5.7 )%
Pub Digital Gaming Machines - Average
installed base (# of terminals) 5,772 5,413 359 6.6 %
Pub Analogue Gaming Machines - Average
installed base (# of terminals) 2,570 3,177 (607 ) (19.1 )%
MSA and Bingo Gaming Machines - Average
installed base (# of terminals)(1) 3,461 3,546 (85 ) (2.4 )%
Inspired Leisure Revenue per Gaming
Machine per week £ 29.20 £ 60.11 £ (30.91 ) (51.4 )%
Inspired Pub Digital Revenue per Gaming
Machine per week £ 32.79 £ 68.47 £ (35.68 ) (52.1 )%
Inspired Pub Analogue Revenue per Gaming
Machine per week £ 18.69 £ 42.81 £ (24.12 ) (56.3 )%
Inspired MSA and Bingo Revenue per
Gaming Machine per week £ 32.37 £ 64.83 £ (32.46 ) (50.1 )%
Inspired Other Revenue per Machine per
week £ 6.93 £ 19.85 £ (12.92 ) (65.1 )%
Total Leisure Parks Revenue (Gaming and Non Gaming) (£'m) £ 9.1 £ 4.4 £ 4.6 104 %
(1) Motorway Service Area machines
52 In the table above:
"End of period installed base Gaming" and "Average installed base Gaming" represent the number of gaming machines installed (excluding Leisure park machines) that are Category B and Category C only, from which there is participation or rental revenue at the end of the period or as an average over the period.
"End of period installed base Other" and "Average installed base Other" represent the number of all other category machines installed (excluding Leisure park machines) from which there is participation or rental revenue at the end of the period or as an average over the period.
"Revenue per machine unit per week" represents the average weekly participation or rental revenue recognized during the period.
Leisure Segment, Recurring Revenue
Set forth below is a breakdown of our Leisure recurring revenue which consists principally of Leisure participation revenue and Leisure other fixed fee revenue. See "- Leisure Segment Revenue" below for a discussion of leisure service revenue between the periods under review.
Set forth below is a breakdown of our Leisure recurring revenue.
For the Twelve-Month
Period ended Variance
Dec 31, Dec 31,
2020 2019 2020 vs 2019 %
(In £ millions)
Leisure Recurring Revenue
Total Leisure Revenue £ 33.7 £ 18.5 £ 15.2 82.2 %
Total Leisure Recurring Revenue £ 31.6 £ 17.5 £ 14.0 80.2 % Leisure Recurring Revenue as a Percentage of Total Leisure Revenue 93.5 % 94.6 %
(1.0 )%
Leisure Segment, key events that affected results for the Twelve Months ended
During the period, Revenue per Gaming Machine per week declined by 51.4%. This decline is almost entirely due to shutdowns and tier restrictions in place across all retail venues due to the COVID-19 closures. Other Revenue per Machine per week was impacted more severely, with revenue declining by 65.1% due to social distancing measures affecting space availability. Gaming machine performance was impacted across all sectors and products within the Leisure segment with Pub Digital Revenue per Gaming Machine declining by 52.1%, Pub Analogue Revenue per Gaming Machine declining by 56.3% and MSA and Bingo Revenue per Gaming Machine declining by 50.1% During periods when venues were allowed to re-open, Revenue per Gaming Machine per week performed at approximately 63.6% of prior year average, with reductions caused by ongoing social distancing measures. Revenue from Leisure Parks increased by £4.6 million in the period, largely due to revenue representing a full year in 2020 compared to 3 months for 2019. On a proforma basis revenue declined by approximately £16.6 million, or 64.6%, almost entirely due to COVID-19 closures and restrictions that severely limited the ability of Leisure Parks to open at all and, when they could, restricted the number of machines that could be switched on and the number of people that
could enter the premises. During the year a limited reduction in installed gaming machine base occurred, with a 5.8% decline to 11,667 terminals installed. The reduction in machines largely related to lower margin Category C machines in pubs and MSAs.
The percentage of installed gaming machine base that were digital terminals increased to 72.2% of the total by the end of 2020, an increase from 66.2% at the end of 2019.
