Attached files
| file | filename |
|---|---|
| EX-32.2 - CERTIFICATION - Inspired Entertainment, Inc. | f10k2020ex32-2_inspired.htm |
| EX-32.1 - CERTIFICATION - Inspired Entertainment, Inc. | f10k2020ex32-1_inspired.htm |
| EX-31.2 - CERTIFICATION - Inspired Entertainment, Inc. | f10k2020ex31-2_inspired.htm |
| EX-31.1 - CERTIFICATION - Inspired Entertainment, Inc. | f10k2020ex31-1_inspired.htm |
| EX-23.1 - CONSENT OF MARCUM LLP - Inspired Entertainment, Inc. | f10k2020ex23-1_inspired.htm |
| EX-21.1 - SUBSIDIARIES OF THE COMPANY - Inspired Entertainment, Inc. | f10k2020ex21-1_inspired.htm |
| EX-10.12 - INSPIRED ENTERTAINMENT, INC. 2020 SHORT-TERM INCENTIVE BONUS PLAN - Inspired Entertainment, Inc. | f10k2020ex10-12_inspired.htm |
| EX-4.4 - DESCRIPTION OF SECURITIES - Inspired Entertainment, Inc. | f10k2020ex4-4_inspired.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
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 incorporation or organization) |
(I.R.S. Employer Identification Number) |
250 West 57th Street, Suite 415
New York, New York 10107
(646) 565-3861
(Address, including zip code, of principal executive offices
and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock, par value $0.0001 per share | INSE | The Nasdaq Stock Market LLC |
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 (Section 232.405 of the 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 the 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the act): Yes ☐ No ☒
The aggregate market value of the registrant’s common stock, other than shares held by persons who may be deemed to be affiliates of the registrant, computed by reference to the closing sales price for the registrant’s common stock on June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the Nasdaq Capital Market, was approximately $25.9 million. For the purpose of this disclosure, executive officers, directors and holders of 10% or more of the registrant’s common stock are considered to be affiliates of the registrant.
As of March 22, 2021, there were 23,218,323 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement relating to the 2021 annual meeting of stockholders are incorporated by reference in Part III. The proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2020. If such proxy statement is not filed on or before April 30, 2021, the information called for by Part III will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.
TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and other information set forth in this report, including in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, may relate to future events and expectations, and as such constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Our forward-looking statements include, but are not limited to, statements regarding our business strategy, plans and objectives and our expected or contemplated future operations, results, financial condition, beliefs and intentions. In addition, any statements that refer to projections, forecasts or other characterizations or predictions of future events or circumstances, including any underlying assumptions on which such statements are expressly or implicitly based, are forward-looking statements. The words “anticipate”, “believe”, “continue”, “can”, “could”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “possible”, “potential”, “predict”, “project”, “scheduled”, “seek”, “should”, “would” and similar expressions, among others, and negatives expressions including such words, may identify forward-looking statements.
Our forward-looking statements reflect our current expectations about our future results, performance, liquidity, financial condition, prospects and opportunities, and are based upon information currently available to us, our interpretation of what we believe to be significant factors affecting our business and many assumptions regarding future events. Actual results, performance, liquidity, financial condition, prospects and opportunities could differ materially from those expressed in, or implied by, our forward-looking statements. This could occur as a result of various risks and uncertainties, including the following:
| ● | the persistence of the ongoing global coronavirus (COVID-19) pandemic on our business with respect to the potential duration and frequency of the various Government-ordered emergency measures including travel restrictions, social distancing and/or shelter in place orders and closure of retail and leisure, resurgences in various regions and appearances of new variants requiring ongoing reinstitution of such Government-ordered emergency measures; |
| ● | government regulation of our industries; |
|
|
● | 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; |
| ● | 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. |
In light of these risks and uncertainties, and others discussed in this report, there can be no assurance that any matters covered by our forward-looking statements will develop as predicted, expected or implied. Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. We advise you to carefully review the reports and documents we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”).
ii
Recent Developments
On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic. From mid-March to mid-June, the Company’s retail venues were closed in the UK, Italy and Greece owing to government-mandated shutdowns.
