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 herein and in our annual report on Form 10-K for the fiscal year endedDecember 31, 2020 . 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 . COVID-19 Update Governments in all of the major jurisdictions in which our land-based customers operate have now reopened land-based venues. As ofApril 12, 2021 , in theUnited Kingdom , licensed betting offices inEngland andWales have reopened with certain restrictions including operating two of four gaming machines per venue, limited dwell time of 15 minutes, as well as a maximum of two visits per day per patron and an8:00pm curfew. These restrictions remained in place untilMay 17, 2021 . Gaming machines in pubs, holiday parks, motorway services, Scottish betting offices and adult gaming centers across theUnited Kingdom reopened onMay 17, 2021 , with social distancing restrictions in place. All social distancing restrictions were removed inEngland as ofJuly 19, 2021 . As ofAugust 9, 2021 , no restrictions remain in theUnited Kingdom . There remains an element of social distancing in venues inGreece and inItaly , there are restrictions in place that state only fully vaccinated people can enter our venues which came into place inItaly onAugust 20, 2021 , and inGreece onSeptember 13, 2021 . It remains uncertain as to whether and when further restrictions or closures could happen in each jurisdiction and how long they may last.
Segment Reporting Recharacterizations
For full information on this, see Part IV, Item 15 of the Annual Report on Form
10-K for the year ended
Revenue We generate revenue in four principal ways: i) on a participation basis, ii) on a fixed rental fee basis, iii) through product sales and iv) through software license fees. Participation revenue generally includes a right to receive a share of our customers' gaming revenue, typically as a share of net win but sometimes as a share of the handle or "coin in" which represents the total
amount wagered.Geographic Range
Geographically, a majority of our revenue is derived from, and majority of our non-current assets are attributable to ourUK operations. The remainder of our revenue is derived from, and non-current assets attributable to,Greece ,Canada ,Italy and the rest of the world. For the three months endedSeptember 30, 2021 , we earned approximately 76% of our revenue in theUK , 8% inGreece and the remaining 16% across the rest of the world. During the three months endedSeptember 30, 2020 , we earned approximately 78%, 10% and 12% of our revenue in those regions, respectively. For the nine months endedSeptember 30, 2021 , we earned approximately 70% of our revenue in theUK , 9% inGreece and the remaining 21% across the rest of the world. During the nine months endedSeptember 30, 2020 , we earned approximately 73%, 10% and 17% of our revenue in those regions, respectively.
As of
22 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 three months endedSeptember 30, 2021 , we derived approximately 24% of our revenue from sales to customers outside theUK , compared to 22% during the three months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 , we derived approximately 30% of our revenue from sales to customers outside theUK , compared to 27% during the nine months endedSeptember 30, 2020 . 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 results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). During the three-month periods endedSeptember 30, 2021 andSeptember 30, 2020 , the average GBP:USD rates were 1.38 and 1.29, respectively. During the nine-month periods endedSeptember 30, 2021 andSeptember 30, 2020 , the average GBP:USD rates were 1.38 and 1.28, respectively.
The following discussion and analysis of our results of operations has been organized in the following manner:
? a discussion and analysis of the Company's results of operations for the
three-month period and nine-month periods ended
to the same periods in 2020;
? a discussion and analysis of the results of operations for each of the
Company's segments (Gaming,
three-month period and nine-month periods ended
to the same periods in 2020, including KPI analysis.
In the discussion and analysis below, certain data may vary from the amounts presented in our consolidated financial statements due to rounding.
For all reported variances, refer to the overall company and segment tables shown below. All variances discussed in the overall company and segment results are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates. 23 Overall Company Results
Three and Nine Months ended
For the Three-Month Period ended For the Nine-Month Period ended
Unaudited Unaudited Unaudited Unaudited
September 30 , September 30 , Variance September 30 , September 30 , Variance
(In millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Variance on
Variance a Variance
Attributable Functional Total Functional Total Attributable Variance on a Total Functional Total
to Currency currency Currency Reported to Currency Functional Currency Reported
Movement basis Variance % Variance % Movement currency basis Variance % Variance %
Revenue:
Service $ 68.7 $ 55.6 $ 4.5 $ 8.6 15.4 % 23.4 % $ 123.3 $ 113.7 $ 9.3 $ 0.3 0.3 % 8.4 %
Product 8.9 4.5 0.6 3.8 85.7 % 97.7 % 18.6 14.3 1.3 2.9 20.6 % 29.9 %
Total revenue 77.6 60.1 5.0 12.4 20.6 % 29.0 % 141.9 128.0 10.6 3.2 2.5 % 10.8 %
Cost of Sales, excluding depreciation and amortization:
Cost of Service (13.8 ) (10.8 ) (0.9 ) (2.1 ) 19.0 % 27.1 % (23.9 ) (21.8 ) ) (1.7 ) (0.4 ) 1.7 % 9.6 %
Cost of Product (4.7 ) (3.3 ) (0.3 ) (1.1 ) 34.5 % 43.7 % (10.6 ) (9.8 ) ) (0.8 ) 0.0 (0.4 )% 8.1 %Selling, general and administrative expenses
(29.2 ) (21.5 ) (1.8 ) (5.8 ) 27.2 % 35.5 % (68.1 ) (60.7 ) ) (5.3 ) (2.1 ) 3.5 % 12.3 %
Stock-based compensation (3.8 ) (1.1 ) (0.2 ) (2.4 ) 221.4 % 242.9 % (8.6 ) (3.1 ) ) (0.7 ) (4.8 ) 154.7 % 177.7 %Acquisition and integration related transaction expenses - (1.2 ) (0.1 ) 1.2 (105.6 )% (100.0 )% (1.5 ) (5.6 ) (0.3 ) 4.4 (77.0 )% (73.8 )% Depreciation and amortization (11.2 ) (14.0 ) (0.7 ) 3.5 (24.8 )% (20.0 )% (36.2 ) (39.9 ) (3.1 ) 6.7 (16.7 )% (9.2 )% Net operating Income (Loss) 14.9 8.2 1.1 5.7 68.0 % 82.1 % (7.0 ) (12.9 ) (1.3 ) 7.1 (53.0 )%
(45.3 )%
Other income (expense)
Interest income 0.1 0.1 (0.0 ) 0.0 11.4 % (20.9 )% 0.2 0.5 ) 0.0 (0.3 ) (62.4 )% (58.5 )%
Interest expense (7.3 ) (8.3 ) (0.5 ) 1.5 (17.6 )% (12.0 )% (38.1 ) (22.5 ) ) (3.2 ) (12.4 ) 54.7 % 69.4 % Change in fair value of warrant liability 17.3 0.2 1.1 16.0 7526.4 % 8060.4 % 3.8 6.1 ) 0.0 (2.3 ) (38.2 )% (37.7 )% Other finance income (expense) 0.3 0.3 0.0 (0.0 ) (5.4 %) 1.0 % 5.5 (5.9 ) 0.2 11.2 (183.8 )% (193.5 )% Loss from equity method investee - - - - NA NA - (0.5 ) (0.0 ) 0.5 (100.0 )% (100.0 )% Total other income (expense), net 10.4 (7.7 ) 0.6 17.4 (228.1 )% (236.0 )% (28.6 ) (22.3 ) ) (3.0 ) (3.3 ) 14.7 % 28.1 % Net Income (loss) from continuing operations before income taxes 25.3 0.5 1.7 23.1 3419.8 % 4742.9 % (35.6 ) (35.2 ) ) (4.2 ) 3.8 (10.4 )% 1.3 % Income tax expense (0.3 ) (0.0 ) (0.0 ) (0.2 ) 626.1 % 646.0 % 0.1 (0.3 ) 0.0 0.4 (117.4 )%
(113.7 )% Net Income (Loss) $ 25.0 $ 0.5 $ 1.7$ 22.8 3571.8 % 5047.4 % $ (35.5 ) $
(35.5 ) ) $ (4.2 ) $ 4.1 (11.4 )%
0.1 %
Exchange Rate - $ to £ 1.38 1.29 1.38 1.28
24
See "Segments Results" below for a more detailed explanation of the significant
changes in our components of revenue within the individual segment results of
operations.
