Inspired Entertainment, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REQUIRED BY RULE 13A-14(B) OR RULE - Inspired Entertainment, Inc.	f10q0920ex32-2_inspiredent.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REQUIRED BY RULE 13A-14(B) OR RULE - Inspired Entertainment, Inc.	f10q0920ex32-1_inspiredent.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REQUIRED BY RULE 13A-14(A) OR RULE - Inspired Entertainment, Inc.	f10q0920ex31-2_inspiredent.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REQUIRED BY RULE 13A-14(A) OR RULE - Inspired Entertainment, Inc.	f10q0920ex31-1_inspiredent.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period _______________

Commission File Number: 001-36689

INSPIRED ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware		47-1025534
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

250 West 57^th Street, Suite 415
New York, NY		10107
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (646) 565-3861

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☒		Smaller reporting company ☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, par value $0.0001 per share		INSE		The NASDAQ Stock Market LLC

As of November 10, 2020, there were 23,029,492 shares of the Company’s common stock issued and outstanding.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Operations and Comprehensive Loss	2

	Condensed Consolidated Statement of Stockholders’ Deficit	3

	Condensed Consolidated Statements of Cash Flows	4

	Notes to Condensed Consolidated Financial Statements	5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	55

ITEM 4.	CONTROLS AND PROCEDURES	56

PART II.	OTHER INFORMATION	57

ITEM 1.	LEGAL PROCEEDINGS	57

ITEM 1A.	RISK FACTORS	57

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	57

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	57

ITEM 4.	MINE SAFETY DISCLOSURES	57

ITEM 5.	OTHER INFORMATION	57

ITEM 6.	EXHIBITS	58

SIGNATURES		59

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

	September 30, 2020			December 31, 2019
	(Unaudited)
Assets
Cash	$	43.9		$	29.1
Accounts receivable, net		28.9			24.2
Inventory, net		16.9			18.8
Prepaid expenses and other current assets		21.3			23.2
Total current assets		111.0			95.3

Property and equipment, net		65.8			79.3
Software development costs, net		40.9			46.9
Other acquired intangible assets subject to amortization, net		7.5			9.9
Goodwill		79.3			80.9
Right of use asset		12.2			9.4
Investment		—			0.6
Other assets		3.6			5.1
Total assets	$	320.3		$	327.4

Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable	$	25.6		$	22.2
Accrued expenses		35.0			31.2
Corporate tax and other current taxes payable		11.4			6.6
Deferred revenue, current		11.0			10.1
Operating lease liabilities		3.2			3.6
Other current liabilities		1.0			1.9
Current portion of long-term debt		12.9			2.6
Current portion of finance lease liabilities		0.6			0.1
Total current liabilities		100.7			78.3

Long-term debt		281.6			270.5
Long term finance lease liabilities		0.3			—
Deferred revenue, net of current portion		12.7			17.7
Derivative liability		2.0			—
Operating lease liabilities		9.0			5.2
Other long-term liabilities		9.0			5.2
Total liabilities		415.3			376.9

Commitments and contingencies

Stockholders’ deficit
Preferred stock; $0.0001 par value; 1,000,000 shares authorized		—			—
Series A Junior Participating Preferred stock; $0.0001 par value; 1,000,000 shares authorized; 49,000 shares designated; no shares issued and outstanding at September 30, 2020 and December 31, 2019		—			—
Common stock; $0.0001 par value; 49,000,000 shares authorized; 22,405,376 shares and 22,230,768 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		—			—
Additional paid in capital		349.7			346.6
Accumulated other comprehensive income		38.1			45.1
Accumulated deficit		(482.8	)		(441.2	)
Total stockholders’ deficit		(95.0	)		(49.5	)
Total liabilities and stockholders’ deficit	$	320.3		$	327.4

The accompanying notes are an integral part of these condensed consolidated financial statements.

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(in millions, except share and per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenue:
Service	$	56.4		$	23.8		$	114.8		$	80.2
Hardware		3.7			2.8			13.2			6.8
Total revenue		60.1			26.6			128.0			87.0

Cost of sales, excluding depreciation and amortization:
Cost of service		(11.2	)		(4.7	)		(20.9	)		(15.4	)
Cost of hardware		(2.5	)		(2.3	)		(9.8	)		(4.9	)
Selling, general and administrative expenses		(21.9	)		(11.5	)		(61.6	)		(39.0	)
Stock-based compensation expense		(1.1	)		(2.2	)		(3.1	)		(6.6	)
Acquisition and integration related transaction expenses		(1.2	)		(3.3	)		(5.6	)		(4.9	)
Depreciation and amortization		(14.0	)		(8.3	)		(39.9	)		(27.1	)
Net operating income (loss)		8.2			(5.7	)		(12.9	)		(10.9	)

Other (expense) income
Interest income		0.1			—			0.5			0.1
Interest expense		(8.3	)		(4.4	)		(22.5	)		(12.9	)
Change in fair value of earnout liability		—			—			—			(2.3	)
Change in fair value of derivative liability		—			2.9			—			2.8
Loss from equity method investee		—			—			(0.5	)		—
Other finance income (expense)		0.3			(1.2	)		(5.9	)		(0.9	)

Total other expense, net		(7.9	)		(2.7	)		(28.4	)		(13.2	)

Income (loss) before income taxes		0.3			(8.4	)		(41.3	)		(24.1	)
Income tax expense		—			(0.1	)		(0.3	)		(0.1	)
Net income (loss)		0.3			(8.5	)		(41.6	)		(24.2	)

Other comprehensive loss:
Foreign currency translation (loss) gain		(4.2	)		0.5			(0.7	)		0.7
Change in fair value of hedging instrument		(0.4	)		3.1			(2.7	)		3.4
Reclassification of loss (gain) on hedging instrument to comprehensive income		0.3			(3.4	)		1.0			(4.5	)
Actuarial losses on pension plan		(0.3	)		(3.1	)		(4.6	)		(4.2	)
Other comprehensive loss		(4.6	)		(2.9	)		(7.0	)		(4.6	)

Comprehensive loss	$	(4.3	)	$	(11.4	)	$	(48.6	)	$	(28.8	)

Net income (loss) per common share – basic and diluted	$	0.01		$	(0.38	)	$	(1.86	)	$	(1.11	)

Weighted average number of shares outstanding during the period – basic		22,405,376			22,193,955			22,396,652			21,790,075
Weighted average number of shares outstanding during the period – diluted		23,344,402			22,193,955			22,396,652			21,790,075

The accompanying notes are an integral part of these condensed consolidated financial statements.

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD JANUARY 1, 2020 TO SEPTEMBER 30, 2020

(in millions, except share data)

(Unaudited)

	Common stock				Additional paid in		Accumulated other comprehensive			Accumulated			Total stockholders’
	Shares		Amount		capital		income			deficit			deficit

Balance as of January 1, 2020		22,230,768	$	—	$	346.6	$	45.1		$	(441.2	)	$	(49.5	)
Foreign currency translation adjustments		—		—		—		3.1			—			3.1
Actuarial gains on pension plan		—		—		—		4.4			—			4.4
Change in fair value of hedging instrument		—		—		—		(1.5	)		—			(1.5	)
Reclassification of loss on hedging instrument to comprehensive income		—		—		—		0.4			—			0.4
Shares issued in net settlement of RSUs		166,959		—		—		—			—			—
Stock-based compensation expense		—		—		1.0		—			—			1.0
Net loss		—		—		—		—			(17.4	)		(17.4	)
Balance as of March 31, 2020		22,397,727	$	—	$	347.6	$	51.5		$	(458.6	)	$	(59.5	)
Foreign currency translation adjustments		—		—		—		0.4			—			0.4
Actuarial loss on pension plan		—		—		—		(8.7	)		—			(8.7	)
Change in fair value of hedging instrument		—		—		—		(0.8	)		—			(0.8	)
Reclassification of loss on hedging instrument to comprehensive income		—		—		—		0.3			—			0.3
Stock-based compensation expense – ESPP		7,649		—		—		—			—			—
Stock-based compensation expense		—		—		1.0		—			—			1.0
Net loss		—		—		—		—			(24.5	)		(24.5	)
Balance as of June 30, 2020		22,405,376	$	—	$	348.6	$	42.7		$	(483.1	)	$	(91.8	)
Foreign currency translation adjustments		—		—		—		(4.2	)		—			(4.2	)
Actuarial loss on pension plan		—		—		—		(0.3	)		—			(0.3	)
Change in fair value of hedging instrument		—		—		—		(0.4	)		—			(0.4	)
Reclassification of loss on hedging instrument to comprehensive income		—		—		—		0.3			—			0.3
Stock-based compensation expense		—		—		1.1		—			—			1.1
Net income		—		—		—		—			0.3			0.3
Balance as of September 30, 2020		22,405,376	$	—	$	349.7	$	38.1		$	(482.8	)	$	(95.0	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD JANUARY 1, 2019 TO SEPTEMBER 30, 2019

(in millions, except share data)

(Unaudited)

	Common stock				Additional paid in		Accumulated other comprehensive			Accumulated			Total stockholders’
	Shares		Amount		capital		income			deficit			deficit

Balance as of January 1, 2019		20,870,397	$	—	$	329.9	$	55.9		$	(404.2	)	$	(18.4	)
Foreign currency translation adjustments		—		—		—		(0.5	)		—			(0.5
Actuarial gains on pension plan		—		—		—		0.9			—			0.9
Change in fair value of hedging instrument		—		—		—		(2.1	)		—			(2.1	)
Reclassification of loss on hedging instrument to comprehensive income		—		—		—		1.5			—			1.5
Shares issued in earnout		1,323,558		—		8.6		—			—			8.6	)
Stock-based compensation expense		—		—		1.7		—			—			1.7
Net loss		—		—		—		—			(5.0	)		(5.0	)
Balance as of March 31, 2019		22,193,955	$	—	$	340.2	$	55.7		$	(409.2	)	$	(13.3	)
Foreign currency translation adjustments		—		—		—		0.7			—			0.7
Actuarial losses on pension plan		—		—		—		(2.0	)		—			(2.0	)
Change in fair value of hedging instrument		—		—		—		2.4			—			2.4
Reclassification of gain on hedging instrument to comprehensive income		—		—		—		(2.6	)		—			(2.6	)
Conversion of awards previously classified as derivatives		—		—		0.8		—			—			0.8
Stock-based compensation expense		—		—		2.1		—			—			2.1
Net loss		—		—				—			(10.7	)		(10.7	)
Balance as of June 30, 2019		22,193,955	$	—	$	343.1	$	54.2		$	(419.9	)	$	(22.6	)
Foreign currency translation adjustments		—		—		—		0.5			—			0.5
Actuarial losses on pension plan		—		—		—		(3.1	)		—			(3.1	)
Change in fair value of hedging instrument		—		—		—		3.1			—			3.1
Reclassification of gain on hedging instrument to comprehensive income		—		—		—		(3.4	)		—			(3.4	)
Stock-based compensation expense		—		—		2.2		—			—			2.2
Net loss		—		—				—			(8.5	)		(8.5	)
Balance as of September 30, 2019		22,193,955	$	—	$	345.3	$	51.3		$	(428.4	)	$	(31.8	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