The venues in which the Company operates in the UK consist mainly of licensed betting offices and motorway service areas which are treated by the UK Government as “non-essential retail” for restriction purposes and pubs, holiday parks, bingo, casinos and bowling alleys which are treated as “leisure venues”. At all times, the leisure venues are the last venues to have restrictions eased.
Between Mid-June and the end of October, non-essential retail venues began to open again (with leisure venues following in early July) but in the UK were subject to national tier systems and curfew restrictions which meant different parts of the UK were subject to some retail venue closures or were subject to restricted opening hours and/or dwell times. In Greece and Italy, the venues in which the Company operates were all re-opened by mid-June.
At the end of October 2020, the UK and Italian Governments imposed another national lockdown closing all retail venues, with a full lockdown in Greece following at the beginning of November. In Italy this lockdown remains in place. In the UK, the month of December saw a return to the tier system (with a new tier across some regions which was equivalent to lockdown with all venues closed) but another national lockdown was imposed at the beginning of January that remains in place. In Greece, for certain venues the lockdown has remained since November and others are subject to curfews and regional lockdowns.
This affected the retail part of our Virtual Sports business segment and our Leisure and Gaming business segments leaving only our Interactive business segment being able to operate at full capacity for the full year. More information about the effect of the COVID-19 pandemic on our business can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Governments in certain of the jurisdictions in which our land-based customers operate have provided guidance as to the potential timing for reopening land-based venues in such jurisdictions. As of March 25, 2021, in the United Kingdom, licensed betting offices, pubs and holiday parks may be permitted reopen, subject to certain operating restrictions, by April 12, 2021. We currently anticipate the reopening of land-based venues in Greece and Italy to occur during the second quarter of 2021.
In response to the COVID-19 disruptions, since the first quarter of 2020, we have taken a series of actions to preserve capital and protect the long-term needs of our businesses, including cutting discretionary spending, significantly reducing capital expenditures, freezing non-essential hiring, furloughing a large percentage of our employees and implementing scaled reductions to salary levels of remaining employees. These initiatives enabled the Company to temporarily reduce expenses by over $30 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, pro forma for the NTG Acquisition. Furthermore, we realized over $10.5 million of incremental expense reduction from synergies related to the NTG Acquisition in 2020 compared to 2019 on a pro forma basis. We expect to realize approximately $17 million of incremental expense savings from synergies on an annualized basis in 2021 compared to 2019 on a pro forma basis.
Overview
We are a global gaming technology company, supplying content, platform and other products and services to online and land-based regulated lottery, betting and gaming operators worldwide through a broad range of distribution channels, predominantly on a business-to-business basis. We provide end-to-end digital gaming solutions (i) on our own proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices and online computer applications and (ii) through third party networks. Our content and other products can be found through the consumer-facing portals of our interactive customers and, through our land-based customers, in licensed betting offices, adult gaming centers, pubs, bingo halls, airports, motorway service areas and leisure parks.
Our customer base includes regulated operators of lotteries, licensed sports bookmakers, gaming and bingo halls, casinos and regulated online operators, adult gaming centers, pubs, holiday parks, and motorway service areas. Some of our key customers include William Hill, SNAI, Sisal, Lottomatica, Betfred, Paddy Power, Betfair, Genting, bet365, Sky Bet, Fortuna, the Greek Organisation of Football Prognostics S.A. (OPAP S.A.), Entain Plc, the Pennsylvania Lottery, Bourne Leisure, Greentube, Stonegate, Mitchells & Butler, Marstons PLC, Greene King, JD Wetherspoon PLC, Parkdean Resort, Centre Parcs Resorts and Novomatic. Geographically, 70% of our revenues (excluding VAT-related revenue) for the year ended December 31, 2020 were generated from our UK operations, with the remainder generated from Italy, Greece and the rest of the world. Our products are designed to operate within applicable gaming and lottery regulations and our customers are regulated gaming or lottery operators or are otherwise licensed to operate our products.