Revenue
Consolidated Reported Revenue by Segment
[[Image Removed]] [[Image Removed]]
For the three and nine months ended September 30, 2021 , revenue on a functional
currency (at constant rate) basis increased by $12.4 million and $3.2 million ,
or 20.6% and 2.5%, respectively. The three-month increase included an increase
from Leisure of $13.8 million , Interactive of $2.2 million and Virtual Sports of
$1.6 million , partly offset by a decrease in Gaming of $5.1 million , driven by
$9.4 million VAT-related revenue in the prior period. The nine-month increase
included an increase from Leisure of $6.9 million and Interactive of $6.5
million , offset by decreases from Gaming of $9.5 million and Virtual Sports of$0.7 million .
Cost of Sales, excluding depreciation and amortization
Cost of Sales, excluding depreciation and amortization for the three and nine months endedSeptember 30, 2021 , increased by$3.2 million and$0.3 million , or 22.7% and 31.0% respectively. Of the three-month increase,$2.1 million was attributable to cost of Service and$1.1 million was attributable to cost of Product sales. Of the nine-month increase,$0.4 million was attributable to
cost of Service.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses for the three and nine
months ended September 30, 2021 increased by $5.8 million and $2.1 million , or
27.2% and 3.5% respectively. The three-month increase was driven by all staff
returning from furlough for the whole period ($3.6 million ), additional other
employee costs ($0.4 million ), additional IT costs due to returning staff ($0.3
million ) and lower labor capitalization ($0.3 million ). The nine-month increase
was driven by staff returning from furlough and additional distribution costs as
markets and retail venues reopened. $1.2 million of the additional cost in the
nine-month period was for the provision following a settlement with the Italian
Tax Authorities in respect of an audit of the Italian Branch of Inspired Gaming
(International) Limited for the period 2015-2017 in respect of the historicVAT treatment of supplies. 25 Stock-based compensation During the three months and nine months endedSeptember 30, 2021 , the Company recorded an expense of$3.8 million and$8.6 million respectively, with respect to outstanding awards. The expense for the three-month and nine-month periods included$1.2 million and$4.1 million respectively, related to awards made under the 2018 Plan,$2.4 million and$4.2 million (including$1.4 million of upfront recognition) respectively related to awards made under the 2021 Plan and$0.2 million related to the vesting of awards from the 2018 Plan. The charge for stock-based compensation for the three months and nine months endedSeptember 30, 2020 , was$1.1 million and$3.1 million , respectively. The expenses for the three-month and nine-month periods included$1.1 million and$2.9 million , respectively, that were related to awards made under the 2018 Plan The nine-month period endedSeptember 30, 2020 , also included$0.2 million , related to costs from awards made under a 2016 long term incentive plan.
Acquisition and integration related transaction expenses
Acquisition and integration related transaction expenses decreased for both the three-month and nine-month periods by$1.2 million to zero and by$4.4 million to$1.5 million , respectively. Both the 2021 and 2020 expenses were primarily integration costs in relation to the NTG acquisition.
Depreciation and amortization
Depreciation and amortization decreased for both the three-month and nine-month periods by$3.5 million and$6.7 million respectively, driven primarily by a decrease in Gaming and Leisure due to certain assets being fully written down. Net operating income/(loss) During the three-month period, net operating income was$14.9 million , an increase of$5.7 million . This was attributable to the increase in revenue, despite the$9.2 million of VAT-related income recorded in the prior period. The increase was due to retail venues across the majority of the business being open for the entire period, with social distancing restrictions being removed, growth in Leisure driven by Leisure parks, as well as growth in Interactive and Online Virtuals. During the nine-month period, net operating loss was$7.0 million which improved by$7.1 million . This was attributable to the increase in our Interactive and Online Virtuals segments as well as our Leisure segment, as well as the decrease in acquisition and integration related transaction expenses and depreciation and amortization. Interest expense Net interest expense decreased by$1.5 million in the three-month period, this decrease was due to a$0.6 million reduction in the level of debt fee amortization after the refinance inMay 2021 , a$0.2million lower revolver interest charge and a$0.5 million impact from currency movement. In the nine-month period net interest expense increased by$12.7 million . This was driven by a$14.4 million increase due to the write-off of previously capitalized debt fees following the refinancing inMay 2021 and a$2.0m higher debt interest charge, offset by a$3.2 million currency movement.
Change in fair value of warrant liability
Change in fair value of warrant liability for the three and nine months endedSeptember 30, 2021 , resulted in a$17.3 million and$3.8 million credit respectively. The credit for both periods was related to changes in liability accounting pursuant to the statement made by theOffice of Chief Accountant of the SEC , released onApril 12, 2021 , informing market participants that warrants issued by special purpose acquisition companies may require classification as a liability of the entity measured at fair value, with changes in fair value each period reported in earnings. The credits for the three-month and nine-month periods reflect the decrease in the value of the warrants, driven by a decrease in the Company's share price and a decrease in the time to warrant expiry, respectively. During the three-month period, the Company's share price decreased from$12.75 onJune 30, 2021 , to$11.70 onSeptember 30, 2021 . Although the Company's share price increased during the nine-month period, the time to expiry for the warrants decreased from approximately one year to three months which drove the decrease in the value of the warrants. 26 Other finance income Other finance income for the three and nine months endedSeptember 30, 2021 , resulted in a$0.3 million credit and a$5.5 million credit, respectively. The three-month credit was in line with the prior year but the nine month credit was$11.4 million better than the corresponding period in the prior year due to movements in the retranslation with respect to the principal balance of our senior debt facilities in place at that time. Income tax expense Our effective tax rate for the three and nine months endedSeptember 30, 2021 , was (1.1%) and (0.3%), respectively. Our effective tax rate for the three and nine months endedSeptember 30, 2020 , was (6.9%) and 0.9%, respectively. Net Income/ (loss)
During the three-month period, net income was$25.0 million , an increase of$22.8 million , primarily due to the increase in net operating income ($5.7 million ), the increase in credit of the change in fair value of warrant liability ($16.0 million ) and a decrease in net interest expense ($1.5 million ). During the nine-month period, net loss was$35.5 million , an improvement of$4.1 million , primarily due to the increase in net operating income ($7.1 million ) and the increase in other finance income ($11.2 million ), partly offset by the increase in net interest expense ($12.7 million ).