	Nine Months Ended September 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(41.6	)	$	(24.2	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		39.9			27.1
Amortization of right of use asset		2.7			—
Stock-based compensation expense		3.1			6.6
Change in fair value of derivative liability		—			(2.8	)
Change in fair value of earnout liability		—			2.3
Impairment of investment in equity method investee		0.7			—
Foreign currency translation on senior bank debt		6.6			4.8
Foreign currency translation on cross currency swaps		—			(3.8	)
Reclassification of loss on hedging instrument to comprehensive income		0.7			—
Non-cash interest expense relating to senior debt		2.2			1.4
Changes in assets and liabilities:
Accounts receivable		(5.8	)		1.0
Inventory		1.1			(0.3	)
Prepaid expenses and other assets		2.8			4.4
Corporate tax and other current taxes payable		5.2			(1.8	)
Accounts payable		4.1			8.5
Deferred revenues and customer prepayment		(4.7	)		(4.3	)
Accrued expenses		16.3			3.3
Operating lease liabilities		(2.3	)		—
Other long-term liabilities		0.5			0.2
Net cash provided by operating activities		31.5			22.4

Cash flows from investing activities:
Purchases of property and equipment		(11.9	)		(4.9	)
Disposals of property and equipment		—			—
Purchases of capital software		(10.1	)		(11.6	)
Net cash used in investing activities		(22.0	)		(16.5	)

Cash flows from financing activities:
Proceeds from issuance of revolver		9.2			9.3
Debt fees incurred		(3.1	)		—
Repayments of finance leases		(0.7	)		(0.3	)
Net cash provided by financing activities		5.4			9.0

Effect of exchange rate changes on cash		(0.1	)		(1.3	)
Net increase in cash		14.8			13.6
Cash, beginning of period		29.1			16.0
Cash, end of period	$	43.9		$	29.6

Supplemental cash flow disclosures
Cash paid during the period for interest	$	0.6		$	12.5
Cash paid during the period for income taxes	$	0.1		$	—
Cash paid during the period for operating leases	$	2.4		$	—

Supplemental disclosure of non-cash investing and financing activities
Lease liabilities arising from obtaining right of use assets	$	(6.1	)	$	—
Adjustment to goodwill arising from adjustment to fair value of assets acquired	$	(0.2	)	$	—
Capitalized interest payments	$	10.6		$	—
Property and equipment acquired through finance lease	$	1.5		$	—
Assets arising from asset retirement obligations	$	0.8		$	—
Additional paid in capital reclassified from derivative liability	$	—		$	0.8

The accompanying notes are an integral part of these condensed consolidated financial statements.

1.	Nature of Operations, Management’s Plans and Summary of Significant Accounting Policies

Company Description and Nature of Operations

Inspired Entertainment, Inc. (the “Company,” “we,” “our,” and “us”) is a global business-to-business gaming technology company, supplying Server Based Gaming (“SBG”) and Virtual Sports (which includes Interactive) systems to regulated lottery, betting and gaming operators worldwide through an “omni-channel” distribution strategy. We provide end-to-end digital gaming solutions on our proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices such as smartphones and tablets and online computer and social applications. Our products can be found in licensed betting offices, adult gaming centers, bingo halls, and through our Acquired Businesses (defined herein), in UK pubs, airports, motorway service areas, and leisure parks.

Management Liquidity Plans

As of September 30, 2020, the Company’s cash on hand was $43.9 million, and the Company had working capital of $10.3 million. The Company recorded net losses of $41.6 million and $24.2 million for the nine months ended September 30, 2020 and 2019, respectively. Net losses include non-cash stock-based compensation of $3.1 million and $6.6 million for the nine months ended September 30, 2020 and 2019, respectively, and excess depreciation and amortization over capital expenditure of $17.9 million and $10.6 million for the nine months ended September 30, 2020 and 2019, respectively. Historically, the Company has generally had positive cash flows from operating activities and has relied on a combination of cash flows provided by operations and the incurrence of debt and/or the refinancing of existing debt to fund its obligations. Cash flows provided by operations amounted to $31.5 million and $22.4 million for the nine months ended September 30, 2020 and 2019, respectively. Working capital of $10.3 million includes a non-cash settled item of $11.0 million of deferred income. Management currently believes that, subject to any unanticipated coronavirus (“COVID-19”) impact (see below), the Company’s cash balances on hand, cash flows expected to be generated from operations, ability to control and defer capital projects and amounts available from the Company’s external borrowings will be sufficient to fund the Company’s net cash requirements through February 2022.

Our business is being, and will continue to be, adversely affected by the expanding nature of the COVID-19 pandemic. There are continuing periods of increases or spikes in the number of COVID-19 cases in areas in which we operate, which have seen the government re-impose restrictions on our operations up to and including complete or partial closures of retail venues. Further, the long-term impacts of the pandemic on the global economy, trade relations, consumer behavior, our industry and our business operations, remain unknown.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s opinion, however, that the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended December 31, 2019 and 2018. The financial information as of December 31, 2019 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2020. The interim results for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim periods.

2.	Inventory

Inventory consists of the following:

	September 30, 2020		December 31, 2019
	(in millions)
Component parts	$	12.6	$	12.7
Work in progress		2.0		2.1
Finished goods		2.3		4.0
Total inventories	$	16.9	$	18.8

Component parts include parts for gaming terminals. Included in inventory are reserves for excess and slow-moving inventory of $1.9 million and $0.9 million as of September 30, 2020 and December 31, 2019, respectively. Our finished goods inventory primarily consists of gaming terminals which are ready for sale.

3.	Accrued Expenses

Accrued expenses consist of the following:

	September 30, 2020		December 31, 2019
	(in millions)
Direct costs of sales	$	4.5	$	5.5
Payroll and related costs		4.5		4.4
Accrued corporate cost expenses		1.0		1.6
Interest payable - cash		12.7		5.5
Asset retirement obligations		1.4		2.0
Acquisition consideration		1.7		2.5
Contract termination costs		0.4		0.1
Other creditors		8.8		9.6
	$	35.0	$	31.2

4.	Contract Liabilities and Other Disclosures

The following table summarizes contract related balances:

	Accounts Receivable		Unbilled Accounts Receivable		Deferred Income			Customer Prepayments and Deposits
	(in millions)
At September 30, 2020	$	30.7	$	12.9	$	(23.7	)	$	(0.5	)
At December 31, 2019	$	24.5	$	15.3	$	(27.8	)	$	(1.9	)
At December 31, 2018	$	11.5	$	11.0	$	(32.0	)	$	(3.6	)

Revenue recognized that was included in the deferred income balance at the beginning of the period amounted to $8.3 million and $9.6 million for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively.

5.	Long Term and Other Debt

On September 27, 2019, the Company, together with certain direct and indirect wholly-owned subsidiaries, entered into a Senior Facilities Agreement (the “SFA”) with Lucid Agency Services Limited, as agent, Nomura International plc and Macquarie Corporate Holdings Pty Limited (UK Branch) as arrangers and/or bookrunners and each lender party thereto (the “Lenders”), pursuant to which the Lenders agreed to provide, subject to certain conditions, two tranches of senior secured term loans (the “Term Loans”), in an original principal amount of £140.0 million ($180.9 million) and €90.0 million ($105.5 million), respectively, and a secured revolving facility loan in an original principal amount of £20.0 million ($25.8 million).

On June 25, 2020, the Company, certain direct and indirect subsidiaries of the Company, Lucid Agency Services Limited, and Lucid Trustee Services Limited as security agent under the SFA and the Intercreditor Agreement (as defined in the SFA), entered into an Amendment and Restatement Agreement (the “ARA”) with respect to the SFA.

The ARA amends the SFA by, among other things, (i) capitalizing certain interest payments that fell due on April 1, 2020, (ii) resetting the leverage and capital expenditure financial covenants applicable under the SFA, removing certain rating requirements under the SFA, (iii) allowing the Company and its subsidiaries to incur additional indebtedness under the UK Coronavirus Large Business Interruption Loan Scheme under a stand-alone facility, which may rank pari passu or junior to the facilities under the SFA, in an amount not exceeding £10.0 million ($12.9 million), (iv) removing certain rating requirements under the SFA, (v) limiting the ability of the Company and its subsidiaries to incur additional indebtedness, including by reducing the amount of general indebtedness the Company and its subsidiaries are permitted to incur and removing the ability to incur senior secured, second lien and unsecured indebtedness in an amount not exceeding the aggregate of (A) an unlimited amount, as long as, pro forma for the utilization of such indebtedness, the consolidated total net leverage ratio does not exceed the lower of 3.4:1 and the then applicable ratio with respect to the consolidated total net leverage financial covenant summarized further below, plus (B) an amount equal to the greater of £16.0 million ($20.7 million) and 25% of the consolidated pro forma EBITDA of the Company and its subsidiaries for the relevant period (as defined in the SFA, but disregarding, for the purposes of calculating the usage of such cap, any financial indebtedness applied to refinancing other financial indebtedness, together with any related interest, fees, costs and expenses), (vi) increasing the margin applicable to the Facilities (as defined in the SFA) by 1% and adding an additional payment-in-kind margin of 0.75% payable on any principal amounts outstanding under Facility B (as defined in the SFA) after September 24, 2021 (the “Relevant Date”), (vii) adding an exit fee payable by the Company with respect to any repayment or prepayment of Facility B after the Relevant Date at the time of such repayment or prepayment in an amount equal to 0.75% of the principal amount of Facility B being repaid or prepaid, (viii) removing any ability to carry forward or carry back any unused allowance under the capital expenditure financial covenant in the SFA and (ix) granting certain additional information rights to the Lenders under the SFA, including the provision of a budget, and certain board observation rights until December 31, 2022. All other material terms of the SFA remain unchanged in all material respects.

In consideration for the amendments listed above, the Company agreed to pay the Lenders an amendment fee equal to 1% of the Total Commitments (as defined in the SFA) after giving effect to the capitalization of the interest payment described above. The amendment fee is payable to the Lenders pro rata to their commitments under the SFA.

The modification to the SFA is not considered to be substantial in accordance with Topic 470-50 and has therefore not been treated as a debt extinguishment. The amendment fees, amounting to $3.2 million, are associated with the modified debt instrument and will be amortized along with the existing unamortized debt issuance costs. Fees payable to third parties are expensed as incurred, resulting in $1.0 million charged to interest expense for the nine months ended September 30, 2020.

There were no breaches of the debt covenants in the periods ended September 30, 2020 and December 31, 2019.

Outstanding Debt and Finance Leases

The following reflects outstanding debt as of September 30, 2020:

	Principal			Unamortized deferred financing charge			Book value, September 30, 2020
	(in millions)
Senior bank debt	$	310.6		$	(16.1	)	$	294.5
Finance lease liabilities		0.9			—			0.9
Total long-term debt outstanding		311.5			(16.1	)		295.4
Less: current portion of long-term debt		(13.5	)		—			(13.5	)
Long-term debt, excluding current portion	$	298.0		$	(16.1	)	$	281.9

6.	Derivatives and Hedging Activities

On January 15, 2020, the Company entered into two interest rate swaps with UBS AG designed to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a portion of the current floating rate debt facilities. The swaps fix the variable interest rate of the current debt facilities and provide protection over potential interest rate increases by providing a fixed rate of interest payment in return. These interest rate swaps are for £95 million ($122.8 million) at a fixed rate of 0.9255% based on the 6-month LIBOR rate and for €60 million ($70.3 million) at a fixed rate of 0.102% based on the 6 month EUROLIBOR rate and are effective until maturity on October 1, 2023.