We conduct business across different jurisdictions of which Great Britain, Italy and Greece have historically contributed the most significant recurring revenues. We are licensed or certified (as applicable) by the Gambling Commission in the United Kingdom, and by the Hellenic Gaming Commission in Greece, and registered with L’Agenzia delle dogane e dei Monopoli (“ADM”) in Italy. We are licensed by regulators in other jurisdictions such as the Malta Gaming Authority, Licensing Authority of Gibraltar, the Alderney Gambling Control Commission, the Belgian Commission, Autorité Des Marchés Financiers (Quebec) and we hold licenses with the states of New Jersey, Illinois, Saskatchewan, Michigan and West Virginia. We are currently in the process of applying, or planning to apply, for licensure in additional North American jurisdictions, where we expect to benefit from any future market growth.
1
We are headquartered in the United States, with principal operating facilities located in the United Kingdom, India and Italy. On October 1, 2019, the Company acquired Gaming Technology Group of Novomatic UK Ltd., a division of Novomatic Group, an international supplier of gaming equipment and solutions (the “NTG Acquisition”). As of December 31, 2020, we had approximately 1,500 employees but approximately 1,100 were on furlough or flexi-furlough. We generated total revenue of $199.8 million and Adjusted EBITDA of $72.1 million for the year ended December 31, 2020, despite our business being materially impacted by the COVID-19 global pandemic. For the year ended December 31, 2019 (our last full year prior to COVID-19 impacting our business), we generated total revenue of $153.4 million and Adjusted EBITDA of $49.0 million. The 2019 results included the effect of the NTG Acquisition for only three months, and the 2020 results include $42.2 million of VAT-related revenue and $1.2 million of VAT-related costs.
The Company is publicly listed on the NASDAQ and had an equity market capitalization of approximately $151.7 million as of December 31, 2020 (based upon a closing stock price of $6.58 on that date).
Certain product and company names referred to herein are trademarks™ or registered® trademarks of their respective holders.
Our Products
Historically, we operated our business in two business segments: Virtual Sports (which included Interactive) and Server Based Gaming. Following the NTG Acquisition, we re-aligned our business segments and now operate in four business segments: Gaming, Virtual Sports, Interactive and Leisure, as further described below.
Gaming Segment
Our Gaming segment supplies gaming terminals as well as gaming software and games for the terminals provided to betting offices, casinos, gaming halls and high street adult gaming centers. It utilizes our Server Based Gaming (“SBG”) technology to supply products to our customers’ global land-based gaming venues. SBG products offer an extensive portfolio of games through digital terminals. Our games are currently deployed through more than 31,500 digital terminals. Because our SBG products are fully digital, they interact with a central server and are provided on a “distributed” basis, which allows us to access a wide geographic footprint through internet and proprietary networks.
Our SBG game portfolio includes a broad selection of popular omni-channel slots titles including the CenturionTM game family and Super Hot FruitsTM (featuring the Sizzling Hot SpinsTM game family). These games offer customers a wide range of volatilities, return-to-player and other special features, which we collectively refer to as “game math.” We also offer a range of more traditional casino games through our SBG network, such as roulette, blackjack and numbers games.
We distribute games to devices through different game management systems (“GMS”), each tailored to a specific operator or sector. Our CORETM GMS is designed for distributed street-gaming sectors and uses Inspired cabinets in combination with gaming content from Inspired, as well as a wide portfolio of content from independent game developers. CORE-CONNECT is our American Gaming Association G2S standard-based VLT GMS, currently deployed in the Greek VLT sector and North America. Our SBG products comply with all requirements in the UK (B2/B3), Italy (’6B), Greece (G2S) and Illinois (G2S).