Segment Results (for the three and nine months ended
Gaming
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, Key Performance Indicators
For the Three-Month Period ended For the Nine-Month Period ended
Unaudited Unaudited Variance Unaudited Unaudited Variance
Sept 30, Sept 30, 2021 vs 2020 Sept 30, Sept 30, 2021 vs 2020
Gaming 2021 2020 % 2021 2020 %
End of period installed
base (# of terminals) 32,236 31,725 511 1.6 % 32,236 31,725 511 1.6 %
Total Gaming - Average
installed base (# of
terminals) 32,204 32,117 87 0.3 % 31,860 32,148 (288 ) (0.9 )%
Participation - Average
installed base (# of
terminals) 29,140 30,188 (1,048 ) (3.5 )% 29,295 30,297 (1,002 ) (3.3 )%
Fixed Rental - Average
installed base (# of
terminals) 3,064 1,929 1,135 58.8 % 2,565 1,851 714 38.6 %
Service Only - Average
installed base (# of
terminals) 21,439 21,377 63 0.3 % 21,564 21,386 178 0.8 %
Customer Gross Win per unit
per day (1) (2) £ 76.5 £ 70.4 £ 6.1 8.6 % £ 41.5 £ 49.0 £ (7.5 ) (15.4 )%
Customer Net Win per unit
per day (1) (2) £ 56.3 £ 51.4 £ 4.9 9.6 % £ 31.2 £ 36.0 £ (4.8 ) (13.3 )%
Inspired Blended
Participation Rate 6.5 % 6.7 % (0.2 )% (2.8 )% 6.3 % 6.6 % (0.3 )% (4.8 )%
Inspired Fixed Rental
Revenue per Gaming Machine
per week £ 37.7 £ 37.9 £ (0 ) N/A £ 21.0 £ 27.2 £ (6.2 ) (22.9 )%
Inspired Service Rental
Revenue per Gaming Machine
per week £ 4.5 £ 4.5 £ (0.1 ) (2.0 )% £ 3.1 £ 3.1 £ 0.0 0.6 %
Gaming Long term license
amortization (£'m) £ 1.3 £ 1.3 £ (0.1 ) (4.0 )% £ 3.8 £ 3.8 £ (0.0 ) (0.7 )%
Number of Machine sales 1,747 363 1,384 381.3 % 2,625 1,561 1,064 68.2 %
Average selling price per
terminal £ 3,071 £ 6,422 £ (3,351 ) (52.2 )% £ 4,141 £ 4,851 £ (710 ) (14.6 )%
(1) Includes all SBG terminals in which the company takes a participation revenue
share across all territories
27
Please refer to our Annual Report on Form 10-K for the year ended
Gaming, 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 Three-Month Period ended For the Nine-Month Period ended
Unaudited Unaudited Variance Unaudited Unaudited Variance
September 30, September 30, 2021 vs 2020 September 30, September 30, 2021 vs 2020(In £ millions) 2021 2020 % 2021 2020 % Gaming Recurring Revenue Total Gaming Revenue £ 20.0 £ 24.0 £ (4.0 ) (16.7 )% £ 39.4 £
46.8 £ (7.4 ) (15.9 )%
Gaming Participation Revenue £ 10.0 £ 9.6 £ 0.4 4.5 % £ 16.2 £ 19.8 £ (3.7 ) (18.4 )% Gaming Other Fixed Fee Recurring Revenue £ 2.8 £ 2.7 £ 0.1 3.3 % £ 4.6 £ 5.5 £ (0.8 ) (15.6 )% Gaming Long-term license amortization £ 1.3 £ 1.3 £ (0.0 ) (1.1 )% £ 3.8 £ 3.8 £ (0.0 ) (0.1 )%
Total Gaming Recurring Revenue * £ 14.1 £ 13.6 £ 0.5 3.7 % £ 24.6 £ 29.1 £ (4.5 ) (15.5 )% Gaming Recurring Revenue as a % of Total Gaming Revenue † 70.5 % 56.6 % 13.9 % 62.5 % 62.2 % 0.3 % Total Gaming excluding VAT related-revenue £ 20.0 £ 16.6 £ 37.1 £
39.5
Gaming Recurring Revenue as a % of Total Gaming Revenue (excluding VAT related-revenue) 70.5 % 81.6 % 66.4 % 73.8 %
* Does not reflect VAT-related revenue for the three-month period or nine-month
period, there was no VAT-related income in the three-month period for 2021
† Total Gaming Revenue for the nine-month period ended
includes the £2.3 million for VAT-related revenue, which is not reflected in
Gaming Recurring Revenue for that period. Excluding VAT-related revenue, Gaming
Recurring Revenue was 66.4% of Total Gaming Revenue for such period. 28
Please refer to our Annual Report on Form 10-K for the year ended
Gaming, Service Revenue by Region
Set forth below is a breakdown of our Gaming service revenue by geographic
region. Gaming Service revenue consists principally of Gaming participation
revenue, Gaming other fixed fee revenue, Gaming long-term license amortization
and Gaming other non-recurring revenue. See "Gaming Segment Revenue" below for a
discussion of gaming service revenue between the periods under review.
For the Three-Month Period ended For the Nine-Month Period ended
Unaudited Unaudited Unaudited Unaudited
September 30, September 30, September 30, September 30,
2021 2020 Variance 2021 2020 Variance
Total Total
Functional Functional
(In millions) 2021 vs 2020 Currency %
2021 vs 2020 Currency %
Service Revenue:
UK LBO $ 10.5 $ 9.7 $ 0.8 8.5 % 1.7 % $ 19.4 $ 20.0 $ (0.7 ) (3.4 )% (10.5 )%UK VAT - Related Income - $
9.3$ (9.3 ) n/a n/a 3.1 9.3$ (6.2 ) (66.5 )% (68.9 )%UK Other 3.0 2.2 0.8 35.0 % 26.9 % 4.4 4.9 (0.6 ) (11.9 )% (18.7 )%Italy 0.9 0.9 (0.0 ) (5.2 )% (11.2 )% 1.2 1.9 (0.7 ) (36.9 )% (41.2 )%Greece 5.1 4.8 0.3 5.7 % (0.9 )% 9.9 11.3 (1.4 ) (12.1 )% (18.8 )% Rest of the World 0.1 0.2 (0.0 ) (26.6 )% (30.8 )% 0.2 0.4 (0.3 ) (64.4 )% (66.8 )%
Total Service revenue $ 19.7 $ 27.2$ (7.5 ) (27.7 )% (32.7 )% $ 38.1 $ 47.9$ (9.8 ) (20.5 )% (26.5 )% Exchange Rate - $ to £ 1.38 1.28 1.38 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.
29 Gaming, key events
For the three and nine months ended
Total Gaming Customer Gross Win per unit per day (in our functional currency, GBP) for the three-month period increased by £6.08, or 8.6%, but decreased by £7.54, or 15.4%, for the nine-month period. The year-to-date decrease was due to the impact of COVID-19 as there was a longer period of retail venue closures compared to the prior period. During the three-month period, retail venues in theUK LBO estate showed significant year over year growth which contributed to the majority of the overall Gross Win per unit per day increase. Revenues returned to prior year levels in the Greek andItaly markets. During the nine-month period in 2021, retail venues across the business were in operation for approximately 53% of the period, compared to approximately 67% of the prior year period in 2020. The participation rate for the three-month period decreased from 6.7% to 6.5% year over year. This was primarily due to the COVID-19 restriction in place in the prior period inUK venues compared to the 2021 asUK share terms are lower than the total blended Gaming average (due to the fact we have higher gross win levels in theUK ). The participation rate for the nine-month decreased from 6.6% to 6.3% due to the same factors.
During the three-month period ended
During the three-month period in the
In addition, during the nine-month period we upgraded our
Inspired furthered its relationship with a major customer in the Dutch market with the sale and delivery of an additional 222 "Analogue" terminals during
the nine-month period.