Hedges of Multiple Risks

The Company’s objectives in using interest rate derivatives are to add stability to interest and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $1.9 million will be reclassified as an increase to interest expense.

As of September 30, 2020, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Interest Rate Derivative		Number of Instruments				Notional
Interest rate swaps			2			£95 million ($122.8 million) at a fixed rate of 0.9255% based on the 6-month LIBOR rate and €60 million ($70.3 million) at a fixed rate of 0.102% based on the 6 month EUROLIBOR rate

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheet as of September 30, 2020.

	Balance Sheet Classification	Asset Derivatives Fair Value		Balance Sheet Classification	Liability Derivatives Fair Value
			(in millions)			(in millions)
Derivatives designated as hedging instruments:
Interest Rate Products	Fair Value of Hedging Instruments	$	—	Other Current Liabilities and Long Term Derivative Liability	$	(2.5	)
Total derivatives designated as hedging instruments		$	—		$	(2.5	)

The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income for the nine months ended September 30, 2020.

	Amount of Gain/(Loss) Recognized in Other Comprehensive Income on Derivative				Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Income
	(in millions)				(in millions)
Interest Rate and Foreign Exchange Products	$	(2.7	)	Interest Expense	$	(1.0	)
Total	$	(2.7	)		$	(1.0	)

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the nine months ended September 30, 2020.

	Interest Expense
		(in millions)
Total amounts of income and expense line items presented in the statement of operations and comprehensive loss in which the effects of fair value or cash flow hedges are recorded	$	19.0

Gain/(loss) on cash flow hedging relationships in Subtopic 815-20	$	(1.0	)

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheet.

The ISDA Master Agreement between Gaming Acquisitions Limited, a wholly-owned subsidiary of the Company, and UBS AG is documented using the 2002 Form and the ISDA standard set-off provision in Section 6(f) of the ISDA Master Agreement apply to both parties and is only modified to include Affiliates of the Payee. There is no CSA and thus there is no collateral posting.

Offsetting of Derivative Assets

September 30, 2020

Gross Amounts Not Offset in the
Statement of Financial Position

Gross
Amounts
of Recognized
Assets

Gross
Amounts
Offset in the
Statement of
Financial
Position

Net Amounts
of Assets
presented
in the
Statement
of Financial
Position

Financial
Instruments

Cash
Collateral
Received

Net
Amount

(in millions)

Fair value of hedging instrument

—

Offsetting of Derivative Liabilities
September 30, 2020
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
	(in millions)
Fair value of hedging instrument	$	2.5	$	—	$	2.5	$	—	$	—	$	—

Credit-risk-related Contingent Features

The Company has entered into an industry standard ISDA Master Agreement, with a negotiated Scheduled thereto (the “ISDA Agreement”), with the counterparty to its derivative transactions and which ISDA Agreement sets forth various provisions which govern the trading relationship between the Company and its counterparty. Such provisions include certain events which, if triggered by either party, may give rise to an acceleration of the ISDA Agreement, thus triggering the exchange of a breakage payment between the parties.

The ISDA Agreement with the Company’s derivative counterparty contains a provision where the Company could be declared in default on its derivative obligations if, among others, its repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. The ISDA Agreement can also be accelerated if Lucid Trustee Services Limited requests or requires that the lender terminates or closes-out any Transaction under the ISDA Agreement pursuant to Clause 4.10 of the Intercreditor Agreement between primarily the Company, Lucid Agency Services as Senior Agent and Lucid Trustee Services Limited as Security Agent; in the event of certain refinancing circumstances; and in the event of certain reductions in the principal with respect to amounts loaned under the Senior Facilities Agreement.

As of September 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to the ISDA Agreements was $2.5 million. As of September 30, 2020, the Company has not posted any collateral related to the ISDA Agreement, as no collateral is required under the terms of such ISDA Agreement. If the Company had breached any of the provision under the ISDA Agreement which resulted in an acceleration of the ISDA Agreement at September 30, 2020, it could have been required to settle its obligations under the ISDA Agreement at its termination value of $3.0 million.

7.	Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of our assets and liabilities utilizing an established three-level hierarchy. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:

	Level 1:	Quoted prices in active markets for identical assets or liabilities.

	Level 2:	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.

	Level 3:	Unobservable inputs that are supported by little or no market activity that are significant to the fair value of the asset or liability. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that are unable to be corroborated with observable market data.

The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments approximates their recorded values.

For each period, derivative financial instrument assets and liabilities measured at fair value on a recurring basis are included in the financial statements as per the table below.

			September 30,		December 31,
	Level		2020		2019
			(in millions)
Derivative liability (see Note 6)		2	$	2.5	$	—
Long term receivable (included in other assets)		2	$	1.2	$	1.5

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s principal financial officer, who reports to the principal executive officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Principal Financial Officer and approved by the Principal Executive Officer.

At September 30, 2020 and December 31, 2019, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

8.	Stock-Based Compensation

The Company’s stock-based compensation plans authorize awards of restricted stock units (“RSUs”), stock options and other equity-related awards. In May 2019, in conjunction with the Company’s stockholders approving the 2018 Omnibus Incentive Plan (the “2018 Plan”), which authorizes a total of 2,550,000 shares to be issued pursuant to awards thereunder, the balances available for awards under the Company’s predecessor plans (i.e., the 2016 Long-Term Incentive Plan and the Second Long-Term Incentive Plan) (collectively, the “Prior Plans”) were terminated. Although outstanding awards under the Prior Plans remain governed by the terms of the Prior Plans, no new awards will be granted or become available for grant under the Prior Plans.

As of September 30, 2020, there were (i) 2,429,011 shares subject to outstanding awards under the Prior Plans, including 1,092,633 shares subject to market-price vesting conditions, and (ii) 1,909,373 shares subject to outstanding awards under the 2018 Plan, including 100,000 shares subject to performance-based target awards and 241,077 shares subject to awards that were previously subject to performance criteria that were determined to be met in June 2020 (at a level equal to approximately 87% of the target awards) which awards continue to remain subject to a time-based vesting schedule. As of September 30, 2020, there were 367,311 shares available for new awards under the 2018 Plan and no shares available for new awards under the Prior Plans. All awards consist of RSUs and Restricted Stock.

The Company also has an employee stock purchase plan (“ESPP”) that authorizes the issuance of up to an aggregate of 500,000 shares of common stock pursuant to purchases thereunder by employees. The ESPP, which was approved by stockholders in July 2017, is administered by the Compensation Committee which has discretion to designate the length of offering periods and other terms subject to the requirements of the ESPP. The Company held a twelve-month offering period under the ESPP that began on June 3, 2019 and ended on June 2, 2020. This offering period authorized employees to contribute up to 10% of their base compensation to purchase a maximum of 1,000 shares at a discounted purchase price that would be equal 85% of the lower of: (i) the closing price at the beginning of the offering period and (ii) the closing price at the end of the offering period. A total of 7,649 shares were purchased on the last day of the offering period, June 2, 2020, at a discounted price of $3.2215 per share. As of September 30, 2020, a total of 467,751 shares remain available for purchase under the ESPP.

A summary of the Company’s RSU activity during the nine months ended September 30, 2020 is as follows:

	Number of Shares

Unvested Outstanding at January 1, 2020		1,571,964
Granted		1,017,039
Forfeited		(47,613	)
Vested ⁽¹⁾		(210,553	)
Unvested Outstanding at September 30, 2020		2,330,837

(1)

The RSUs that vested during the nine months ended September 30, 2020 are subject to deferred settlement terms such that the awards do not settle until the participant’s services terminate. The Company issued a total of 166,959 shares during the nine months ended September 30, 2020 in connection with the net settlement of RSUs that vested during the preceding year (on December 31, 2019).

Stock-based compensation is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. For performance awards that are contingent upon the Company achieving certain pre-determined financial performance targets, compensation expense is calculated based on the number of shares expected to vest after assessing the probability that the performance criteria will be met. Determining the probability of achieving a performance target requires estimates and judgment.

The Company recognized stock-based compensation expense for Restricted Stock and RSUs amounting to $1.1 million and $2.2 million for the three months ended September 30, 2020 and 2019, respectively, and $3.1 million and $6.6 million for the nine months ended September 30, 2020 and 2019, respectively. Total unrecognized compensation expense related to unvested stock awards and unvested RSUs at September 30, 2020 amounts to $7.5 million and is expected to be recognized over a weighted average period of 1.4 years.

9.	Accumulated Other Comprehensive Loss (Income)

The accumulated balances for each classification of comprehensive loss (income) are presented below:

	Foreign Currency Translation Adjustments			Change in Fair Value of Hedging Instrument		Unrecognized Pension Benefit Costs			Accumulated Other Comprehensive (Income)
	(in millions)
Balance at January 1, 2020	$	(76.5	)	$	1.4	$	30.0		$	(45.1	)
Change during the period		(3.1	)		1.1		(4.4	)		(6.4	)
Balance at March 31, 2020		(79.6	)		2.5		25.6			(51.5	)
Change during the period		(0.4	)		0.5		8.7			8.8
Balance at June 30, 2020		(80.0	)		3.0		34.3			(42.7	)
Change during the period		4.2			0.1		0.3			4.6
Balance at September 30, 2020	$	(75.8	)	$	3.1	$	34.6		$	(38.1	)

	Foreign Currency Translation Adjustments			Change in Fair Value of Hedging Instrument			Unrecognized Pension Benefit Costs			Accumulated Other Comprehensive (Income)
	(in millions)
Balance at January 1, 2019	$	(78.9	)	$	(0.1	)	$	23.1		$	(55.9	)
Change during the period		0.5			0.6			(0.9	)		0.2
Balance at March 31, 2019		(78.4	)		0.5			22.2			(55.7	)
Change during the period		(0.7	)		0.2			2.0			1.5
Balance at June 30, 2019		(79.1	)		0.7			24.2			(54.2	)
Change during the period		(0.5	)		0.3			3.1			2.9
Balance at September 30, 2019	$	(79.6	)	$	1.0		$	27.3		$	(51.3	)

Included within accumulated other comprehensive income is an amount of $0.8 million relating to the change in fair value of discontinued hedging instruments. This amount will be amortized as a charge to income over the life of the original instrument, to August 2021 in accordance with US GAAP. The remaining $2.3 million relates to currently active hedging instruments.

10.

Net Income/Loss per Share

Basic income/loss per share (“EPS”) is computed by dividing net income/loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period, including stock options, restricted stock, RSUs and warrants, using the treasury stock method, and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.

The computation of diluted EPS excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

RSUs		—		3,066,697		3,714,268		3,066,697
Unvested Restricted Stock		624,116		624,116		624,116		624,116
Stock Warrants		9,539,565		9,539,565		9,539,565		9,539,565
		10,163,681		13,230,378		13,877,949		13,230,378

11.