During the period, we signed five-year supply deals with two of our main Motorway Service Area customers, including Moto, signedDecember 2020 , and Welcome Break, signedOctober 2020 . We also signed a contract extension with three of our keyLeisure Park customers, including two of them by 18 months and one by two years, as well as contract extensions with two significant Pub customers for 12 and 18 months, respectively. 53
Leisure Segment, Twelve Months ended
For the Twelve-Month
Period ended Variance Variance
Dec 31, Dec 31, Organic Total Functional Total
2020 2019 2020 vs 2019 Growth % Currency % Growth %
(In millions)
Revenue:
Service $ 40.8 $ 22.6 $ 18.3 (64.4 )% 80.1 % 81.0 %
Product 2.8 1.2 1.5 (20.9 )% 120 % 123 %
Total revenue 43.6 23.8 19.8 (62.1 )% 82.2 % 83.1 %
Cost of sales,
excluding
depreciation and
amortization:
Cost of service (9.6 ) (4.0 ) (5.6 ) (46.3 )% 138 % 139 %
Cost of product (2.0 ) (0.9 ) (1.1 ) (6.1 )% 127 % 130 %
Total cost of sales (11.6 ) (4.9 ) (6.7 ) (39.1 )% 136 % 138 %
Selling, general and
administrative
expenses (30.8 ) (12.7 ) (18.0 ) (32.6 )% 141 % 141 %
Stock-based
compensation (0.1 ) (0.1 ) (0.1 ) 101 % 182 % 162 %
Depreciation and
amortization (16.9 ) (3.8 ) (13.1 ) (3.2 )% 346 % 346 %
Net operating Income
(Loss) $ (15.8 ) $ 2.3 $ (18.1 ) (368 )% (775 )% (772 )%
Exchange Rate - $ to
£ 1.29 1.29
Note: Exchange rate in the table is calculated by dividing the USD total revenue
by the GBP total revenue, therefore this could be slightly different from the
average rate during the period depending on timing of transactions.
Leisure Segment Revenue
During the period, revenue increased by
Service revenue increased by$18.3 million on a reported basis. Favorable currency movements accounted for$0.2 million . On a functional currency at constant rate basis, Leisure Service revenue increased by$18.1 million , or 80.1%, to$40.8 million . This was driven by the addition of$32.6 million attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth). This is partly offset by a reduction of$14.5 million driven by COVID-19 closures in the fourth quarter. Product revenue increased by$1.5 million to$2.8 million on a reported basis. On a functional currency at constant rate basis, the revenue increase was$1.5 million or 120%. This increase was driven by$1.8 million attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth), partly offset by a decline in Product sales of$0.3 million . 54
Leisure Segment Operating Income
Cost of sales (excluding depreciation and amortization) increased by
Service cost of sales increased by$5.6 million to$9.6 million on a reported basis. On a functional currency at constant rate basis, Service cost of sales increased by$5.5 million or 138%, driven by an increase of$7.4 million in Service costs attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth), offset by$1.9 million of lower Service costs driven by the reduction in Service revenue driven by the COVID-19 closures. Product cost of sales increased by$1.1 million to$2.0 million on a reported basis and on a functional currency at constant rate basis. This was primarily due to an increase in Product cost of sales attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth) of$1.2 million . SG&A expenses increased by$18.0 million on a reported basis to$30.8 million , which included the impact of unfavorable currency movements of$0.1 million . On a functional currency at constant rate basis SG&A expenses increased by$17.9 million or 141%. This increase was driven by a$22.0 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth), partly offset by a reduction of$4.1 million from staff-related cost savings generated from synergies and use of the government furlough scheme. Depreciation and amortization increased by$13.1 million on a reported basis to$16.9 million . This included an impact of favorable currency movements of$0.1 million . On a functional currency at constant rate basis, Leisure depreciation increased by$13.2 million or 346%. This was driven by a$13.3 million increase in depreciation and amortization attributable to the addition of the NTG Acquisition for the nine months of 2020 endedSeptember 30 (not reflected in organic growth).
Operating income decreased by
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 warrant or earnout liabilities and income and expenditure in relation to legacy portions of the business (being those portions where trading no longer occurs) including closed defined benefit pension schemes. Additional adjustments are made for items considered outside the normal course of business, including (1) restructuring costs, which include charges attributable to employee severance, management changes, restructuring, dual running costs, costs related to facility closures and integration costs, (2) merger and acquisition costs and (3) gains or losses not in the ordinary course of business. This does not include any adjustments related to COVID-19. 55 We believe Adjusted EBITDA, when considered along with other performance measures, is a particularly useful performance measure, because it focuses on certain operating drivers of the business, including sales growth, operating costs, selling and administrative expense and other operating income and expense. We believe Adjusted EBITDA can provide a more complete understanding of our operating results and the trends to which we are subject, and an enhanced overall understanding of our financial performance and prospects for the future. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income or loss, because it does not take into account certain aspects of our operating performance (for example, it excludes non-recurring gains and losses which are not deemed to be a normal part of underlying business activities). Our use of Adjusted EBITDA may not be comparable to the use by other companies of similarly termed measures. Management compensates for these limitations by using Adjusted EBITDA as only one of several measures for evaluating our operating performance. In addition, capital expenditures, which affect depreciation and amortization, interest expense, and income tax benefit (expense), are evaluated separately by management. Functional Currency at Constant rate. Currency impacts discussed have been calculated as the current-period average GBP: USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP: USD rate, as a proxy for functional currency at constant rate movement.