In theUK LBO market, during the three-month period Inspired continued its strong relationship with a major customer by securing a new three-year contract extension for the service of self-service betting terminals "SSBTs" which are charged on a rental basis. In the same period Inspired recognized hardware sales for an additional 150 SSBTs generating revenue of$0.6 million . During the three-month period, Inspired recognized a 944 VLT hardware sale to a major Italian customer, generating revenue of$1.1 million . This completed
a 1,624 VLT hardware sale. During the three-month period, Inspired sold a further 60 "Valor™" terminals to a number of customers inIllinois , bringing the total terminals sold for the nine-month period to 171 and increasing the total number of North American unit sales since launch inDecember 2019 to 600. Retail venues inIllinois were shut down duringJanuary 2021 , which negatively impacted sales during this period. As ofFebruary 2021 , all eleven regions inIllinois had reopened. During the nine-month period, Inspired delivered its first sales toWestern Canada Lottery Corporation ("WCLC"), our second jurisdiction inNorth America . Inspired recorded the sale of 100 "Valor™" terminals to WCLC duringMarch 2021 , generating revenue of$1.5 million . 30 Gaming, Results of Operations For the Three-Month Period ended For the Nine-Month Period ended Unaudited Unaudited Unaudited UnauditedSeptember 30 ,September 30 , VarianceSeptember 30 ,September 30 , Variance (In millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020 Variance on Variance a Variance Attributable Functional Total Functional Total Attributable Variance on a Total Functional Total to Currency currency Currency Reported to Currency Functional Currency Reported Movement basis Variance % Variance % Movement currency basis Variance % Variance % Revenue: Service $ 19.7 $ 27.2 $ 1.3$ (8.9 ) (32.7 )% (27.7 )% $ 38.1 $ 47.9 $ 2.9 $ (12.7 ) (26.5 )% (20.5 )% Product 7.9 3.7 $ 0.5 3.7 103.5 % 115.4 % 16.5 12.1 $ 1.2 3.2 26.3 % 36.5 % Total revenue 27.6 30.9 1.8 (5.1 ) (16.7 )% (10.7 )% 54.6 60.0 4.1 (9.5 )
(15.9 )% (9.0 )%
Cost of Sales, excluding depreciation and amortization: Cost of Service (4.1 ) (5.8 ) $ (0.3 ) 1.9 (33.4 )% (28.8 )% (8.3 ) (11.1 ) $ (0.5 ) 3.3 (30.2 )% (25.0 )% Cost of Product (4.2 ) (2.7 ) $ (0.3 ) (1.1 ) 42.3 % 52.8 % (9.5 ) (8.3 ) $ (0.8 ) (0.4 ) 4.6 % 14.5 % Total cost of sales (8.3 ) (8.5 ) (0.5 ) 0.8 (9.1 )% (2.6 )% (17.8 ) (19.4 ) (1.3 ) 2.9
(15.1 )% (8.1 )%
Selling, general and administrative expenses (8.4 ) (6.0 ) $ (0.5 ) (1.9 ) 31.8 % 40.5 % (19.2 ) (17.9 ) $ (1.4 ) 0.1
(0.5 )% 7.3 %
Stock-based compensation (0.5 ) (0.2 ) $ (0.0 ) (0.2 ) 114.9 % 130.4 % (1.1 ) (0.4 ) $ (0.1 ) (0.6 ) 145.2 % 165.2 %
Depreciation and amortization (5.3 ) (6.6 ) $ (0.3 ) 1.6 (24.6 )% (19.6 )% (17.7 ) (21.0 ) $ (1.5 ) 4.8
(22.6 )% (15.7 )%
Net operating Income (Loss) $ 5.1 $ 9.6 $ 0.4$ (4.9 ) (50.5 )% (46.6 )% $ (1.2 ) $ 1.3 $ (0.2 ) $ (2.3 )
(190.7 )% (186.5 )%
Exchange Rate - $ to £ 1.38 1.29 1.38 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. All variances discussed in the Gaming results below are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates. Gaming Revenue
During the three-month period, all COVID-19 closures and restrictions were removed for the key markets for the majority of both the current and prior periods. During the nine-month, Gaming revenue was impacted by COVID-19 closures and restrictions for a portion of both the current and prior periods (for more details please see the Gaming Revenue section in the Quarterly Report on Form 10-Q for the period endedJune 30, 2021 ). During the three-month and nine-month period, Gaming revenue decreased by$5.1 million and$9.5 million , or 16.7% and 15.9%, respectively. This was driven by the decrease in VAT-related revenue of$9.4 million in the three-month period and$6.5 million in the nine-month period compared to the prior period. Excluding the VAT-related revenue, Gaming revenue during the three-month period increased by$4.3 million and decreased by$3.0 million during the nine-month period. 31 For the three-month period, Gaming Service revenue (excluding VAT-related revenue) increased by$0.6 million . This was primarily driven by an increase inUK sales (including Licensed Betting Offices ("LBOs") andUK other) of$0.8 million due to the increase inUK LBO Net Win (a record high average for the period since the implementation of the Triennial regulation changes). For the nine-month period, Gaming Service revenue (excluding VAT-related revenue) decreased by$6.2 million . This was driven by a decline inUK sales (including LBOs andUK other) of$3.0 million primarily driven by the COVID-19 closures, with both markets experiencing additional lockdowns andUK LBO capacity restrictions compared to the prior period.Greece andItaly experienced revenue declines of$2.1 million and$0.8 million , respectively, driven by the COVID-19 closures as both markets experienced additional lockdowns compared
to the prior period.
Product revenue increased in the three-month and nine-month period by
Gaming Operating Income
Operating Income decreased during both the three-month and nine-month periods by
The decrease in Operating Income in the three-month period was primarily due to the decrease in VAT-related income compared to the prior period ($9.2 million ) and an increase in SG&A ($1.9 million ) as all staff returned from furlough for the whole period. This was partially offset by the increase in product revenue (detailed above), a$1.6 million decrease in depreciation and amortization driven by a decrease in depreciation in theUK LBO andGreece markets, and a decrease in Cost of Sales of$0.8 million . Excluding the VAT-related Income, Operating Income would have increased by$4.2 million in the three-month period. The decrease in Operating Income in the nine-month period was primarily due to the decrease in VAT-related income compared to the prior periods ($6.3 million ) and the decrease in Gaming Service revenue (detailed above). This was partially offset by the increase in product revenue (detailed above), a decrease in cost of sales ($2.9 million ), as well as a reduction in depreciation and amortization ($4.8 million ) particularly inUK LBO as certain assets have been fully written down. Excluding the VAT-related Income, Operating Income would have increased by$4.0 million in the nine-month period.Virtual Sports 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
32
For the Three-Month For the Nine-Month
Period ended Period ended
Unaudited Unaudited Variance Unaudited Unaudited Variance
Sept 30, Sept 30, 2021 vs 2020 Sept 30, Sept 30, 2021 vs 2020
Virtuals 2021 2020 % 2021 2020 %
No. of Live Customers at
the end of the period 61 56 5 8.9 % 61 56 5 8.9 %
Average No. of Live
Customers 60 56 4 6.5 % 60 58 2 3.0 %
Total Revenue (£'m) £ 7.6 £ 6.4 £ 1.2 19.3 % £ 18.1 £ 18.6 £ (0.5 ) (2.9 )% Total Revenue £'m - Retail
£ 2.6 £ 3.2 £ (0.6 ) (18.8 )% £ 4.7 £ 7.5 £ (2.8 ) (37.5 )%
Total Revenue £'m -
Online Virtuals £ 5.1 £ 3.2 £ 1.8 56.6 % £ 13.4 £ 11.1 £ 2.3 20.5 %
Please refer to our Annual Report on Form 10-K for the year ended
Set forth below is a breakdown of ourVirtual Sports recurring revenue, which consists of Retail Virtuals and Online Virtuals recurring revenue as well as long-term license amortization. See "Virtual Sports Segment Revenue" below for a discussion of Virtual Sports Service revenue between the periods under review. For the Three-Month For the Nine-Month Period ended Period ended Unaudited Unaudited Variance Unaudited Unaudited Variance September 30, September 30, 2021 vs 2020 September 30, September 30, 2021 vs 2020 (In £ millions) 2021 2020 % 2021 2020 % Virtual Sports Recurring Revenue Total Virtual Sports Revenue £ 7.6 £ 6.4 £ 1.2 19.3 % £ 18.1 £ 18.6
£ (0.5 ) (2.9 )%
Recurring Revenue - Retail Virtuals £ 2.4 £ 3.0 £ (0.5 ) (18.0 )% £ 4.3 £ 6.6 £ (2.3 ) (34.6 )% Recurring Revenue - Online Virtuals £ 4.7 £ 3.1 £ 1.6 51.0 % £ 12.9 £ 10.3 £ 2.6 25.7 % Total Virtual Sports Long-term license amortization £ 0.2 £ 0.2 £ 0.0 0.8 % £ 0.5 £ 0.9 £ (0.3 ) (38.0 )% Total Virtual Sports Recurring Revenue £ 7.4 £ 6.3 £ 1.1 17.0 % £ 17.8 £ 17.8 £ 0.0 0.1 % Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue 96.7 % 98.6 % (1.9 )% 98.3 % 95.4 % 2.9 %
Please refer to our Annual Report on Form 10-K for the year ended
Virtual Sports , key events
During the three months ended
Our largest online customer bet365 launched four channels of our brand-new
V-Play Soccer 3 product. Furthermore, we signed new contracts with Mozzarbet
(
33 DuringAugust 2021 , the Italian government introduced a proof of vaccination requirement to enter betting shops which has slowed recovery.Virtual Sports have not resumed inBelgium betting shops in 2021 due to evolution in regulations.