Other Finance Income (Expense)

Other finance income (expense) consisted of the following for the three and nine months ended September 30, 2020 and 2019:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(in millions)						(in millions)
Pension interest cost	$	(0.5	)	$	(0.6	)	$	(1.6	)	$	(2.0	)
Expected return on pension plan assets		0.8			0.9			2.3			2.7
Foreign currency translation on senior bank debt		—			(4.5	)		(6.6	)		(4.8	)
Foreign currency remeasurement on hedging instrument		—			3.0			—			3.2
	$	0.3		$	(1.2	)	$	(5.9	)	$	(0.9	)

12.

Income Taxes

The effective income tax rate for the three months ended September 30, 2020 and 2019 was 0.0% and 1.2%, respectively, resulting in a $0.0 million and $0.1 million income tax expense, respectively. The effective income tax rate for the nine months ended September 30, 2020 and 2019 was 0.7% and 0.4%, respectively, resulting in a $0.3 million and $0.1 million income tax expense, respectively. The Company’s effective income tax rate has fluctuated primarily as a result of the income mix between jurisdictions.

The income tax expense for the three and nine months ended September 30, 2020 and 2019 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to pre-tax losses for which no tax benefit can be recorded, and foreign earnings being taxed at rates different than the US statutory rate.

13.

Related Parties

Macquarie Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK”), is an affiliate of MIHI LLC, the beneficial owner of approximately 16.75% of our common stock. Macquarie UK is one of the lending parties with respect to our senior secured term loans and revolving credit facility under our senior facilities agreement dated September 27, 2019, as amended and restated on June 25, 2020 (the “SFA”) (see Note 5). The portion of the total loans of $310.6 million under these facilities held by Macquarie UK at September 30, 2020 was $29.2 million. Interest expense payable to Macquarie UK for the three months ended September 30, 2020 and 2019 amounted to $0.6 million and $0.0 million, respectively, and for the nine months ended September 30, 2020 and 2019 amounted to $1.7 million and $0.0 million, respectively. In addition, $1.1 million of a total $12.7 million of accrued interest payable was due to Macquarie UK at September 30, 2020, and Macquarie UK received $0.3 million of the total $3.1 million of SFA amendment fees paid (see Note 5). MIHI LLC, is also a party to a stockholders agreement with the Company and other stockholders, dated December 23, 2016, pursuant to which, subject to certain conditions, MIHI LLC, jointly with Hydra Industries Sponsor LLC, are permitted to designate two directors to be nominated for election as directors of the Company at any annual or special meeting of stockholders at which directors are to be elected, until such time as MIHI LLC and Hydra Industries Sponsor LLC in the aggregate hold less than 5% of the outstanding shares of the Company.

The Company held a 40% non-controlling equity interest in Innov8 Gaming Limited (“Innov8”) from October 2019 until April 2020 when the Company disposed of its interest. Revenue earned from Innov8 while a related party for the nine months ended September 30, 2020 and 2019 amounted to $0.6 million and $0.0 million, respectively and purchases from Innov8 while a related party for the nine months ended September 30, 2020 and 2019 amounted to $0.2 million and $0.0 million, respectively. The value of the investment was impaired by $0.7 million to $Nil in March 2020 prior to disposal.

14.

Leases

The Company is party to leases with third parties with respect to various gaming machines. Gaming machine leases typically include a lease (of the machine) and a non-lease (provision of software services) component.

The components of lease income were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in millions)				(in millions)
Interest receivable from sales type leases	$	0.1	$	—	$	0.1	$	—
Operating lease income		0.9		—		1.9		—
Variable income from sales type leases		0.3		—		0.5		—
	$	1.3	$	—	$	2.5	$	—

15.

Commitments and Contingencies

Legal Matters

From time to time, the Company may become involved in lawsuits and legal matters arising in the ordinary course of business. While the Company believes that, currently, it has no such matters that are material, there can be no assurance that existing or new matters arising in the ordinary course of business will not have a material adverse effect on the Company’s business, financial condition or results of operations.

16.

Pension Plan

We operate a defined contributions pension scheme in the US, and both defined benefit and defined contributions pension schemes in the UK. The defined contribution scheme assets are held separately from those of the Company in independently administered funds. The defined benefit section has been closed to new entrants since April 1, 1999 and closed to future accruals for services rendered to the Company for the entire financial statement periods presented. On March 15, 2019, it was agreed that no further deficit reduction contributions shall be made to the scheme, except in the event that the scheme funding level does not progress as expected, in which case contingent contributions would be made subject to an agreed maximum amount. It was determined that contingent contributions of $1.1 million and expense contributions of $0.4 million would be payable during the year ended December 31, 2020, with agreement reached with the trustees of the scheme to defer $0.4 million of the contingent contributions into the year ending December 31, 2021 The funding level of the scheme will next be tested against the expected position at December 31, 2020 to determine whether further contingent contributions are payable during the year ending December 31, 2021.

The total amount of employer contributions paid during the nine months ended September 30, 2020 amounted to $0.6 million.

The following table presents the components of our net periodic pension benefit cost:

	Nine Months Ended September 30,
	2020			2019
	(in millions)
Components of net periodic pension benefit cost:
Interest cost	$	1.6		$	2.0
Expected return on plan assets		(2.3	)		(2.7	)
Net periodic benefit	$	(0.7	)	$	(0.7	)

The following table sets forth the estimate of the combined funded status of the pension plans and their reconciliation to the related amounts recognized in our consolidated financial statements at the respective measurement dates:

	September 30, 2020			December 31, 2019
	(in millions)
Change in benefit obligation:
Benefit obligation at beginning of period	$	110.4		$	94.1
Interest cost		1.6			2.7
Prior service cost		—			—
Actuarial loss		5.8			14.1
Benefits paid		(1.9	)		(4.2	)
Foreign currency translation adjustments		(1.9	)		3.7
Benefit obligation at end of period	$	114.0		$	110.4
Change in plan assets:
Fair value of plan assets at beginning of period	$	107.3		$	97.4
Actual gain on plan assets		2.9			10.3
Employer contributions		0.6			0.2
Benefits paid		(1.9	)		(4.2	)
Foreign currency translation adjustments		(2.1	)		3.6
Fair value of assets at end of period	$	106.8		$	107.3
Amount recognized in the consolidated balance sheets:
Unfunded status (non-current)	$	(7.2	)	$	(3.1	)
Net amount recognized in other long-term liabilities	$	(7.2	)	$	(3.1	)

17.

Segment Reporting and Geographic Information

The Company operates its business along three operating segments, which are segregated based on revenue stream: Service Based Gaming, Virtual Sports (which includes Interactive) and Acquired Businesses. The Company believes this method of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated.

The following tables present revenue, cost of sales, excluding depreciation and amortization, selling, general and administrative expenses, depreciation and amortization, stock-based compensation expense and acquisition related transaction expenses, operating profit/(loss), total assets and total capital expenditures for the periods ended September 30, 2020 and 2019, respectively, by business segment. Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these costs are not allocable and to do so would not be practical. Corporate function costs consist primarily of selling, general and administrative expenses, depreciation and amortization, capital expenditures, right of use assets, cash, prepaid expenses and property and equipment and software development costs relating to corporate/shared functions. All acquisition and integration related transaction expenses are allocated as corporate function costs.

As a result of improved processes that have allowed us to more accurately allocate assets between reporting segments, we have allocated our right of use asset between segments differently when compared to previous quarters.

Segment Information

Three Months Ended September 30, 2020

	Server Based Gaming			Virtual Sports			Acquired Businesses			Intergroup Eliminations			Corporate Functions			Total
	(in millions)
Revenue:
Service	$	23.7		$	10.9		$	22.4		$	(0.6	)	$	—		$	56.4
Hardware		1.8			—			1.9			—			—			3.7
Total revenue		25.5			10.9			24.3			(0.6	)		—			60.1
Cost of sales, excluding depreciation and amortization:
Cost of service		(5.0	)		(1.2	)		(5.6	)		0.6			—			(11.2	)
Cost of hardware		(0.9	)		—			(1.6	)		—			—			(2.5	)
Selling, general and administrative expenses		(4.5	)		(1.4	)		(12.1	)		—			(3.9	)		(21.9	)
Stock-based compensation expense		(0.2	)		(0.2	)		—			—			(0.7	)		(1.1	)
Acquisition and integration related transaction expenses		—			—			—			—			(1.2	)		(1.2	)
Depreciation and amortization		(5.4	)		(1.5	)		(6.8	)		—			(0.3	)		(14.0	)
Segment operating income (loss)		9.5			6.6			(1.8	)		—			(6.1	)		8.2

Net operating income																$	8.2

Total assets at September 30, 2020	$	61.1		$	69.2		$	149.1		$	—		$	40.9		$	320.3

Total goodwill at September 30, 2020	$	—		$	45.4		$	33.9		$	—		$	—		$	79.3
Total capital expenditures for the three months ended September 30, 2020	$	1.2		$	1.8		$	2.4		$	—		$	1.0		$	6.4

Three Months Ended September 30, 2019

	Server Based Gaming			Virtual Sports			Acquired Businesses		Intergroup Eliminations		Corporate Functions			Total
	(in millions)
Revenue:
Service	$	15.5		$	8.3		$	—	$	—	$	—		$	23.8
Hardware		2.8			—			—		—		—			2.8
Total revenue		18.3			8.3			—		—		—			26.6
Cost of sales, excluding depreciation and amortization:								—		—
Cost of service		(4.1	)		(0.6	)		—		—		—			(4.7	)
Cost of hardware		(2.3	)		—			—		—		—			(2.3	)
Selling, general and administrative expenses		(5.7	)		(1.9	)		—		—		(3.9	)		(11.5	)
Stock-based compensation expense		(0.4	)		(0.3	)		—		—		(1.5	)		(2.2	)
Acquisition and integration related transaction expenses		—			—			—		—		(3.3	)		(3.3	)
Depreciation and amortization		(6.8	)		(1.3	)		—		—		(0.2	)		(8.3	)
Segment operating income (loss)		(1.0	)		4.2			—		—		(8.9	)		(5.7	)

Net operating loss														$	(5.7	)

Total assets at December 31, 2019	$	80.8		$	66.8		$	156.7	$	—	$	23.1		$	327.4

Total goodwill at December 31, 2019	$	—		$	46.4		$	34.5	$	—	$	—		$	80.9
Total capital expenditures for the three months ended September 30, 2019	$	3.7		$	1.4		$	—	$	—	$	0.2		$	5.3

Nine Months Ended September 30, 2020

	Server Based Gaming			Virtual Sports			Acquired Businesses			Intergroup Eliminations			Corporate Functions			Total
	(in millions)
Revenue:
Service	$	40.7		$	29.7		$	45.6		$	(1.2	)	$	—		$	114.8
Hardware		5.5			—			7.9			(0.2	)		—			13.2
Total revenue		46.2			29.7			53.5			(1.4	)		—			128.0
Cost of sales, excluding depreciation and amortization:
Cost of service		(9.6	)		(3.3	)		(9.2	)		1.2			—			(20.9	)
Cost of hardware		(3.0	)		—			(6.8	)		—			—			(9.8	)
Selling, general and administrative expenses		(11.5	)		(4.2	)		(32.6	)		—			(13.3	)		(61.6	)
Stock-based compensation expense		(0.5	)		(0.4	)		—			—			(2.2	)		(3.1	)
Acquisition and integration related transaction expenses		—			—			—			—			(5.6	)		(5.6	)
Depreciation and amortization		(17.6	)		(4.3	)		(17.2	)		—			(0.8	)		(39.9	)
Segment operating income (loss)		4.0			17.5			(12.3	)		(0.2	)		(21.9	)		(12.9	)