Our SBG terminals in the United Kingdom account for a material portion of all SBG terminal placements, and we offer over 100 games for play across this portfolio. We are also a material supplier to customers in Greece and Italy. Over the past two years, we have grown our business in North America where we have sold products in Illinois and to the Western Canada Lottery Corporation. We offer SBG terminals such as the Flex4k curved screen, EclipseTM, ValorTM, OptimusTM, BlazeTM and Sabre HydraTM , each offering a different size terminal, graphics, technology and price proposition.
As of December 31, 2020, we had a total installed base of 31,515 units, which were operated primarily under participation-based contracts. We generate revenue by participating, typically as a function of gross revenue from each machine, in a percentage of volumes generated by these machines. Because we participate in our customers’ revenues under such contracts, we are aligned with our customers in benefitting from the introduction of our new content, which can drive growth of the win per unit per day of our installed base. Additionally, we earn revenue through the sale of units, as well as receiving a fixed daily fee for some of our installed units. During 2019, we sold 2,521 machines (6,362 on a pro forma basis for the NTG Acquisition) and during 2020 we sold 2,227 machines despite many of our customers having operations which were closed for a portion of 2020. Our average sale price decreased by approximately 2% in 2020 as compared to 2019 on an actual basis and increased by approximately 21% on a pro forma basis for the NTG Acquisition. With our participation-driven business model, approximately 97% of service revenue for our Gaming segment was recurring in nature in 2020 (excluding $42.2 million of VAT-related revenue) and derived under long-term contracts. We have successfully renewed all of our key Gaming contracts expiring over the last three years.
For the year ended December 31, 2020, our Gaming segment generated revenue and Adjusted EBITDA of $110.5 million and $57.9 million, respectively, as compared to the year ended December 31, 2019, during which we generated $91.5 million and $32.8 million in revenue and Adjusted EBITDA, respectively. Pro forma for the NTG Acquisition, our Gaming segment generated approximately $117.8 million in revenue in 2019. We believe the COVID-19 global pandemic impacted this segment during the year ended December 31, 2020 due primarily to government-imposed lockdowns that forced our land-based customers to close during certain periods. Currently, based on the most recently available guidance from the jurisdictions in which our customers operate, we expect these customers to begin reopening during the second quarter of 2021, subject to applicable government directives. The 2019 results included only three months of results following the NTG Acquisition, and the 2020 results include $42.2 million of VAT-related revenue and $1.2 million of VAT-related costs.
2
Virtual Sports Segment
Our Virtual Sports business designs, develops, markets and distributes ultra-high-definition games that create an always-on sports wagering experience in betting shops, other locations and online. Our Virtual Sports product comprises a complex software and networking package that provides fixed odds wagering on an ultra-high definition computer rendering of a simulated sporting event, such as soccer, football or basketball. Players can bet on the simulated sporting event, in both a streaming and on-demand environment, overcoming the relative infrequency of live sporting events. We have developed this product using an award-winning TV and film graphics team with advanced motion capture techniques.
We believe we are one of the most innovative suppliers of Virtual Sports gaming products in the world. We offer a wide range of sports and numbers games to more than 44,000 land-based channels as well as through various online websites. Our products are installed in over 35 gaming jurisdictions worldwide, including the UK, Italy, Greece, Morocco, and the U.S.
Our Virtual Sports game portfolio includes titles such as V-Play Soccer, V-Play Football, V-Play Basketball, Virtual Grand National and V-Play NFLA, as well as greyhounds, other horse racing products, tennis, motor racing, cycling, cricket, speedway, golf and darts. We have also licensed the use of images of certain sports brands in our games, including with the NFL Alumni. We also entered into a partnership with the UK Jockey Club to create the Virtual Grand National, which has aired on live UK television since 2017.
Our customers are many of the largest operators in lottery, gaming and betting worldwide. We are contracted to supply Virtual Sports to mobile and online operators in the United Kingdom, the U.S. states of Nevada, Pennsylvania and New Jersey; Gibraltar and other regulated EU sectors, including Italy, Greece and Poland; and other jurisdictions such as Turkey and Morocco. Virtual Sports can be adapted to function in sports betting, lottery, or gaming environments and is therefore available to a wide range of customers in both public and private implementations.