In
InPennsylvania , Inspired revenue share increased by approximately 70% during the nine-month period endedSeptember 30, 2021 , driven by our "Derby Cash"
horse racing product.
Multiple Italian clients (including
For the Three-Month Period ended For theNine-Month Period ended
Unaudited Unaudited Unaudited Unaudited
September 30 , September 30 , Variance September 30 , September 30 , Variance
(In millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Variance on Variance on
Variance a Variance a
Attributable Functional Total Functional Total Attributable Functional Total Functional Total
to Currency currency Currency Reported to Currency currency Currency Reported
Movement basis Variance % Variance % Movement basis Variance % Variance %Service Revenue $ 10.5 $ 8.3 $ 0.7$ 1.6 19.3 % 27.3 % $ 25.0 $ 23.7 $ 2.0$ (0.7 ) (2.9 )% 5.4 % Cost of Service (0.5 ) (0.7 ) (0.0 ) 0.2 (32.7 )% (28.2 )% (1.3 ) (2.2 ) (0.1 ) 1.0 (45.3 )% (40.4 )%
Selling, general and administrative expenses (1.4 )
(0.8 ) 0.1 (0.7 ) 86.7 % 73.5 % (5.2 ) (2.7 ) (0.4 ) (2.1 ) 75.7 % 91.5 %
Stock-based compensation (0.3 ) (0.1 ) (0.0 ) (0.1 ) 147.6 % 164.4 % (0.5 ) (0.3 ) (0.0 ) (0.1 ) 42.6 % 54.8 %
Depreciation and amortization (0.7 ) (1.0 ) (0.0 ) 0.3 (29.7 )% (25.0 )% (2.5 ) (2.7 ) (0.1 ) 0.3 (10.6 )% (5.5 )%
Net operating Income (Loss) $ 7.6 $ 5.7 $ 0.7 $ 1.3 23.0 % 35.0 % $ 15.5 $ 15.8 $ 1.3 $ (1.6 ) (10.2 )% (2.2 )%
Exchange Rate - $ to £ 1.38 1.29 1.38 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.
All variances discussed in theVirtual Sports results below are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates. 34Virtual Sports revenue
During the three-month period, revenue increased by$1.6 million , or 19.3%. This increase was driven by a$2.1 million increase in Online Virtuals, driven by the performance of one of our major online customers, which was partially offset by a decline in recurring Retail Virtuals of$0.7 million , driven by slower recovery since reopening in all major markets compared to the prior year, as well as regulator changes inBelgium resulting in no revenues for 2021. During the nine-month period, revenue decreased by$0.7 million , or 2.9%. This decrease was driven by a$3.0 million decrease in retail revenue due to the COVID-19 closures and a decline of$0.5 million from historical license fee amortization contracts reaching their expiration. This decline was partially offset by growth in recurring Online Virtuals of$3.4 million . Online revenues remain significantly higher than pre-Covid-19 levels.
Operating Income increased in the three-month period by
The increase in the three-month period was primarily due to the increase in revenue of$1.6 million , the decrease in Depreciation and Amortization of$0.3 million and the decrease in Cost of Sales of$0.2 million . This was partly offset by the increase in SG&A expenses of$0.7 million , driven by the increase in costs as all staff returned to full pay for the period and an increase in technology costs driven by the growth of Online Virtuals. The decline in the nine-month period was primarily due to the decrease in revenue of$0.7 million and the increase in SG&A expenses of$2.1 million driven by the$1.2 million increase from the settlement with the Italian Tax Authorities as well as staff returning from furlough. This was partly offset by a decrease in Cost of Sales of$1.0 million . Interactive 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. 35
Interactive, Key Performance Indicators
For the Three-Month For the Nine-Month
Period ended Period ended
Unaudited Unaudited Variance Unaudited Unaudited Variance
Sept 30, Sept 30, 2021 vs 2020 Sept 30, Sept 30, 2021 vs 2020
Interactive 2021 2020 % 2021 2020 %
No. of Live Customers
at the end of the
period 104 76 28 36.8 % 104 76 28 36.8 %
Average No. of Live
Customers 102 75 28 37.1 % 98 71 27 38.0 %
No. of Live Games at
the end of the period 226 200 26 13.0 % 226 200 26 13.0 %
Average No. of Live
Games 224 198 26 13.2 % 213 187 26 14.0 %
Total Revenue (£'m) £ 4.4 £ 2.7 £ 1.7 62.7 % £ 12.3 £ 7.2 £ 5.2 72.3 %
Please refer to our Annual Report on Form 10-K for the year ended
Interactive, Recurring Revenue
Set forth below is a breakdown of our Interactive recurring revenue which consists principally of Interactive participation revenue. See "Interactive Segment Revenue" below for a discussion of Interactive service revenue between the periods under review.
For the Three-Month For the Nine-Month
Period ended Period ended
Unaudited Unaudited Variance Unaudited Unaudited Variance
September 30, September 30, 2021 vs 2020 September 30, September 30, 2021 vs 2020
(In £ millions) 2021 2020 % 2021 2020 %
Interactive Recurring Revenue
Total Interactive Revenue £ 4.4 £ 2.7 £ 1.7 62.7 % £ 12.3 £ 7.1 £ 5.3 74.3 %
Total Recurring Revenue - Interactive £ 4.4 £ 2.6 £ 1.8 67.9 % £ 12.3 £ 7.0 £ 5.3 75.0 % Interactive Recurring Revenue as a Percentage of Total Interactive Revenue 100.0 % 96.9 % 3.1 % 100.0 % 99.6 % 0.4 % Interactive, key events
During the three-month period, we were shortlisted for the SBC Awards for Casino / Slots Developer of the year.
There were twelve new brand launches during the quarter endedSeptember 2021 including Draftkings inMichigan , four brands with The Stars Group, Pokerstars, Betstars,Full Tilt and Stars Casino andLeo Vegas inSpain . There were twenty-eight new brand launches across the nine-month period including BetMGM inNew Jersey andMichigan , Golden Nugget inMichigan , Gamesys, Draftkings inMichigan and four brands under The Stars Group. We also launched with our first operators inSpain , Luckia, 888 andLeo Vegas .
We deployed twenty-three new games in the nine-month period across the estate and eight new games in the three-month period including "William Hill Cash Spins", "Big Piggy Bonus", "Dice Spinner Megaways" and "Reel Spooky King Megaways".