Net operating loss																$	(12.9	)

Total capital expenditures for the nine months ended September 30, 2020	$	2.8		$	5.4		$	9.7		$	—		$	3.9		$	21.8

Nine Months Ended September 30, 2019

	Server Based Gaming			Virtual Sports			Acquired Businesses		Intergroup Eliminations		Corporate Functions			Total
	(in millions)
Revenue:
Service	$	52.7		$	27.5		$	—	$	—	$	—		$	80.2
Hardware		6.8			—			—		—		—			6.8
Total revenue		59.5			27.5			—		—		—			87.0
Cost of sales, excluding depreciation and amortization:
Cost of service		(12.9	)		(2.5	)		—		—		—			(15.4	)
Cost of hardware		(4.9	)		—			—		—		—			(4.9	)
Selling, general and administrative expenses		(18.3	)		(6.2	)		—		—		(14.5	)		(39.0	)
Stock-based compensation expense		(1.3	)		(1.0	)		—		—		(4.3	)		(6.6	)
Acquisition and integration related transaction expenses		—			—			—		—		(4.9	)		(4.9	)
Depreciation and amortization		(21.7	)		(4.2	)		—		—		(1.2	)		(27.1	)
Segment operating income (loss)		0.4			13.6			—		—		(24.9	)		(10.9	)

Net operating loss														$	(10.9	)

Total capital expenditures for the nine months ended September 30, 2019	$	8.7		$	4.4		$	—	$	—	$	0.9		$	14.0

Geographic Information

Geographic information for revenue is set forth below:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in millions)				(in millions)
Total revenue
UK	$	47.8	$	16.0	$	95.4	$	53.7
Greece		5.7		4.9		13.1		14.5
Italy		2.6		3.6		6.2		12.0
Rest of world		4.0		2.1		13.3		6.8
Total	$	60.1	$	26.6	$	128.0	$	87.0

Geographic information of our non-current assets excluding goodwill is set forth below:

	September 30, 2020		December 31, 2019
	(in millions)
UK	$	99.8	$	116.1
Greece		19.7		26.5
Italy		2.2		2.3
Rest of world		8.3		6.3
Total	$	130.0	$	151.2

Software development costs are included as attributable to the market in which they are utilized.

18.

Customer Concentration

During the three months ended September 30, 2020, one customer represented at least 10% of the Company’s revenues, accounting for 21% of the Company’s revenues. The customer was served by both the Server Based Gaming and Virtual Sports segments. During the three months ended September 30, 2019, two customers represented at least 10% of revenues, each accounting for 18% of the Company’s revenues. Both customers were served by the Server Based Gaming and Virtual Sports segments.

During the nine months ended September 30, 2020, two customers represented at least 10% of the Company’s revenues, accounting for 12% and 10% of the Company’s revenues. During the nine months ended September 30, 2019, three customers represented at least 10% of revenues, accounting for 20%, 16% and 10% of the Company’s revenues. All these customers were served by both the Server Based Gaming and Virtual Sports segments.

At September 30, 2020 and December 31, 2019, there were no customers that represented at least 10% of accounts receivable.

19.

Subsequent Events

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued. Other than as described below, the Company did not identify subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

On November 10, 2020, the Company agreed to contractual income of £24.6 million ($32.5 million) from a customer in relation to our revenue share agreements and their previously paid VAT on fixed odds betting terminals, as result of the UK decision in Commissioners for HM Revenue and Customs –v- (1) The Rank Group Plc and (2) Done Brothers (Cash Betting) Ltd & Ord [2020] UKUT 0117 (TCC). This amount was received on November 11, 2020.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual future results could differ materially from the historical results discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included herein and in our annual report on Form 10-K for the fiscal year ended December 31, 2019..

COVID-19 Update

Investors and potential investors are advised to review this Form 10-Q in light of ongoing events. As with other businesses worldwide, we are experiencing severe disruption to our business as a result of the COVID-19 pandemic and the far-reaching actions of the governments of various countries where we do, and hope to do, business, as well as countries sourcing our supply chain.

Our business is being and will continue to be adversely affected by the continuing nature of the coronavirus (COVID-19) pandemic. Due to the speed and fluidity with which the situation continues to develop, we are not able at this time to estimate the extent of the impact of the COVID-19 pandemic on our financial results and operations in future periods. The “second wave” has seen various governments re-impose restrictions on our operations, including complete or partial closures of retail venues and the long-term impacts of the pandemic on the global economy, trade relations, consumer behavior, our industry and our business operations. As of the date of this report, the majority of retail venues in the UK, Italy, and Greece are closed.

During the previous closure of retail venues, we saw a significant increase in our online revenues from slots and virtual sports, though we can provide no assurance that such an increase will accompany current or future closures.

Our ability to execute our strategy is necessarily affected by the ongoing COVID-19 pandemic and its continuing effects on our business. We continue to be highly focused on managing our cash flow and liquidity, as well as focusing on managing the recent re-closures our businesses.

However, the dynamic nature of the pandemic and government restrictions, as well as evolving potential for future relevant, government sponsored business stimuli and creditor relief plans are neither quantifiable nor predictable as of this Report.

Forward-Looking Statements

We make forward-looking statements in this Quarterly Report on Form 10-Q. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business, and the timing and ability for us to complete currently contemplated or future acquisitions. Specifically, forward-looking statements may include statements relating to:

●

the future financial performance of the Company;

●

restrictions in our existing borrowings, including covenants set forth in our existing debt facilities (and the recent amendment thereto), or any other indebtedness we may incur in the future, could adversely affect our business, financial condition, or results of operations, and our ability to make distributions to stockholders and the value of our common stock;

●

the market for our products and services;

●

expansion plans and opportunities, including currently contemplated or future acquisitions or additional business combinations; and

●

other statements preceded by, followed by or that include words such as “anticipate”, “believe”, “can”, “continue”, “could”, “estimate”, “expect”, “forecast”, “intend”, “may”, “might”, “plan”, “possible”, “potential”, “predict”, “project”, “proposed”, “scheduled”, “seek”, “should”, “target”, “would” or similar expressions, among others.

These forward-looking statements are based on information available as of the date hereof, and current expectations, forecasts and assumptions that involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause our actual results or performance to differ include:

●

the effect and impact of the ongoing global coronavirus (COVID-19) pandemic on our business including whether there is continuing increases or spikes in the number of COVID-19 cases in areas in which we operate; the duration, degree and effectiveness of governmental, business or other actions in response to the pandemic, including but not limited to quarantine, shelter-in-place and social distancing measures; restrictions on or changes to our operations up to and including complete or partial closures of retail venues; the long-term impacts of the pandemic on the global economy, trade relations, consumer behavior, our industry and our business operations;

●

our ability to compete effectively in our industries;

●

the effect of evolving technology on our business;

●

our ability to renew long-term contracts and retain customers, and secure new contracts and customers;

●

our ability to maintain relationships with suppliers;

●

our ability to protect our intellectual property;

	●	our ability to protect our business against cybersecurity threats;

	●	government regulation of our industries;

●

our ability to successfully grow by acquisition as well as organically;

●

fluctuations due to seasonality;

●

our ability to attract and retain key members of our management team;

●

our need for working capital;

●

our ability to secure capital for growth and expansion;

●

changing consumer, technology and other trends in our industries;

●

our ability to successfully operate across multiple jurisdictions and markets around the world;

●

changes in local, regional and global economic and political conditions; and

●

other factors.

Overview

We are a global business-to-business gaming technology company, supplying Server Based Gaming (“SBG”) and Virtual Sports (which includes Interactive) systems to regulated lottery, betting and gaming operators worldwide through an “omni-channel” distribution strategy. We provide end-to-end digital gaming solutions on our proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices such as smartphones and tablets and online computer and social applications. Our products can be found in licensed betting offices, adult gaming centers, bingo halls, and through our Acquired Businesses, in UK pubs, airports, motorway service areas, and leisure parks.

Our key strategic priorities are to:

●

Extend our strong positions in each of Virtual Sports, Interactive and SBG by developing new omni-channel products;

●

Continue to invest in games and technology in order to grow our existing customers’ revenues;

●

Add new customers by expanding into underpenetrated markets and newly regulated jurisdictions; and

●

Pursue targeted mergers and acquisitions to expand our product portfolio and/or distribution footprint.

Business Segments

We report our operations in three business segments, SBG, Virtual Sports (which includes Interactive, an operating segment which does not exceed the quantitative thresholds in Accounting Standards Committee (“ASC” 280-10-50-12), and Acquired Businesses (which is comprised of the aforementioned NTG business, acquired on October 1, 2019), representing our different products and services. We evaluate our business performance, resource allocation and capital spending on an operating segment level, where possible. We use our operating results and identified assets of each of our operating segments in order to make prospective operating decisions. Although our revenue and cost of sales (excluding depreciation and amortization) are reported exclusively by segment, we do include unallocated items in our consolidated financial statements for certain expenses including depreciation and amortization as well as selling, general and administrative expenses. Unallocated balance sheet line items include items that are a shared resource and therefore not allocated between operating segments.

Our SBG business segment designs, develops, markets and distributes a broad portfolio of games through our digital network architecture. Our SBG customers include UK licensed betting offices (“LBOs”), casinos, gaming hall operators, bingo operators and regulated operators of lotteries, as well as government-affiliated operators.

Our Virtual Sports business segment designs, develops, markets and distributes ultra-high-definition games that create an always-on sports wagering experience. Our Virtual Sports customers include virtual sports retail and digital operators, including regulated betting operators, lotteries, casinos, online and social gaming operators and other gaming and lottery operators in the UK, continental Europe, Africa, Asia and North America. Our Interactive business segment (reported as part of Virtual Sports) comprises the offering of our SBG, Virtual Sports, and interactive-only content via our remote gaming servers.

Our Acquired Businesses designs, develops, markets and distributes a broad portfolio of games through our digital network architecture. In addition, it operates analog gaming and amusement machines for certain customers, including UK pubs, adult gaming centers, motorway service stations and holiday resorts.

Revenue

We generate revenue in three principal ways: on a participation basis, on a fixed rental fee basis and through product sales and software license fees. Participation revenue includes a right to receive a share of revenue generated from (i) our Virtual Sports products placed with operators; (ii) our SBG terminals placed in gaming and lottery venues; (iii) our Interactive content placed with operators; (iv) licensing our game content and intellectual property to third parties; and (v) our games on third-party online gaming platforms that are interoperable with our game servers.

Geographic Range

Geographically, more than half of our revenue is derived from, and more than half of our non-current assets are attributed to, our UK operations, with the remainder of our revenue derived from, and non-current assets attributed to, Italy, Greece and the rest of the world.

For the three months ended September 30, 2020, we earned approximately 79.6% of our revenue in the UK, 9.5% in Greece, 4.3% in Italy and the remaining 6.6% across the rest of the world. During the three months ended September 30, 2019, we earned approximately 60.2%, 18.3%, 13.5% and 8.0% of our revenue in those regions, respectively.