The Virtual Sports events are capable of being offered to millions of our customers’ customers, through land-based, online and mobile platforms, many of them available 24 hours per day, 7 days per week, and often concurrently within the same location or interactive platform. We have multiple hosting solutions capable of fulfilling the product delivery needs of our customers including our proprietary Virtual Plug and Play end to end online and mobile turnkey solutions. In addition, a cloud-based solution is available to customers who require an XML sportsbook integration that is fully hosted and operated by Inspired.
Our Virtual Sports products are typically offered to operators on a participation basis, whereby we receive a portion of the gaming revenues generated, plus an upfront software license fee. With our participation-driven business model, our Virtual Sports segment produces approximately 94% of total revenue on a recurring basis under long-term contracts for which our standard term is three years in duration. We have successfully renewed all of our key Virtual Sports contracts expiring over the last three years.
For the year ended December 31, 2020, our Virtual Sports segment generated revenue and Adjusted EBITDA of $32.4 million and $25.1 million, respectively, as compared to the year ended December 31 2019, during which we generated $33.4 million and $25.2 million in revenue and Adjusted EBITDA, respectively. Retail revenue for our Virtual Sports segment decreased from $20.7 million in 2019 to $12.2 million in 2020 driven primarily by COVID-19 closures, while Scheduled Online Virtuals revenue increased from $12.8 million to $20.2 million, or 58.2%, during the same period. We believe the COVID-19 global pandemic impacted retail revenue for this segment during the year ended December 31, 2020 due primarily to government-imposed lockdowns which forced our retail customers to close during certain periods. Currently, we expect these retail customers to begin reopening during the second quarter of 2021, subject to applicable government directives. We believe that the COVID-19 global pandemic accelerated the market adoption of Virtual Sports through online channels, which enabled us to benefit from market trends in this business during a period in which our land-based customers were not operating due to government-imposed lockdowns.
3
Interactive Segment
Our Interactive business uses offerings from our Gaming and Virtual Sports segments, as well as interactive-only content, via remote gaming servers to allow online gaming operators to use our games and content online and on mobile devices worldwide. Our interactive content includes a wide range of premium random number generated casino content from feature-rich bonus games to European-style casino free spins and table games incorporating well-known first and third-party brands including 20p RouletteTM, Jagr’s Super SlotTM, Super Hot FruitsTM and Reel King MegawaysTM. Inspired releases several new titles per month and new games can be seamlessly deployed to the full estate of operators and aggregators through its proprietary Virgo RGS™. Games are available on over 100 websites across much of regulated Europe including the UK, Gibraltar, Malta, Spain, Sweden, Italy, Germany, Greece and Belgium as well as in New Jersey. We expect to next go live in Michigan and West Virginia.
Inspired’s Virgo RGS™ is integrated with a number of best known casino brands, including William Hill, Entain, bet365, Flutter, 888, Kindred, Gamesys, BetFred, Rank, Leo Vegas, OPAP and Stoiximan. We are also now live with six North American operators: Bet MGM, Draft Kings, Caesars, Resorts, Mohegan, Unibet and Golden Nugget and with Loto Quebec in Canada.
Our Interactive products are typically offered to operators on a participation basis, whereby we receive a percentage of total amount of stakes wagered or a percentage of net gaming revenue. For the year ended December 31, 2020, our Interactive segment generated revenue and Adjusted EBITDA of $13.3 million and $7.5 million, respectively. These levels represented growth of 181%, or $8.6 million, and $7.5 million, respectively, compared to the year ended December 31, 2019, but the 2019 results only included three months of results following the NTG Acquisition. Pro forma for the NTG Acquisition, our Interactive segment generated $7.3 million in revenue in 2019. 2020 Interactive revenue therefore represented growth of 82%, or $6.0 million, compared to 2019 pro forma for the NTG Acquisition. With our participation-driven business model, approximately 99% of revenue for our Interactive segment is recurring in nature and derived under long-term contracts for which our standard term is three years in duration. We have successfully renewed all of our key Interactive contracts expiring over the last three years. We believe the COVID-19 global pandemic accelerated the market adoption of interactive gaming by end-users, and that our EBITDA margins in this segment will expand as our revenue grows due to the low variable costs we expect to incur on incremental revenue, versus our existing base of revenue.