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
Dec 31, Dec 31,
2020 2019
(In millions)
Net loss $ (32.4 ) $ (41.1 )
Items Relating to Legacy Activities:
Pension charges (1) 0.6 0.6
Items outside the normal course of business:
Costs of group restructure (2) 0.8 3.3
Acquisition and integration related transaction expenses (3) 7.0 6.7
Impairment on interest in equity method investee (4) 0.7 -
Italian tax related costs relating to prior years - 0.4
Stock-based compensation expense 4.8
9.0
Depreciation and amortization 52.3 42.0
Interest Income (0.6 ) (0.1 )
Interest Expense 30.6 27.8Change in fair value of earnout liability - 2.3 Change in fair value of derivative liability - (3.0 ) Change in fair value of warrant liability 3.2 4.1 Other finance expenses / (income) 4.7
(3.2 )
Income tax 0.4 0.1
Adjusted EBITDA $ 72.1 $ 49.0
Adjusted EBITDA £ 55.5 £ 38.2
Exchange Rate - $ to £ (5) 1.30 1.28
56
Reconciliation to Adjusted EBITDA by segment for the Twelve Months ended
December 31, 2020
For theTwelve-Month Period ended
Dec 31, 2020
Virtual
Total Gaming Sports Interactive Leisure Corporate
(In millions)Net Income/(loss)$ (32.4 ) $ 29.5 $ 21.0
$ 4.9
Items Relating to Legacy Activities: Pension charges (1) 0.6 0.6 Items outside the normal course of business: Costs of group restructure (2) 0.8 0.8 Acquisition and integration related transaction expenses (3) 7.0 7.0 Impairment on interest in equity method investee(4) 0.7 0.7 Italian tax related costs relating to prior years (5) - - Stock-based compensation expense 4.8 0.8 0.4
0.3 0.1 3.2
Depreciation and amortization 52.3 27.6 3.7 2.3 16.9 1.8
Interest Income (0.6 ) (0.6 )
Interest Expense 30.6 30.6
Change in fair value of earnout
liability - -
Change in fair value of derivative
liability - -
Change in fair value of warrant
liability 3.2 3.2
Other finance expenses / (income) 4.7
4.7
Income tax 0.4 0.4
Adjusted EBITDA $ 72.1 $ 57.9 $ 25.1 $ 7.5 $ 1.3 $ (19.7 )
Adjusted EBITDA £ 55.5
Exchange Rate - $ to £ (6) 1.30
Note: Certain unallocated corporate function costs have not been allocated to the Company's reportable operating segments because these costs are not allocable and to do so would not be practical, these are shown in the Corporate category. 57 Reconciliation to Adjusted EBITDA by segment for the Twelve Months endedDecember 31, 2019 For the Twelve-Month Period ended Dec 31, 2019 Virtual Total Gaming Sports Interactive Leisure Corporate (In millions) Net Income/(loss)$ (41.1 ) $ 0.3 $ 21.6 $ (3.1 ) $ 2.3 $ (62.2 ) Items Relating to Legacy Activities: Pension charges (1) 0.6 0.6 Items outside the normal course of business: Costs of group restructure (2) 3.3 1.1 0.1 2.1 Acquisition and integration related transaction expenses (3) 6.7 6.7 Impairment on interest in equity method investee(4) - - Italian tax related costs relating to prior years (5) 0.4 0.4 - Stock-based compensation expense 9.0 1.0 0.6
0.2 0.1 7.1
Depreciation and amortization 42.0 30.4 2.6 2.9 3.8 2.3
Interest Income (0.1 ) (0.1 )
Interest Expense 27.8 27.8
Change in fair value of earnout
liability 2.3 2.3
Change in fair value of derivative
liability (3.0 ) (3.0 )
Change in fair value of warrant
liability 4.1 4.1
Other finance expenses / (income) (3.2 )
(3.2 )
Income tax 0.1 0.1
Adjusted EBITDA $ 49.0 $ 32.8 $ 25.2 $ 0.1 $ 6.2 $ (15.3 )
Adjusted EBITDA £ 38.2
Exchange Rate - $ to £ (5) 1.28
Notes to EBITDA tables above:
(1) "Pension charges" are profit and loss charges included within selling,
general and administrative expenses, relating to a defined benefit scheme
which was closed to new entrants in 1999 and to future accrual in 2010. As
well as the amortization of net loss, the figure also includes charges
relating to the
pension scheme) and a small amount of associated professional services
expenses. These costs are included within Corporate Functions.