For the nine months ended September 30, 2020, we earned approximately 74.5% of our revenue in the UK, 10.5% in Greece, 4.8% in Italy and the remaining 10.2% across the rest of the world. During the nine months ended September 30, 2019, we earned approximately 61.7%, 16.7%, 13.8% and 7.8% of our revenue in those regions, respectively.

Foreign Exchange

Our results are affected by changes in foreign currency exchange rates as a result of the translation of foreign functional currencies into our reporting currency and the re-measurement of foreign currency transactions and balances. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. The largest geographic region in which we operate is the UK and the British pound (“GBP”) is considered to be our functional currency. Our reporting currency is the U.S. dollar (“USD”). Our results are translated from our functional currency of GBP into the reporting currency of USD using average rates for profit and loss transactions and applicable spot rates for period-end balances. The effect of translating our functional currency into our reporting currency, as well as translating the results of foreign subsidiaries that have a different functional currency into our functional currency, is reported separately in Accumulated Other Comprehensive Income.

During the three months ended September 30, 2020, we derived approximately 20% of our revenue from sales to customers outside the UK, compared to 40% during the three months ended September 30, 2019.

During the nine months ended September 30, 2020, we derived approximately 25% of our revenue from sales to customers outside the UK, compared to 38% during the nine months ended September 30, 2019.

In the section “Results of Operations” below, currency impacts shown have been calculated as the current-period average GBP:USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP:USD rate. This is not a U.S. GAAP measure, but is one which management believes gives a clearer indication of results. In the tables below, variances in particular line items from period to period exclude currency translation movements, and currency translation impacts are shown independently.

Non-GAAP Financial Measures

We use certain financial measures that are not compliant with U.S. GAAP (“Non-GAAP financial measures”), including EBITDA and Adjusted EBITDA, to analyze our operating performance. In this discussion and analysis, we present certain non-GAAP financial measures, define and explain these measures and provide reconciliations to the most comparable U.S. GAAP measures. See “Non-GAAP Financial Measures” below.

Results of Operations

The following discussion and analysis of our results of operations has been organized in the following manner:

●

a discussion and analysis of the results of operations of the Company, our SBG, Virtual Sports and Acquired Businesses business segments for the three-month period ended September 30, 2020, compared to the same period in 2019, including KPI analysis; and

●

a discussion and analysis of the results of operations of the Company, our SBG, Virtual Sports and Acquired Businesses business segments for the nine-month period ended September 30, 2020, compared to the same period in 2019, including KPI analysis.

Our fiscal year begins on January 1 and ends on December 31 of each calendar year. The results for the three months and nine months ended September 30, 2020 are unaudited.

Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). In the three-month periods ended September 30, 2020 and September 30, 2019, the average GBP:USD rates were 1.29 and 1.23, respectively. In the nine-month periods ended September 30, 2020 and 2019, the average GBP:USD rates were 1.28 and 1.28, respectively.

Our results for the quarter ended September 30, 2020 have continued to be impacted by the COVID-19 pandemic. Most retail venues were able to re-open during the period; however, social distancing regulations meant that pre-COVID income levels were not achieved in all areas. With respect to the jurisdictions in which the Company operates, the UK, Italy, Greece, and US (Illinois) reopened for business, with certain limitations, on June 15, 2020, June 15, 2020, June 8, 2020, and July 1, 2020, respectively. Recurring revenue across the whole business returned to approximately 90% of pre-COVID levels, with online revenue performing well, even after retail venues re-opened. SBG income returned strongly in all areas, with income in Greece particularly robust. Overall revenue from the leisure sectors was slower to return, particularly in holiday parks; however, by the end of August/early September revenue was recovering well. Revenue from digital Category C machines in pubs recovered, but non-gaming machines had difficulty reaching pre-lockdown levels, largely as a result of social distancing measures. The last week of September saw the introduction of a 10 PM curfew for restaurants, pubs and other hospitality venues in the UK, leading to a reduction in revenue in affected sites.

In the discussion and analysis below, certain data may vary from the amounts presented in our consolidated financial statements due to rounding.

Three Months ended September 30, 2020 compared to Three Months ended September 30, 2019

	For the Three-Month
	Period ended											Variance
	Unaudited			Unaudited								Functional
	Sept 30,			Sept 30,			Variance					Currency at			Functional			Currency
(In millions)	2020			2019			2020 vs 2019					Constant rate			Currency			Movement
Revenue:
Service	$	56.4		$	23.8		$	32.6		137.1	%	$	30.2			127.2	%	$	2.4
Hardware		3.7			2.8			0.9		32.1	%		0.7			24.9	%		0.2
Total revenue		60.1			26.6			33.5		125.9	%		30.9			116.2	%		2.6
Cost of sales, excluding depreciation and amortization:
Cost of service		(11.2	)		(4.7	)		(6.4	)	135.4	%		(5.9	)		124.7	%		(0.5	)
Cost of hardware		(2.5	)		(2.3	)		(0.3	)	11.3	%		(0.2	)		8.7	%		(0.1	)
Selling, general and administrative expenses		(21.9	)		(11.5	)		(10.4	)	90.5	%		(9.5	)		82.1	%		(1.0	)
Stock-based compensation		(1.1	)		(2.2	)		1.1		(50.1	%)		1.2			(52.4	)%		(0.1	)
Acquisition and integration related transaction expenses		(1.2	)		(3.3	)		2.1		(63.3	%)		2.2			(65.3	)%		(0.1	)
Depreciation and amortization		(14.0	)		(8.3	)		(5.7	)	68.6	%		(5.1	)		60.9	%		(0.6	)
Net operating Income (Loss)		8.2			(5.7	)		13.9		NM			13.6			NM			0.2
Other income (expense)
Interest income		0.1			(0.0	)		0.2		NM			0.2			NM			0.0
Interest expense		(8.3	)		(4.4	)		(3.9	)	89.2	%		(3.5	)		80.5	%		(0.4	)
Change in fair value of earnout liability		-			-			-		-			-			-			-
Change in fair value of derivative liability		-			2.9			(2.9	)	(100.0	%)		(2.9	)		(100.0	)%		(0.0	)
Other finance income (expense)		0.3			(1.2	)		1.6		NM			1.5			NM			0.0
Loss from equity method investee		-			-			-		-			-			-			-
Total other income (expense), net		(7.9	)		(2.7	)		(5.1	)	187.5	%		(4.8	)		172.5	%		(0.3	)
Net income (loss) from continuing operations before income taxes		0.3			(8.4	)		8.8		NM			8.9			NM			(0.1	)
Income tax expense		(0.0	)		(0.1	)		0.1		(75.5	%)		0.1			(77.3	)%		(0.0	)
Net Income (Loss)	$	0.3		$	(8.5	)	$	8.9		NM		$	9.0			NM		$	(0.1	)
Exchange Rate - $ to £		1.29			1.23

Revenue

Total reported revenue for the three months ended September 30, 2020 increased by $33.5 million, or 125.9%, to $60.1 million on a reported basis. This increase includes $24.3 million in revenue from Acquired Businesses, which was not in our results in the prior year quarter. In addition, we had an increase in revenue of $9.3 million remitted to us by one of our major UK customers, to which we were entitled that was the result of a UK tax ruling, creating a rebate of value added tax that had been incorrectly applied to certain gaming machines in their estate (the “VAT-related income”) in the past. As our contract with this customer is 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 $2.6 million impact. On a functional currency at constant rate basis, revenue increased by $30.9 million, or 116.2%.

SBG reported revenue increased by $7.2 million, comprised of an increase in service revenue of $8.2 million, reflecting the VAT-related income, offset by a $1.0 million decrease in hardware sales. Service revenue was impacted by COVID-19, as some venues had not reopened as of the beginning of the period. Customer gross win declined from the comparative period, reflecting growth in terminals in Greece, a lower customer gross win region, offset by strong performance in the UK.

Virtual Sports reported revenue increased by $2.6 million, or 31.6%. This increase included a $0.4 million decrease in retail recurring revenue from the COVID-19 national shutdowns, offset by growth in Scheduled Online Virtuals of $1.1 million and Interactive of $1.3 million.

Acquired Businesses revenue accounted for $24.3 million. As with the Company’s other businesses in the UK, revenue has increased significantly from the second quarter of 2020, as COVID-19 related shutdowns were lifted at the beginning of the period, although social distancing regulations have led to lower revenue than pre-COVID-19, particularly in holiday parks.

Cost of sales, excluding depreciation and amortization

Cost of sales, excluding depreciation and amortization, increased by $6.7 million, or 95.5%, on a reported basis, to $13.7 million, including the impact of $0.6 million from unfavorable currency movements.

Of this increase, $7.2 million was attributable to the inclusion of Acquired Businesses, which was not included in our prior period results. This was offset by a $0.4 million reduction in SBG cost of sales and a $0.6 million reduction in Virtual Sports cost of sales.

Selling, general and administrative expenses

SG&A expenses increased by $10.4 million, or 90.5%, on a reported basis, to $21.9 million. This included $1.0 million of unfavorable currency movements. The reported increase was driven by incremental SG&A expenses of $12.1 million from the Acquired Businesses, offset by a $1.7 million decrease in selling, general and administrative expenses in SBG and Virtual Sports.

Stock-based compensation

During the three months ended September 30, 2020, the Company recorded an expense of $1.1 million with respect to outstanding awards. All of this expense related to costs from awards made under the 2018 Plan and all costs related to recurring costs. During the three months ended September 30, 2019, the charge for stock-based compensation was $2.2 million. Of this expense, $1.5 million related to costs from awards made under the 2016 Long Term Incentive Plan and $0.7 million from awards made under the 2018 Plan.

Acquisition and integration related transaction expenses

Acquisition related transaction expenses decreased by $2.1 million to $1.2 million, on a reported basis. The entirety of the 2019 and the majority of the 2020 period expenses were related to work in respect of potential acquisitions, with the 2019 expenses relating to the acquisition and third party integration fees linked exclusively to the acquisition and integration of Novomatic UK’s Gaming Technology Group. In addition, there was a further $0.7 million of costs incurred in 2020 relating to potential merger and acquisition activity.

Depreciation and amortization

Depreciation and amortization increased by $5.7 million, or 68.6% to $14.0 million on a reported basis. This included the impact of unfavorable currency movements of $0.6 million.

This increase was driven by the addition of $6.8 million in depreciation and amortization attributable to Acquired Businesses, offset by a reduction in depreciation in SBG as UK machines reached fully depreciated status.

Net operating profit

During the period, net operating profit was $8.2 million compared to a net operating loss of $5.7 million in the prior period. The increase in operating profit was attributable to an increase of $10.4 million in operating profit in SBG, largely attributable to the VAT-related income, an increase of $2.4 million in operating profit in Virtual Sports, as well as the $2.1 million decrease in acquisition related transaction expenses, offset by a $1.8 million operating loss in Acquired Businesses. This increase also included a $0.3 million favorable impact from foreign currency translation.

Interest expense

Interest expense increased by $3.9 million in the period, to $8.3 million, on a reported basis due to a $3.1 million increase in debt interest and a $0.6 million increase in debt fee amortization following the refinancing in October 2019.