36
Interactive, Results of Operations
For the Three-Month Period ended For theNine-Month Period ended
Unaudited Unaudited Unaudited Unaudited
September 30 , September 30 , Variance September 30 , September 30 , Variance
(In millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Variance on Variance on
Variance a Variance a
Attributable Functional Total Functional Total Attributable Functional Total Functional Total
to Currency currency Currency Reported to Currency currency Currency Reported
Movement basis Variance % Variance % Movement basis Variance % Variance %
Service Revenue $ 6.1 $ 3.5 $ 0.4 $ 2.2 62.7 % 73.4 % $ 17.1 $ 9.0 $ 1.4 $ 6.7 74.3 % 90.2 %
Cost of Service (1.0 ) (0.4 ) (0.1 ) (0.5 ) 111.5 % 125.1 % (2.7 ) (1.0 ) (0.3 ) (1.4 ) 129.7 % 170.4 %
Selling, general and administrative expenses (1.7 )
(0.9 ) (0.2 ) (0.7 ) 79.0 % 102.1 % (4.0 ) (2.7 ) (0.2 ) (1.1 ) 41.6 % 49.0 %
Stock-based compensation (0.2 ) (0.1 ) (0.0 ) (0.1 ) 50.7 % 60.6 % (0.4 ) (0.2 ) (0.0 ) (0.1 ) 63.3 % 80.3 %
Depreciation and amortization (0.9 )
(0.5 ) (0.1 ) (0.3 ) 60.6 % 71.2 % (2.5 ) (1.7 ) (0.2 ) (0.6 ) 32.8 % 44.8 %
Net operating Income (Loss) $ 2.3 $ 1.6 $ 0.1 $ 0.7 41.6 % 44.9 % $ 7.5 $ 3.4 $ 0.7 $ 3.5 103.2 % 122.5 %
Exchange Rate - $ to £ 1.38 1.29 1.39 1.27
Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
All variances discussed in the Interactive results below are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates. Interactive revenue During the three-month and nine-month periods, revenue increased by$2.2 million and$6.7 million , respectively. These increases were driven by recurring revenue growth due to the consistent launch of new content across the estate, growth in the customer base in new, emerging and core markets and increased promotional activity through exclusive deals with tier-one customers. 37
Interactive operating income
Operating Income increased in the three-month and nine-month periods by
The increase in both periods was primarily due to the increase in revenue (detailed above), partly offset by an increase in cost of sales ($0.5 million and$1.4 million for the three-month and nine-month periods, respectively) driven by an increase in third party platform provider costs (in line with the revenue increase for the periods) as well as an increase in SG&A expenses ($0.7 million and$1.1 million for the three-month and nine-month periods, respectively) driven by the investment in the segment to help drive the increasing revenues. Leisure 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, Key Performance Indicators
For the Three-Month For the Nine-Month
Period ended Period ended
Unaudited Unaudited Variance Unaudited Unaudited Variance
Sept 30, Sept 30, 2021 vs 2020 Sept 30, Sept 30, 2021 vs 2020
Leisure 2021 2020 % 2021 2020 %
End of period installed
base Gaming machines (# of
terminals) 11,546 11,964 (418 ) (3.5 )% 11,546 11,964 (418 ) (3.5 )%
Average installed base
Gaming machines (# of
terminals) 11,548 12,101 (553 ) (4.6 )% 11,626 12,165 (539 ) (4.4 )%
End of period installed
base Other (# of
terminals) 6,989 7,719 (730 ) (9.5 )% 6,989 7,719 (730 ) (9.5 )%
Average installed base
Other (# of terminals) 7,062 7,935 (873 ) (11.0 )% 7,134 8,059 (925 ) (11.5 )%
Pub Digital Gaming
Machines - Average
installed base (# of
terminals) 6,238 5,772 465 8.1 % 5,978 5,764 214 3.7 %
Pub Analogue Gaming
Machines - Average
installed base (# of
terminals) 1,969 2,602 (634 ) (24.3 )% 2,146 2,677 (531 ) (19.8 )%
MSA and Bingo Gaming
Machines - Average
installed base (# of
terminals)(1) 3,085 3,464 (379 ) (10.9 )% 3,239 3,497 (258 ) (7.4 )%
Inspired Leisure Revenue
per Gaming Machine per
week £ 60.4 £ 40.4 £ 20.0 49.4 % £ 28.3 £ 31.4 £ (3.1 ) (9.8 )%
Inspired Pub Digital
Revenue per Gaming Machine
per week £ 57.5 £ 49.2 £ 8.3 16.8 % £ 27.8 £ 36.5 £ (8.6 ) (23.7 )%
Inspired Pub Analogue
Revenue per Gaming Machine
per week £ 37.2 £ 25.3 £ 11.9 46.9 % £ 16.8 £ 21.2 £ (4.4 ) (20.7) %
Inspired MSA and Bingo
Revenue per Gaming Machine
per week £ 83.2 £ 39.4 £ 43.8 111 % £ 37.8 £ 32.1 £ 5.7 17.9 %
Inspired Other Revenue per
Machine per week £ 19.8 £ 4.3 £ 15.5 356 % £ 8.2 £ 7.8 £ 0.4 5.3 %
Total Leisure Parks
Revenue (Gaming and Non
Gaming) (£'m) £ 12.5 £ 5.4 £ 7.1 132 % £ 15.8 £ 7.1 £ 8.7 123 %
(1) Motorway Service Area machines
Please refer to our Annual Report on Form 10-K for the year ended
38 Leisure, Recurring Revenue Set forth below is a breakdown of our Leisure recurring revenue which consists principally of Leisure participation revenue and Leisure other fixed fee revenue. See "Leisure Segment Revenue" below for a discussion of leisure service revenue between the periods under review.
Set forth below is a breakdown of our Leisure recurring revenue.
For the Three-Month Period ended For the Nine-Month Period ended
Unaudited Unaudited Variance Unaudited Unaudited Variance
September 30, September 30, 2021 vs 2020 September 30, September 30, 2021 vs 2020
(In £ millions) 2021 2020 % 2021 2020 %
Leisure Recurring Revenue
Total Leisure Revenue £ 24.2 £ 13.5 £ 10.7 79.3 % £ 32.7 £ 27.4 £ 5.3 19.4 %
Total Leisure Recurring Revenue £ 23.4 £ 12.8 £ 10.6 82.3 % £ 31.0 £ 25.6 £ 5.4 21.2 %
Leisure Recurring Revenue as a
Percentage of Total Leisure
Revenue 96.6 % 95.0 % 1.6 % 95.0 % 93.6 % 1.4 %
Leisure, key events
During the nine-month period ending September 30, 2021 , all major sectors of the
Leisure segment (Pubs, Holiday Parks, Motorway Service Areas and Bingo Halls )
remained closed due to the COVID-19 closures in the UK until May 17th, 2021 .
Venues subsequently reopened with social distancing and other restrictions
imposed due to COVID-19. All significant COVID-19 restrictions were liftedonJuly 19, 2021 . During the three-month period, COVID-19 restrictions resulted in frequent amendments to overseas travel policies in theUK . The additional costs and uncertainty of overseas travel during the quarter resulted in a strong summer season for our Leisure Parks business despite initial restrictions inWales
andScotland . During the three-month period, new investments in cashless operations proved popular at an increased number of sites The MSA sector continued to trade strongly due to increased travel within theUK and increasing volume of road transport. 39
Leisure, Results of Operations
For the Three-Month Period ended Forthe Nine-Month Period ended
Unaudited Unaudited Unaudited Unaudited
September 30 , September 30 , Variance September 30 , September 30 , Variance
(In millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Variance on Variance on
Variance a Variance a
Attributable Functional Total Functional Total Attributable Functional Total Functional Total
to Currency currency Currency Reported Total to Currency currency Currency Reported
Movement basis Variance % Variance % Variance $ Movement basis Variance % Variance %
Revenue:
Service $ 32.4 $ 16.6 $ 2.1 $ 13.7 82.8 % 95 % $ 43.1 $ 33.1 $ 10.0 $ 2.9 $ 7.1 21.4 % 30.3 %
Product 1.0 0.8 0.1 0.1 9.2 % 17 % 2.1 2.2 (0.1 ) 0.2 (0.2 ) (10.8 )% (4.0 )%
Total revenue 33.4 17.4 2.1 13.8 79.3 % 92 % 45.2 35.3 9.9 3.1 6.9 19.4 % 28.2 %
Cost of Sales, excluding depreciation and amortization:
Cost of Service (8.2 ) (3.9 ) (0.5 ) (3.7 ) 96.4 % 108 % (11.6 ) (7.5 ) (4.1 ) (0.8 ) (3.3 ) 43.9 % 54.8 %
Cost of Product (0.5 ) (0.6 ) 0.0 0.0 (2.6 )% (5 )% (1.1 ) (1.5 ) 0.4 (0.1 ) 0.4 (28.7 )% (25.4 )%
Total cost of sales (8.7 ) (4.5 ) (0.5 ) (3.7 ) 83.8 % 94 % (12.7 ) (9.0 ) (3.7 ) (0.9 ) (2.9 ) 31.8 % 41.3 %
Selling, general and administrative expenses (11.7 )
(9.6 ) (0.7 ) (1.4 ) 15.0 % 22 % (23.1 ) (23.2 ) 0.1 (1.8 ) 1.9 (8.1 )% (0.5 )%
Stock-based compensation (0.1 ) - (0.0 ) (0.1 ) NA NA (0.3 ) (0.0 ) (0.3 ) (0.0 ) (0.3 ) 627 % 680 %
Depreciation and amortization (3.9 )
(5.4 ) (0.2 ) 1.8 (32.4 )% (28.3 )% (12.2 ) (13.2 ) 1.0 (1.0 ) 2.0 (15.1 )% (7.6 )%
Net operating Income (Loss) 9.0
(2.1 ) $ 0.7 $ 10.3 (515 )% (532 )% (3.1 ) (10.1 ) 7.0 $ (0.6 ) $ 7.6 (72.5 )% (69.5 )%
Exchange Rate - $ to £ 1.38 1.29 1.38 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.