4
Leisure Segment
We are a supplier of gaming terminals and amusement machines to the Leisure and Hospitality sectors and one of the largest operators of “pay to play” gaming terminals and amusement machines in the UK. As of December 31, 2020, we supplied and operated over 11,600 gaming terminals and 6,000 pool tables, prize vending and jukeboxes located in pubs, bingo halls, and adult gaming centers. We also service approximately 2,200 terminals under maintenance only contracts. The increasing majority of gaming terminals we operate are server based, allowing us to distribute content supplied by our “in house” design studios as well as some of the most popular content titles from our strategic partners. We also manufacture and sell analog machines.
In addition, we also supply and operate approximately 9,300 amusement machines and 2,200 gaming terminals in family entertainment centers located in holiday parks, bowling centers and other entertainment venues. These include virtual reality simulators and arcade games, redemption and skill with prize games, basketball, air hockey and cue sports. Commercial arrangements are typically structured as either revenue participations or rental agreements.
Our customers in this segment include the vast majority of recognizable brands that participate in the geographies and sectors in which we operate. These customers include large pub operators JD Wetherspoons, Stonegate Pub Company, Marstons PLC, Greene King, Mitchells and Butler, Punch Taverns, Whitbread and Star Pubs and Bars (Heineken). In the Bingo sector, we supply gaming terminals and services to Buzz Bingo and Mecca. We supply gaming terminals and services to transport hub operators, Moto and Welcome Break and major airports including Heathrow. We also operate our own adult gaming centers under the Quicksilver brand in Extra Motorway Services. We have joint venture agreements with holiday park operators Parkdean Resorts and Bourne Leisure across their Haven, Butlins and Warner Hotels brands, where we supply machines and trained staff to manage and operate family entertainment centers.
Overall, our Leisure segment had, as of December 31, 2020, an installed base of over 16,000 gaming terminals, which were operated primarily under participation-based contracts. We generate revenue by participating, typically as a function of gross revenue from each machine, in a percentage of volumes generated by these machines. Because we participate in our customers’ revenues under such contracts, we are aligned with our customers in benefitting from the introduction of our new content, which can drive growth in the win per unit per day of our installed base. Additionally, we earn revenue through the sale of units, as well as a fixed daily fee for certain of our installed units. With our participation-driven business model, approximately 94% of revenue for our Leisure segment is recurring in nature and derived under long-term contracts. Since the NTG Acquisition, we have successfully renewed all of our key Leisure contracts expiring over the last three years.
For the year ended December 31, 2020, our Leisure segment generated revenue and Adjusted EBITDA of $43.6 million and $1.3 million, respectively, as compared to the year ended December 31, 2019 during which we generated $23.8 million and $6.2 million in revenue and Adjusted EBITDA, respectively, but the 2019 results only included three months of results following the NTG Acquisition. Pro forma for the NTG Acquisition, our Leisure segment generated approximately $97.5 million in revenue in 2019. We believe the COVID-19 global pandemic impacted this segment during the year ended December 31, 2020 due primarily to government-imposed lockdowns, which forced our land-based customers to close during certain periods. Currently, based on the most recently available guidance from the jurisdictions in which our customers operate, we expect these customers to begin reopening during the second quarter of 2021, subject to applicable government directives.