(2) "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.
(3) 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, change in fair value of warrant liability and other finance
income.
(4) In
interest in
million being written off.
(5) "Italian tax related costs relating to prior years invoicing" relate to VAT
charges and associated costs, relating to prior years, imposed on our Virtual
Sports segment following changes in interpretation of legislation and an
ongoing VAT audit in line with prior years disclosure. (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.
58
Liquidity and Capital Resources
Year ended
12 Months ended Variance
Dec 31, Dec 31, 2020 to
2020 2019 2019
(in millions)
Net loss $ (32.4 ) $ (41.1 ) $ 8.7
Amortization of debt fees 3.4 9.0 (5.6 )
Change in fair value of derivative, warrant and
earnout liabilities and stock-based compensation
expense 8.9 12.4 (3.5 )
Impairment expense 0.7 0.0 0.7
Foreign currency translation on senior bank debt
and cross currency swaps 5.6 (2.8 ) 8.4
Depreciation and amortization (incl RoU assets) 55.9 43.0 12.9
Other net cash generated by operating activities 10.8 10.2 0.6
Net cash provided by operating activities 52.9 30.7 22.2
Net cash used in investing activities (29.9 ) (133.4 ) 103.5
Net cash (used)/generated by financing activities (8.2 ) 113.5 (121.7 )
Effect of exchange rates on cash 3.2 2.3 0.9
Net increase in cash and cash equivalents $ 18.0 $ 13.1 $ 4.9 Net cash provided by operating activities.
For the year ended
Amortization of debt fees decreased by$5.6 million to$3.4 million . The current year's non-cash interest expense was related to amortization of debt fees incurred in relation to the business refinancing inOctober 2019 . The prior year's expense was related to the amortization of debt fees incurred in relation to the business refinancing inOctober 2019 and inAugust 2018 . The remainder of debt fees relating to theAugust 2018 refinancing were amortized inOctober 2019 resulting in a one-off amortization charge of$7.3 million . Change in fair value of derivative, warrant and earnout liabilities and stock-based compensation expense reduced by$3.5 million , from an inflow of$12.4 million to an inflow of$8.9 million . Movements in the market value of the stock price in the year endedDecember 31, 2019 resulted in a$2.3 million higher earnout inflow. There was also a$4.3 million higher inflow relating to stock-based compensation expense in the year endedDecember 31, 2019 . These were offset by a$3.9 million movement relating to cross-currency swaps. OnMarch 25, 2019 , the shares relating to the earnout liability were issued resulting in no further inflows or outflows after this date. The expense relating to the change in the fair value of the warrant liability reduced by$0.9 million in the year to$3.2 million .
Foreign currency translation on senior bank debt and cross currency swaps
following the refinancing on
Depreciation and amortization increased by$12.9 million to$55.9 million with increases of$8.0 million in depreciation and$3.3 million in development costs and licenses following the NTG Acquisition. In addition, a full year expense of$3.6 million was incurred in the year endedDecember 31, 2020 , relating to the amortization of Right of Use assets under ASC842, an increase of$2.6 million over the year endedDecember 31, 2019 when the expense only incurred in the final quarter of that year. Other net cash generated by operating activities increased by$0.6 million , to a$10.8 million inflow despite the significant impact in the current year of the COVID-19 closures. Movements in trading levels generated a$10.2 million benefit in current taxes with further favorable movements in deferred revenue and accruals of$2.0 million and$3.7 million , respectively. These were partly offset by adverse movements in accounts receivable of$1.4 million , accounts payable$11.7 million and inventory$0.7 million . Throughout the year endedDecember 31, 2020 , and especially upon the outbreak of the COVID-19 closures, management actively managed our cash levels to seek to optimize our liquidity position. Included within net cash provided by operating activities were$41.0 million of receipts relating to VAT reclaims and$7.9 million of payments relating to transaction and integration expenses and$1.0 million of payments relating to restructuring costs. This compares to$6.1 million relating to transaction expenses and$3.3 million relating to restructuring costs in the prior year. There were no receipts related to VAT reclaims in the prior year. 59
Net cash used in investing activities.