All variances discussed in the Leisure results below are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates.
Leisure Revenue
The three-month period was the first quarter in 2021 when revenue was not
impacted by COVID-19 closures and restrictions. For the three-month period,
revenue increased by
For the three-month period, Service revenue increased by$13.7 million to$32.4 million . This was driven by strong incomes in leisure parks with the removal of all COVID-19 restrictions for the majority of the period. Product revenue increased by$0.1 million .
For the nine-month period, Service revenue increased by
40 Leisure Operating Income Operating Income for the three-month period improved by$10.3 million to income of$9.0 million . This was primarily due to the increase in revenue as venues reopened and COVID-19 restrictions were removed. Operating Loss for the nine-month period improved by$7.6 million to a loss of$3.1 million . This was primarily due to the increase in revenue as venues reopened as well as cost of sales and SG&A savings driven by COVID-19 closures earlier in the period. 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 income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense.
Adjusted EBITDA is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense, and other additional exclusions and adjustments. Such additional excluded amounts include stock-based 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. This does not include any adjustments related to COVID-19. We believe Adjusted EBITDA, when considered along with other performance measures, is a particularly useful performance measure, because it focuses on certain operating drivers of the business, including sales growth, operating costs, selling and administrative expense and other operating income and expense. We believe Adjusted EBITDA can provide a more complete understanding of our operating results and the trends to which we are subject, and an enhanced overall understanding of our financial performance and prospects for the future. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income or loss, because it does not take into account certain aspects of our operating performance (for example, it excludes non-recurring gains and losses which are not deemed to be a normal part of underlying business activities). Our use of Adjusted EBITDA may not be comparable to the use by other companies of similarly termed measures. Management compensates for these limitations by using Adjusted EBITDA as only one of several measures for evaluating our operating performance. In addition, capital expenditures, which affect depreciation and amortization, interest expense, and income tax benefit (expense), are evaluated separately by management. Functional Currency at Constant rate. Currency impacts discussed have been calculated as the current-period average GBP: USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP: USD rate, as a proxy for functional currency at constant rate movement.
41
Reconciliations from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Loss, to Adjusted EBITDA are shown below.
Reconciliation to Adjusted EBITDA by segment for the Three and Nine Months endedSeptember 30, 2021 For the Three-Month Period ended For the Nine-Month Period ended Unaudited Unaudited September 30, September 30, (In millions) 2021 2021 Virtual Total Gaming Virtual
Sports Interactive Leisure Corporate Total Gaming Sports Interactive Leisure Corporate Net Income/ (loss)
$ 25.0 $ 5.1 $
7.6 $ 2.3
Items Relating to Legacy Activities: Pension charges (1) 0.2 0.2 0.6 0.6 Items outside the normal course of business: Acquisition and integration related transaction expenses (3) - - 1.5 1.5 Refinancing of Company Debt (4) - - 0.8 0.8 Italian tax related costs relating to prior years (5) - - - 1.4 1.4 - Stock-based compensation expense 3.8 0.5
0.3 0.2 0.1 2.7 8.6 1.1 0.5 0.4 0.3 6.3 Depreciation and amortization 11.2 5.3 0.7 0.9 3.9 0.4 36.2 17.7 2.5 2.5 12.2 1.3 Interest Income (0.1 ) (0.1 ) (0.2 ) (0.2 ) Interest Expense 7.3 7.3 38.1 38.1 Change in fair value of warrant liability (17.3 ) (17.3 ) (3.8 ) (3.8 ) Other finance expenses / (income) (0.3 )
(0.3 ) (5.5 ) (5.5 )
Income tax 0.3 0.3 (0.1 ) (0.1 )
Adjusted EBITDA $ 30.1 $ 10.9 $ 8.6 $ 3.4 $ 13.0 $ (5.8 ) $ 42.0 $ 17.6 $ 19.9 $ 10.4 $ 9.4 $ (15.2 )
Adjusted EBITDA £ 21.8 £ 30.4
Exchange Rate - $ to £ (7) 1.38 1.38
Note: Certain unallocated corporate function costs have not been allocated to the Company's reportable operating segments because these costs are not allocable and to do so would not be practical, these are shown in the Corporate category. 42 Reconciliation to Adjusted EBITDA by segment for the Three and Nine Months endedSeptember 30, 2020 For
the Three-Month Period ended For the Nine-Month Period ended
Unaudited Unaudited
September 30, September 30,
(In millions) 2020 2020
Virtual
Total Gaming Virtual Sports Interactive Leisure Corporate Total Gaming Sports Interactive Leisure Corporate
Net Income/ (loss) $ 0.5 $ 9.6 $ 5.7 $ 1.6 $ (2.1 ) $ (14.3 ) $ (35.5 ) $ 1.3 $ 15.8 $ 3.4 $ (10.1 ) $ (45.9 )
Items Relating to Legacy Activities:
Pension charges (1) 0.2 0.2 0.5 0.5
Items outside the normal course of
business:
Costs of group restructure (2) 0.4 0.4 0.8 0.8
Acquisition and integration related
transaction expenses (3) 1.2 1.2 5.6 5.6
Impairment on interest in equity
method investee(6) - - 0.7 0.7
Stock-based compensation expense 1.1 0.2 0.1 0.1 - 0.7 3.1 0.4 0.3 0.2 0.0 2.2 Depreciation and amortization 14.0 6.6 1.0 0.5 5.4 0.5 39.9 21.0 2.7 1.7 13.2 1.3 Interest Income (0.1 ) (0.1 ) (0.5 ) (0.5 ) Interest Expense 8.3 8.3 22.5 22.5 Change in fair value of warrant liability (0.2 ) (0.2 ) (6.1 ) (6.1 ) Other finance expenses / (income) (0.3 )
(0.3 ) 5.9 5.9
Income tax 0.0 0.0 0.3 0.3
Adjusted EBITDA $ 25.0 $ 16.4 $ 6.8 $ 2.2 $ 3.3 $ (3.7 ) $ 37.2 $ 22.7 $ 18.8 $ 5.3 $ 3.1 $ (12.7 )
Adjusted EBITDA £ 19.5 £ 29.0
Exchange Rate - $ to £ (7) 1.29 1.26
Note: Certain unallocated corporate function costs have not been allocated to the Company's reportable operating segments because these costs are not allocable and to do so would not be practical, these are shown in the Corporate category.
Notes to Adjusted EBITDA reconciliation tables above:
(1) "Pension charges" are profit and loss charges included within selling,
general and administrative expenses, relating to a defined benefit scheme
which was closed to new entrants in 1999 and to future accrual in 2010. As
well as the amortization of net loss, the figure also includes charges
relating to the
pension scheme) and a small amount of associated professional services
expenses. These costs are included within Corporate Functions.
43
(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 and other finance income.
(4) In
result of the refinance.
(5) "Italian tax related costs relating to prior years invoicing" relate to a
settlement with the Italian Tax Authorities in respect of an audit of the
Italian Branch of
2015-2017 in respect of the historic VAT treatment of supplies.
(6) In
interest in
million being written off.
(7) Exchange rate in the table is calculated by dividing the USD Adjusted EBITDA
by the GBP Adjusted EBITDA, therefore this could be slightly different from
the average rate during the period depending on timing of transactions.