Change in fair value of derivative liability

Following the termination of the cross-currency swaps on October 1, 2019, there was no change in the fair values of derivative liabilities in the three months ended September 30, 2020. The current swaps qualify for hedge accounting and accordingly are not shown as derivative liability movements. For the three months ended September 30, 2019, the change in fair value of derivative liability was a $2.9 million credit.

Other finance income

Other finance income for the three months ended September 30, 2020 resulted in a $0.3 million credit compared to a $1.2 million charge in the three months ended September 30, 2019. Movements in the retranslation in the senior debt explain the changes, but 2019 also included a $3.0 million benefit from the GBP:USD cross-currency swap which was terminated on October 1, 2019.

Income tax expense

Our effective tax rate for the period ended September 30, 2020 was 0.0% and our effective tax rate for the period ended September 30, 2019 was 1.2%.

Net profit

During the period, net profit was $0.3 million compared to a net loss of $8.5 million in the prior period. On a functional currency at constant rate basis, net profit increased by $9.0 million, primarily due to the VAT-related income and growth in Virtual Sports as customers moved towards online Virtuals during COVID-19 related shutdowns.

Three Months ended September 30, 2020 compared to Three Months ended September 30, 2019 – Server Based Gaming Segment

Revenue growth for our SBG business is principally driven by the number of operator customers we have, the number of SBG machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.

SBG Segment, Key Performance Indicators

	For the Three-Month Period ended
	Unaudited			Unaudited
	Sept 30,			Sept 30,			Variance
SBG	2020			2019			2020 vs 2019
										%
End of period installed base (# of terminals)		32,311			32,084			227			0.7	%
Average installed base (# of terminals)		32,698			34,764			(2,066	)		(5.9	%)
Customer Gross Win per unit per day (1)(2)	£	69.24		£	74.06		£	(4.82	)		(6.5	%)
Customer Net Win per unit per day (1)(2)	£	50.85		£	53.10		£	(2.24	)		(4.2	%)
Inspired Blended Participation Rate		6.2	%		6.3	%		(0.1	%)

(1)	Includes all SBG terminals in which the company takes a participation revenue share across all territories

(2)	Includes all days of the quarter, including the days during which the SBG terminals were not operating due to COVID-19.

In the table above:

“End of Period Installed Base” is equal to the number of deployed SBG terminals at the end of each period that have been placed on a participation basis. SBG participation revenue, which comprises the majority of SBG service revenue, is directly related to the terminal installed base. This is the medium by which customers generate revenue and distribute a revenue share to the Company. To the extent all other KPIs and certain other factors remain constant, the larger the installed base, the higher the Company’s revenue will be for that period. Management gives careful consideration to this KPI in terms of driving growth across the segment.

Revenue is derived from the performance of the installed base as described by the Gross and Net Win KPIs.

If the End of Period Installed Base is materially different from the Average Installed Base (described below), we believe this gives an indication as to potential future performance. The End of Period Installed Base is particularly useful for assessing new customers or markets, to indicate the progress being made with respect to entering new territories or jurisdictions.

“Average Installed Base” is the average number of deployed SBG terminals during the period. Therefore, it is more closely aligned to revenue in the period. This measure is particularly useful for assessing existing customers or markets to provide comparisons of historical size and performance.

“Customer Gross Win per unit per day” is a KPI used by our internal decision makers to (i) assess impact on the Company’s revenue, (ii) determine changes in the strength of the overall market and (iii) evaluate the impacts of regulatory change and our new content releases on our customers. Customer Gross Win per unit per day is the average per unit cash generated across all SBG terminals in which the Company takes a participation revenue share across all territories in the period, defined as the difference between the amounts staked less winnings to players divided by the Average Installed Base in the period, then divided by the number of days in the period.

SBG revenue share income accrued in the period is derived from Customer Gross Win accrued in the period after deducting gaming taxes (defined as a regulatory levy paid by the Customer to government bodies) and applying the Company’s contractual revenue share percentage.

Our internal decision makers believe Customer Gross Win measures are meaningful because they represent a view of customer operating performance that is unaffected by our revenue share percentage and allow management to (1) readily view operating trends, (2) perform analytical comparisons and benchmarking between customers and (3) identify strategies to improve operating performance in the different markets in which we operate.

“Customer Net Win per unit per day” is Customer Gross Win per unit per day after giving effect to the deduction of gaming taxes.

“Inspired Blended Participation Rate” is the Company’s average revenue share percentage across all terminals where revenue is earned on a participation basis, weighted by Customer Net Win per unit per day.

Our overall SBG revenue from terminals placed on a participation basis can therefore be described as the product of the Average Installed Base, the Customer Net Win per unit per day, the number of days in the period, and the Inspired Blended Participation Rate, to give “participation revenue”.

SBG Segment, key events that affected results for the Three Months ended September 30, 2020

During the period Customer Gross Win per unit per day in the total UK market (including non-LBO markets) increased by 7.1%. This was due mainly to the strong recovery of incomes in the UK LBO market post COVID-19 shutdown of venues. However, while the comparative third quarter 2019 UK gross win per unit per day of £89 includes a diminishing impact from the reduction in maximum permitted bets on B2 gaming machines in the UK, effective as of April 1, 2019 (“the Triennial Implementation”), it does not include the impact of the September 2020 closure of 700 lower-performing venues, which positively impacts the average UK gross win per unit per day. A further 116 retail venues were permanently closed with the same customer post-reopening in June 2020.

In July 2020 the $9.3 million VAT-related income was received from a major UK customer. This amount has been recorded as revenue in our results.

In the UK Electronic Table Games (ETG) market, we sold 50 “Sabre Hydra” terminals to a major Casino customer, as the first batch of installs from an order of 156 terminals which was completed in October 2020.

During the period, new market sales continued in markets which we entered in December 2019. Hardware sales of a further 54 “Valor™” terminals were agreed between multiple customers in Illinois, North America, taking the total number of unit sales since launch to 331. Retail venues in Illinois reopened after the COVID-19 related shutdown in July 2020.

In Italy, Customer Net Win per unit per day (in EUR) decreased by 47.9% vs the comparative period, driven mainly by an increase in gaming tax on value played of 0.6% and the impact of card readers implemented in January 2020. When compared against first quarter 2020, which includes a comparable level of shutdowns due to COVID-19, Customer Net Win per unit per day (in EUR) decreased by 11%.

Greece Customer Gross Win per unit per day (in EUR) decreased by just 1.3%, despite the increase in average installed base year on year of 1,100 terminals.

Customer Gross Win per unit per day (in our functional currency, GBP) decreased by £5 or 6.5% across the entire estate due mainly to the impact of the introduction of card readers in the Italy market as well as COVID-19 related shutdowns. The blended participation rate decreased from 6.3% to 6.2%.

SBG Segment, Three Months ended September 30, 2020 compared to Three Months ended September 30, 2019

	For the Three-Month Period ended											Variance
Server Based Gaming	Unaudited Sept 30,			Unaudited Sept 30,			Variance					Functional Currency at			Functional			Currency
(In millions)	2020			2019			2020 vs 2019					Constant rate			Currency			Movement
Revenue:
Service	$	23.7		$	15.5		$	8.2		53.1	%	$	7.3			47.3	%	$	0.9
Hardware		1.8			2.8			(1.0	)	(35.3	%)		(1.1	)		(38.3	%)		0.1
Total revenue		25.5			18.3			7.2		39.3	%		6.2			33.9	%		1.0

Cost of sales, excluding depreciation and amortization:
Cost of service		(5.0	)		(4.1	)		(0.9	)	20.7	%		(0.6	)		15.4	%		(0.2	)
Cost of hardware		(0.9	)		(2.3	)		1.3		(58.4	%)		1.3			(59.8	%)		(0.0	)
Total cost of sales		(5.9	)		(6.4	)		0.4		(6.7	%)		0.7			(10.8	%)		(0.3	)
Selling, general and administrative expenses		(4.5	)		(5.7	)		1.2		(20.2	%)		1.3			(22.9	%)		(0.1	)
Stock-based compensation		(0.2	)		(0.4	)		0.2		(51.6	%)		0.2			(56.4	%)		(0.0	)
Depreciation and amortization		(5.4	)		(6.8	)		1.4		(21.2	%)		1.7			(24.7	%)		(0.2	)
Net operating Income (Loss)	$	9.5		$	(1.0	)	$	10.4		NM		$	10.1			NM		$	0.3
Exchange Rate - $ to £		1.28			1.23

Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.

SBG Segment Revenue

In the period revenue increased by $7.2 million to $25.5 million, on a reported basis. This increase was partly due to favorable currency movements of $1.0 million. On a functional currency at constant rate basis, SBG revenue increased by $6.2 million, or 33.9%.

Service revenue increased by $8.2 million on a reported basis. Favorable currency movements accounted for $0.9 million of the increase. On a functional currency at constant rate basis, SBG service revenue increased by $7.3 million, or 47.3%, to $23.7 million. This was primarily due to the VAT-related income and increased installed base in the Greek market of $0.6 million. These were partly offset by Italy tax, card reader impact and recovery of incomes post COVID-19 of $0.9 million, impact of a service contract that ceased in the UK Casino market and delayed UK Casino and Bingo venue openings of $0.6 million, and the impact of an incremental 600 UK LBO retail venue closures of $0.9 million.

Hardware revenue decreased by $1.0 million to $1.8 million on a reported basis. On a functional currency at constant rate basis, the revenue decrease was also $1.1 million or a decline of 38.3%. The decrease was due to the 30 additional “Sabre Hydra” sales in 2020 of $0.4 million and North America “Valor™” sales of $0.8 million offset by the reduction in sales of 365 SSBTs (Self Service Betting Terminals) in the UK LBO market of $1.4 million and 100 “Flex Cabinets” in the UK Bingo & Leisure market for $0.8 million from 2019 to 2020.

SBG Segment Operating Income

Cost of sales (excluding depreciation and amortization) decreased by $0.4 million to $5.9 million on reported basis, which included adverse currency movements of $0.3 million. On a functional currency at constant rate basis, SBG cost of sales decreased by $0.7 million or 10.8%.

Service cost of sales increased by $0.9 million to $5.0 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 increased by $0.6 million or 15.4%, driven by third party content cost of sale element related to the VAT-related income of $0.3 million and Colombia write offs of $0.5 million, partly offset by reduced costs in the UK and Italy of $0.2 million.

Hardware cost of sales decreased by $1.3 million to $0.9 million on both a reported and functional currency basis, reflecting the decrease in hardware sales.

SBG SG&A expense declined by $1.2 million on a reported basis. This decrease includes the impact of unfavorable currency movements of $0.1 million, reflecting ongoing restructuring, as well as synergies associated with the acquisition of the Acquired Businesses. Of this reduction, $1.0 million is attributable to reduced staffing costs, related to both staff reductions and reduced salaries implemented due to the COVID-19 pandemic.

Depreciation declined by $1.4 million on a reported basis, or 21.2%. The decrease in depreciation expense was due to the machines in the UK estate becoming fully depreciated, offset by additional depreciation from new machines in the Greek estate.