5
Our Competitive Strengths
We believe key factors that give us a competitive advantage over other players in the gaming technology space include:
Established presence across multiple Product Verticals
We have a substantial installed base across each of our product verticals, including over 31,500 digital terminals in the Gaming segment located across key jurisdictions in the United Kingdom, Greece, Italy and South America; with approximately 14,000 terminals installed in UK Licensed Betting Offices and approximately 8,500 installed in Greek video lottery terminals (“VLTs”). In our Leisure segment, we supply and operate an installed base of approximately 14,000 gaming terminals (including approximately 2,200 terminals under maintenance only contracts) and 6,000 pool tables, prize vending and jukeboxes to pubs, bingo halls and adult gaming centers. In addition, we also supply and operate approximately 9,300 amusement machines and 2,200 gaming terminals in family entertainment centers located in holiday parks, bowling centers and other entertainment venues. We have award winning content and products in our Virtual Sports segment, which offers a wide range of sports and numbers games through more than 44,000 land-based channels as well as through various online channels. Our Virtual Sports gaming products are installed in approximately 35 gaming jurisdictions worldwide, including the United Kingdom, Italy, Greece, Morocco and the United States, our customers being many of the largest operators of lottery, gaming, and betting operations worldwide. Additionally, our Interactive segment provides a wide range of premium iGaming content to large operators primarily located in the United Kingdom, Italy, Greece and North America, as well as several other countries across Europe through over 100 websites.
Highly Diversified Business Underpinned by Longstanding Customer Relationships
We operate in several business segments and geographic locations that provide us a diversified revenue and cash flow stream that has proven to be resilient under various economic environments. While our Gaming segment represents over 50% of our historical revenue base over the last three years, our Virtual Sports and Interactive segments represent substantial growth opportunities as demonstrated by recent trends, including during the COVID-19 global pandemic, which are expected to continue to diversify our business. Additionally, we continue to expand in high growth markets, such as North America, which are expected to drive further geographic diversification across business segments. We have over 600 customers, including major lottery, sports betting and gaming operators (both interactive and location-based) within regulated sectors worldwide. Many of our customer relationships in the UK and European sectors are long-standing and in excess of 10 years. The NTG Acquisition further diversified our customer base. For the year ended December 31, 2020, our largest customer represented approximately 11% of our revenue (excluding VAT-related revenue). We expect that our diverse customer base will afford us opportunities to sell incremental products to certain of these customers in the future.
Substantial Recurring Revenue Supported by Long-Term Participation-Based Contracts
We believe our robust recurring revenue business model will drive our performance and free cash flow generation. For the year ended December 31, 2020, our recurring revenue, which included revenue generated from participation-based contracts and licensing arrangements, represented approximately 67% of total revenue (84% excluding VAT-related revenue), as compared to 83% for the year ended December 31, 2019. We believe our large installed base and participation-driven business model will result in immediate revenue generation once retail venues reopen in the various jurisdictions in which our land-based customers operate. Additionally, our content and products, which are provided primarily pursuant to long-term contracts, are essential to generating revenue for our customers and satisfying the demand of our end users. Our long-term contracts typically have an initial duration of three to five years depending on the business segment and the customer and, over the last three years, we have successfully renewed all expiring contracts with key customers in our Gaming, Virtual Sports and Interactive segments, and have successfully renewed all expiring contracts with key customers in our Leisure segment since the NTG Acquisition.
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Proprietary Technology and Track-Record of Strong Content Development
We are dedicated to being at the forefront of our industry in terms of technology and innovation. We combine complementary expertise in technology and operations, positioning us as a provider of superior technical solutions. As of December 31, 2020, we held approximately 15 patents and approximately 200 trademarks worldwide. We focus our product development efforts on emerging technology trends, utilizing a combination of customer research, design experience and engineering excellence. We are committed to developing innovative products for our customers and are focused on improving player entertainment and customer profitability.
We believe convergence trends in the gaming industry emphasize the importance of proprietary content, including licensed content. Such content is needed to successfully promote a compelling game offering across multiple platforms and to develop distinctive products for operator-clients. Our proprietary content drives engagement across gaming platforms. Our full suite of high-quality gaming products, services and multichannel distribution capabilities, extensive traditional content library, sizeable installed gaming machine base and deep relationships with operator-customers help make us an attractive partner for potential licensors of branded content.