Liquidity and Capital Resources
Nine Months endedSeptember 30, 2021 , compared to Nine Months endedSeptember 30, 2020 9 Months ended Variance (in millions) Sept 30, Sept 30, 2021 2020 2021 to 2020 Net loss$ (35.5 ) $ (35.5 ) $ (0.0 ) Amortization of debt fees 16.7 2.2 14.5 Change in fair value of derivative and warrant liabilities and stock-based compensation expense 6.1 (2.3 ) 8.4 Impairment expense 0.0 0.7 (0.7 ) Foreign currency translation on senior bank debt and cross currency swaps (4.6 ) 6.6 (11.2 ) Depreciation and amortization (incl RoU assets) 38.7 42.6 (3.9 ) Other net cash (utilized)/generated by operating activities (14.4 ) 17.2 (31.6 ) Net cash provided by operating activities 7.0 31.5 (24.5 ) Net cash used in investing activities (18.2 ) (22.0 ) 3.8 Net cash generated by financing activities 0.9 5.4 (4.5 ) Effect of exchange rates on cash 0.3 (0.1 ) 0.4 Net (decrease)/increase in cash and cash equivalents$ (10.0 ) $ 14.8 $ (24.8 ) 44
Net cash provided by operating activities
For the nine months endedSeptember 30, 2021 , net cash inflow provided by operating activities was$7.0 million , compared to a$31.5 million inflow for the nine months endedSeptember 30, 2020 , representing a$24.5 million decrease in cash generation. This decrease was driven by interest timing differences resulting in interest payments of$17.6 million compared to$0.6 million in the prior period. The prior period also included a receipt in relation to VAT related income. Amortization of debt fees increased by$14.5 million to$16.7 million due to the write-off inMay 2021 of capitalized debt fees totaling$14.4 million following the Company refinancing. The remainder of the current year's non-cash interest expense related to amortization of debt fees incurred in relation to the business refinancing inOctober 2019 up to the refinancing. Post refinancing the amortization of debt fees related to those incurred and capitalized as part of theMay 2021 refinancing. The prior year's non-cash interest expense related to amortization of debt fees incurred in relation to the business refinancing
inOctober 2019 .
Change in fair value of derivative and warrant liabilities and stock-based compensation expense increased by$8.4 million , from an outflow of$2.3 million to an inflow of$6.1 million . Movements in the fair valuation of warrant liabilities increased the inflow by$2.3 million ,$5.5 million related to stock-based compensation expense and$0.6 million related to the movement in cross-currency swaps. Foreign currency translation on senior bank debt and cross currency swaps resulted in a loss in the nine months endedSeptember 30, 2021 , of$4.6 million as a result of the movement in exchange rates during the period, compared to a$6.6 million gain in the nine months endedSeptember 30, 2020 . Depreciation and amortization decreased by$3.9 million to$38.7 million with reductions of a$2.9 million in machine depreciation and$1.5 million in amortization of intangible assets offset through an increase of$0.6 million in development costs and licenses amortization. Other net cash utilized by operating activities decreased by$31.6 million , to a$14.4 million outflow following the significant impact of the COVID-19 closures. Movements due to different timing of interest payments following theMay 2021 refinancing have resulted in a$15.6 million higher outflow in the nine months endedSeptember 30, 2021 . In addition a higher VAT accrual level at the start of 2021 resulted in a net$10.6 million adverse movement in the nine months endedSeptember 30, 2021 . Further adverse movements were also seen on deferred revenue creditors ($3.3 million ) long term liabilities ($1.8 million ) and accounts receivable ($7.7 million ), caused by the variability of trading levels caused by COVID-19 lockdowns and the unwind period needed when lockdown restrictions were eased are partly offset by favorable movements in accounts payable and accruals ($6.6 million ).
Net cash used in investing activities
Net cash used in investing activities decreased by
Net cash generated by financing activities
During the nine months endedSeptember 30, 2021 , net cash generated by financing activities was an inflow of$0.9 million , compared to a$5.4 million inflow in the nine months endedSeptember 30, 2020 . The inflow in the nine months endedSeptember 30, 2021 , related to the net movement from theMay 2021 refinancing and finance lease spend of$0.4 million . During the nine months endedSeptember 30, 2020 , an increase in the amount drawn on the revolver provided a$9.2 million inflow which was partly offset by$3.1 million of debt fees incurred and$0.7 million of finance lease spend. 45 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 ofSeptember 30, 2021 , we had liquidity of$37.1 million in cash and cash equivalents and a further$27.0 million of an undrawn revolver facility. This compares to$43.9 million of cash and cash equivalents as ofSeptember 30, 2020 , but$12.9 million drawn on the revolver facility with a further$12.9 million of revolver facilities undrawn. We had a working capital outflow of$14.4 million for the nine months endedSeptember 30, 2021 , compared to an$17.3 million inflow for the nine months endedSeptember 30, 2020 . 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 and 2021 following the COVID-19 closures, can result in significant working capital volatility. In periods of low activity, our working capital volatility is reduced. Working capital is reviewed and managed with the aim of ensuring that current liabilities are covered by the level of cash held and the expected level of short-term receipts.
Some of our business operations require cash to be held within the machines. As
of
Subsequent to the balance sheet date, holders of the Company's public warrants exercised 109,346 warrants for a total exercise price of$0.6 million , resulting in the issue of 54,673 common shares. As ofNovember 9, 2021 , there were 23,433,386 shares of the Company's common stock outstanding. The Company may from time to time to purchase all or a portion of the Company's outstanding debt, or a portion of the Company's outstanding equity securities. Such purchases may be effected in the open market, through redemptions, or through privately negotiated transactions. Management currently believes that the Company's cash balances on hand, cash flows expected to be generated from operations, and the ability to control and defer capital projects will be sufficient to fund the Company's net cash requirements throughNovember 2022 . Long Term and Other Debt
See Note 4 Long Term and Other Debt of the Financial Statements for detail of the debts held during 2020 and 2021.
Debt Covenants Under our debt facilities in place as ofSeptember 30, 2021 , we are not subject to covenant testing on the Senior Secured Notes. We are, however, subject to covenant testing at the level ofInspired Entertainment Inc. , the ultimate holding company, on our Super Senior Revolving Credit Facility which requires the Company to maintain a maximum consolidated senior secured net leverage ratio of 6.25x on the test date for the relevant period endingJune 30, 2021 , stepping down to 6.0x onMarch 31, 2022 , 5.75x onMarch 31, 2023 and 5.50x fromMarch 31, 2024 and thereafter (the "RCF Financial Covenant"). The RCF Financial Covenant is calculated as the ratio of consolidated senior secured net debt to consolidated pro forma EBITDA (defined as net loss excluding depreciation and amortization, interest expense, interest income and income tax expense) for the 12-month period preceding the relevant quarterly testing date and is tested quarterly on a rolling basis, subject to the Initial Facility (as defined in the RCF Agreement) being drawn on the relevant test date. The RCF Financial Covenant does not include a minimum interest coverage ratio or other financial covenants. As the RCF has never been drawn at any point since being in place, no covenant testing was required atSeptember 30, 2021 . Under our debt facilities in place as ofSeptember 30, 2020 , we were subject to covenant testing on the Senior Secured Notes. 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 was tested at quarterly intervals commencing for the period endingJune 30, 2020 , and capital expenditure was tested annually commencing onDecember 31, 2019 .
Prior to reaching our first leverage covenant test on
46
There were no breaches of the debt covenants in the periods ended
Liens and Encumbrances As ofSeptember 30, 2021 , our senior bank debt was secured by the imposition of a fixed and floating charge in favor of the lender over all the assets of the Company and certain of the Company's subsidiaries. Contractual Obligations
As of
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 $ 125.4 $ 25.6 $ 49.9 Financing activities Senior bank debt - principal repayment 316.9 - - 316.9 - Finance lease payments 1.7 0.9 0.5 0.3 - Operating lease payments 10.5 3.2 3.4 1.9 2.0 Interest on non-utilisation fees 1.7 0.4 0.8 0.5 - Total$ 456.2 $ 30.1 $ 54.6 $ 369.5 $ 2.0
Off-Balance Sheet Arrangements
As of
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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