Operating income increased by $10.4 million year over year, from a $1.0 million reported operating loss to a $9.5 million operating profit year over year, due primarily to the VAT-related income.

SBG Segment, Recurring Revenue

Set forth below is a breakdown of our SBG recurring revenue. SBG recurring revenue consists principally of SBG participation revenue.

	For the Three-Month Period ended
	Unaudited			Unaudited
	Sept 30,			Sept 30,			Variance
(In £ millions)	2020			2019			2020 vs 2019			%
SBG Recurring Revenue
Total SBG Revenue	£	19.9		£	14.9		£	5.0			33.9	%

SBG Participation Revenue *	£	9.4		£	10.6		£	(1.1	)		(10.8	%)
SBG Other Fixed Fee Recurring Revenue	£	0.2		£	0.3		£	(0.2	)		(47.5	%)
Total SBG Recurring Revenue	£	9.6		£	10.9		£	(1.3	)		(11.9	%)
SBG Recurring Revenue as a % of Total SBG Revenue		48.3	%		73.5	%		(25.1	%)

Does not reflect VAT-related income

In the table above:

“SBG Participation Revenue” includes our share of revenue generated from (i) our SBG terminals placed in gaming and lottery venues; and (ii) licensing of our game content and intellectual property to third parties.

“SBG Other Fixed Fee Recurring Revenue” includes service revenue in which the Company earns a periodic fixed fee on a contracted basis.

“Total SBG Recurring Revenue” is equal to SBG Participation Revenue plus SBG Other Fixed Fee Recurring Revenue.

SBG Segment, Service Revenue by Region

Set forth below is a breakdown of our SBG service revenue by geographic region. SBG service revenue consists principally of SBG participation revenue.

Server Based Gaming Service Revenue by Region

	For the Three-Month Period ended									Variance
	Unaudited		Unaudited							Functional
	Sept 30,		Sept 30,		Variance					Currency at			Functional			Currency
(In millions)	2020		2019		2020 vs 2019					Constant rate			Currency			Movement
Service Revenue:
UK LBO	$	17.1	$	8.3	$	8.8		106.8	%	$	8.2			99.6	%	$	0.6
UK Other	$	0.7	$	1.3		(0.6	)	(43.5	)%		(0.6	)		(46.1	)%		0.0
Italy	$	0.9	$	1.7		(0.8	)	(46.1	)%		(0.8	)		(48.6	)%		0.0
Greece	$	4.8	$	4.0		0.8		19.4	%		0.6			14.0	%		0.2
Rest of the World	$	0.1	$	0.1		(0.0	)	(32.8	)%		(0.1	)		(36.6	)%		0.0

Total service revenue	$	23.7	$	15.5	$	8.2		53.1	%	$	7.3			47.3	%	$	0.9

Exchange Rate - $ to £		1.28		1.23

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.

Virtual Sports Segment, Three Months ended September 30, 2020 compared to Three Months ended September 30, 2019

Virtual Sports Segment, Key Performance Indicators

	For the Three-Month Period ended
	Unaudited		Unaudited
	Sept 30,		Sept 30,		Variance
Virtuals	2020		2019		2020 vs 2019
								%
No. of Live Customers at the end of the period		129		102		27			26.5	%
Average No. of Live Customers		128		101		27			26.7	%
Total Revenue (£‘m)	£	8.4	£	6.7	£	1.7			25.6	%

Total Virtual Sports Recurring Revenue (£‘m)	£	8.0	£	6.0	£	2.0			33.2	%
Total Revenue £‘m - Retail	£	3.2	£	3.8	£	(0.6	)		(16.1	)%
Total Revenue £‘m - Scheduled Online Virtuals	£	3.2	£	2.2	£	1.0			45.0	%
Total Revenue £‘m - Interactive	£	2.0	£	0.7	£	1.3			196.9	%
Average Revenue Per Customer per day (£)	£	713	£	717	£	(4	)		(0.6	)%

In the table above:

“No. of Live Customers at the end of the period” and “Average No. of Live Customers” represent the number of customers from which there is Virtual Sports revenue at the end of the period and the average number of customers from which there is Virtual Sports revenue during the period, respectively.

“Total Revenue (£m)” represents total revenue for the Virtual Sports segment, including recurring and upfront service revenue. Total revenue is also divided between “Total Revenue (£m) – Retail,” which consists of revenue earned through players wagering at Virtual Sports venues, “Total Revenue (£m) – Scheduled Online Virtuals,” which consists of revenue earned through players wagering on Virtual Sports online, and “Total Revenue (£m) – Interactive,” which consists of revenue earned through our Interactive product.

“Recurring Revenue” includes our share of revenue generated from (i) our Virtual Sports products placed with operators; (ii) licensing our game content and intellectual property to third parties; and (iii) our games on third-party online gaming platforms that are interoperable with our game servers.

“Average Revenue per Customer per day” represents total revenue for the Virtual Sports segment in the period, divided by the Average No. of Live Customers, divided by the number of days in the period.

Virtual Sports Segment, Recurring Revenue

	For the Three-Month Period ended
	Unaudited			Unaudited
	Sept 30,			Sept 30,			Variance
(In £ millions)	2020			2019			2020 vs 2019
										%
Virtual Sports Recurring Revenue
Total Virtual Sports Revenue	£	8.4		£	6.7		£	1.7			25.6	%

Recurring Revenue - Retail Virtuals	£	2.9		£	3.3		£	(0.4	)		(11.4	)%
Recurring Revenue - Scheduled Online Virtuals	£	3.2		£	2.1		£	1.1			54.1	%
Recurring Revenue - Interactive	£	1.9		£	0.7		£	1.3			189.4	%
Total Virtual Sports Recurring Revenue	£	8.0		£	6.0		£	2.0			33.2	%
Virtual Sports Recurring Revenue as a Percentage of Total		95.7	%		90.3	%		5.5	%
Virtual Sports Revenue

For definitions of the terms used in the table above, see the definitions provided above.

Virtual Sports Segment, key events that affected results for the Three Months ended September 30, 2020

During the quarter most retail territories were back online and in a recovery phase from the COVID-19 related worldwide lockdown that severely impacted the previous quarter. Whilst retail recovery has exceeded expectations, there has been a year on year decline of $0.5 million. Online revenues across the Scheduled Virtuals and Interactive divisions have increased $3.0 million leading to a net increase in revenue of $2.5 million.

At the end of September, our Scheduled Online Virtuals products were launched in Turkey with Misli, a major online operator.

Scheduled Online Virtuals were deployed with several GVC websites including BWIN, Sportingbet and Partypoker.

In New Jersey, Scheduled Online Virtuals were launched with Draftkings, a major strategic deployment in North America, representing our first US launch with VPP.

The Interactive division added key new customers during the period, including Kindred Europe, Stoiximan in Greece, Draftkings in New Jersey and Caliente in Mexico. The summer blockbuster titles, Centurion Megaways™ and Reelking Megaways™ were launched to the wider estate driving significant growth in the period

The Average Number of Live Customers during the period increased by twenty-seven, from 101 to 128. Including the launch of new Interactive customers in the quarter, our Average Number of Live Interactive Customers for the period increased to 72.

Virtual Sports Segment, Three Months ended September 30, 2020 compared to Three Months ended September 30, 2019

	For the Three-Month Period ended											Variance
Virtual Sports	Unaudited Sept 30,			Unaudited Sept 30,			Variance					Functional Currency at			Functional			Currency
(In millions)	2020			2019			2020 vs 2019					Constant rate			Currency			Movement

Service Revenue	$	10.9		$	8.3		$	2.6		31.5	%	$	2.1			25.6	%	$	0.5
Cost of Service		(1.2	)		(0.6	)		(0.6	)	97.0	%		(0.5	)		87.8	%		(0.1	)
Selling, general and administrative expenses		(1.4	)		(1.9	)		0.5		(28.3	%)		0.6			(32.8	%)		(0.1	)
Stock-based compensation		(0.2	)		(0.3	)		0.1		(49.9	%)		0.2			(63.7	%)		(0.1	)
Depreciation and amortization		(1.5	)		(1.3	)		(0.3	)	20.1	%		(0.2	)		16.2	%		(0.1	)
Net operating Income (Loss)	$	6.6		$	4.2		$	2.5		58.4	%	$	2.2			53.8	%	$	0.2
Exchange Rate - $ to £		1.29			1.23

Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.

Virtual Sports Segment revenue. In the period revenue increased by $2.6 million, or 31.5%, on a reported basis. This increase includes the impact of favorable currency movements of $0.5 million. On a functional currency at constant rate basis, Virtual Sports revenue increased by $2.1 million, or 25.6%. This increase included a $0.5 million decline in retail recurring revenue from the COVID-19 national shutdowns. Declines were offset by growth in Scheduled Online Virtuals of $1.4 million and Interactive of $1.6 million.

Virtual Sports Segment operating income. Cost of service increased by $0.6 million to $1.2 million on a reported basis due to increased third party platform provider costs from the Interactive division, in line with the significant revenue increase for the period.

SG&A expenses decreased by $0.5 million on a reported basis. This decrease includes the impact of adverse currency movements of $0.1 million. On a functional currency at constant rate basis, SG&A decreased by $0.6 million, driven by staff-related cost savings.

Depreciation and amortization increased by $0.3 million on a reported basis. This increase includes the impact of adverse currency movements of $0.1 million.

Operating profit increased by $2.5 million on a reported basis which included the impact of favorable currency movements of $0.2 million. On a functional currency at constant rate basis operating profit increased by $2.2 million. This was primarily due to an increase in revenues and reduced SG&A expenses.

Acquired Businesses Segment - Three Months ended September 30, 2020 compared to Three Months ended September 30, 2019

We generate revenue from our Acquired Businesses segment through the manufacturing, marketing, and rental of our gaming machines and gaming software. We manufacture gaming machines for rental to UK pubs, adult gaming centers, bowling alleys, motorway service stations, and leisure parks, as well as for sale. We receive rental fees for machines, typically on a long-term contract basis, on both a participation and fixed fee basis, with our newer digital pub machines typically contracted on a fixed fee basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming terminals placed in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.

Revenue growth for our Acquired Businesses is principally driven by the number of operator customers we have, the number of gaming machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.

On October 1, 2019, the Company completed the acquisition of the Gaming Technology Group (“NTG”) of Novomatic UK Ltd., a division of Novomatic Group, a leading international supplier of gaming equipment and solutions. As per ASC 280, the Company reports the results of this acquisition as a business segment denoted as “Acquired Businesses.” Because the Company completed the transaction on October 1, 2019, it can only report the results since that date.

Acquired Businesses segment, Key Performance Indicators

	For the Three-Month Period ended
	Unaudited Sept 30,		Unaudited Sept 30,		Variance
Acquired Businesses	2020		2019		2020 vs 2019
								%
Pub Digital Cat C Gaming Machines - Average installed base (# of terminals)		5,772		5,106		666			13.0	%

Inspired Pubs Revenue per Digital Cat C Gaming Machine per week	£	49.25	£	65.80	£	(16.56	)		(25.2	)%

Pub Analogue Digital Cat C Gaming Machines - Average installed base (# of terminals)		2,602		3,450		(848	)		(24.6	)%

Inspired Entertainment, Inc. - FORM 10-Q - November 12, 2020

Attached files