Net cash used in investing activities decreased by$103.5 million to$29.9 million in the year endedDecember 31, 2020 . The year endedDecember 31, 2019 included a payment of$105.9 million in respect of the NTG Acquisition. During the year endedDecember 31, 2020 , we increased capital spending by$1.8 million , largely as a result of the addition of the NTG Acquisition for the full year, compared with only 3 months during the prior year. Capital spending during 2020 was reduced significantly from planned levels as a direct consequence of the COVID-19 closures. Net cash used by financing activities. During the year endedDecember 31, 2020 , net cash used by financing activities was$8.2 million , compared to a$113.5 million inflow in the year endedDecember 31, 2019 . Repayment of all amounts drawn on our revolver during the year endedDecember 31, 2020 resulted in an outflow of$4.2 million . Further outflows in the year related to finance lease payments of$0.9 million and a$3.1 million payment of lender fees associated with the changes made to the debt terms and covenant levels as a result of the COVID-19 closures. The year endedDecember 31, 2019 included a net debt inflow of$111.1 million plus a$2.8 million increase in the level of revolver drawn offset by$0.5 million of finance lease payments, the result of the NTG Acquisition and subsequent refinancing. Funding Needs and Sources To fund our obligations we have relied historically on a combination of cash flows provided by operations and the incurrence of additional debt or the refinancing of existing debt. As ofDecember 31, 2020 , we had liquidity of$47.1 million in cash and cash equivalents and a further$27.3 million of an undrawn revolver facility. This compares to$29.1 million of cash and cash equivalents as atDecember 31, 2019 and a further$23.8 million of an undrawn revolver facility. We had a working capital inflow of$10.9 million for the year endedDecember 31, 2020 , compared to a$10.9 million inflow for the year endedDecember 31, 2019 . The level of our working capital surplus or deficit varies with the level of machine production we are undertaking and our capitalization as well as the seasonality evident in some of the businesses purchased as part of the NTG Acquisition. 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 which have been seen during 2020 following the COVID-19 closures, can result in significant working capital volatility. In periods of low activity, our working capital volatility is reduced. Working capital is reviewed and managed with the aim of ensuring that current liabilities are covered by the level of cash held and the expected level of short-term receipts. Some of our business operations require cash to be held within the machines. As ofDecember 31, 2020 ,$1.5 million of our$47.1 million of cash and cash equivalents were held as operational floats within the machines. In addition, we held a further$7.2 million of ring-fenced cash. Management currently believes that despite the reduced trading levels caused by the COVID-19 closures, the Company's cash balances on hand, cash flows expected to be generated from operations, the refinancing of the business following the NTG Acquisition inOctober 2019 and the ability to control and defer capital projects will be sufficient to fund the Company's net cash requirements throughMarch 2022 . We routinely review and explore financing alternatives to fund the Company's ongoing activities. 60 Long Term and Other Debt December 31, December 31, 2020 2019 (In millions) Cash held £ 34.5$ 47.1 £ 22.0$ 29.1 Revolver drawn 0.0 0.0 (2.0 ) (2.6 ) Original principal senior debt (229.6 ) (313.3 ) (216.5 ) (286.0 ) Cash interest accrued (4.9 ) (6.8 ) (4.2 ) (5.5 ) Finance lease creditors (0.6 ) (0.8 ) (0.1 ) (0.1 ) Total £ (200.6 )$ (273.8 ) £ (200.8 )$ (265.2 )
See Note 13 Long Term and Other Debt of the Financial Statements for detail of the debts held during 2019 and 2020.
Debt Covenants
Under our debt facilities in place as ofDecember 31, 2020 andDecember 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 to be tested at quarterly intervals commencing for the period endingJune 30, 2020 and capital expenditure is tested annually commencing onDecember 31, 2019 .
Prior to reaching our first leverage covenant test on
There were no breaches of the debt covenants in the periods ended
Liens and Encumbrances
As of
Contractual Obligations
As of
Contractual Obligations (in Less than More than millions) Total 1 yr 1-3 years 3-5 years 5 yrs Operating activities Interest on long term debt$ 108.5 $ 31.8 $ 51.0 $ 25.7 $ - Financing activities Senior bank debt - principal repayment 313.3 - - 313.3 - Finance lease payments 0.8 0.6 0.2 - - Operating lease payments 12.8 3.6 4.4 2.4 2.4 Interest on non-utilisation fees 2.1 0.5 1.1 0.5 - Total$ 437.5 $ 36.5 $ 56.7 $ 341.9 $ 2.4
Off-Balance Sheet Arrangements
As of
61 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.
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