Our Interactive business has expanded rapidly, with revenue growing at an approximate compound annual growth rate of 103% on a functional currency at constant rate basis between 2018 and 2020. We believe this growth has been driven by our content library of over 106 slot machine games, many of which have not been extensively distributed previously to interactive operators. Many of our recent game launches, including Maximus Gold CashTM, Rainbow CashpotsTM, and Mighty Hot WildsTM (a consistent top performer in the Greek sector), have been omni-channel, offering a premium player experience across multiple platforms.
Inspired’s award-winning Virtual Sports products offer a wide range of betting markets and what we consider to be superior graphics. Our Virtual Sports revenue has been growing fast and has achieved high Adjusted EBITDA margins, while providing an attractive recurring-revenue base. Additionally, this business has benefitted from recent trends, including during the COVID-19 global pandemic, toward online gaming.
Attractive Economic Model to Drive Strong Performance Post COVID-19
Due to our comprehensive COVID-19 mitigation plan and the strength of our Virtual Sports and Interactive businesses, we were able to return to revenue growth in the quarter ended September 30, 2020 as compared to the prior year period, following the initial COVID-19 lockdowns in Europe. This was partly attributable to the fact that the NTG Acquisition was completed in October of 2019 and thus the results of operations of the acquired entities were reflected in our consolidated results for the quarter ended September 30, 2020 but not the prior year period. Overall, our business generated $25.0 million and $34.9 million of Adjusted EBITDA in the third and fourth quarters of 2020 respectively, representing a year-over-year growth rate of 97% and 185%, respectively. More specifically, during October 2020, when our business was closest to being fully operational, we generated Adjusted EBITDA of $6.4 million which represented year-over-year growth of approximately 22%, with strong margin improvement. We were able to achieve such results despite operating under several governmental restrictions, such as pub curfews and the introduction of a tiered system of UK closures, which we believe did not allow our business to reach its full potential despite our demonstrated growth. We believe we are well positioned to capitalize on significant pent-up demand from end users upon a full reopening of the respective jurisdictions in which we operate. As a result, we expect to generate meaningful free cash flow given our improved cost structure, synergies expected to be realized from the NTG Acquisition and reduced capital expenditure requirements.
Positioned To Benefit From Key Market Trends
With our proprietary digital gaming platform and content comprising an end-to-end product offering and our multi-channel capabilities and robust relationships across the client spectrum, we believe we are well-positioned to benefit from emerging gaming sector trends, including growth stimulated by liberalization of government gaming regulations, the emergence of multi-channel offerings and the increasing importance of proprietary content.
Our multi-channel offerings are well-positioned to benefit from the increased prevalence of smart phones and tablets and the legalization of online gaming in certain parts of the United States, Canada and other jurisdictions. Such jurisdictions have provided new growth opportunities for gaming and lottery operators through the introduction of new channels and portals for delivering games to customers. This supplements the existing broad-based online gambling market across Europe. Our multi-channel solutions and customer relationship management capabilities position us to take advantage of new opportunities to extend our gaming solutions across different channels for our customers to reach new players, expand the player demographic base and access players wherever they are whenever they want to play. Our technology extends play for existing players and has the capability to reach new player segments. This and other technology help position us for future online real-money gaming opportunities by offering play-for-fun online gaming options in jurisdictions where online real-money gaming may be legalized in the future.
Government initiatives, such as the legalization of casino operations in new jurisdictions, increases in the number of casinos allowed to operate in a given jurisdiction and the legalization of new products, have helped stimulate growth in the gaming market. In the United States, legislative change has led to an increase in the legalization of sports betting. As of December 31, 2020, 21 U.S. states and the District of Columbia have legalized sports betting. Some of these states began offering sports betting in 2020 and others are expected to begin offering sports betting in 2021.
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Experienced Management Team
Our seasoned management team is led by our Executive Chairman, Lorne Weil, who is known as a gaming industry innovator and whose past leadership includes growing a diversified global gaming technology company both organically and through extensive acquisitions and joint ventures further bolstering the business. Other members of the Company’s Office of the Executive Chairman (the “OEC”) are our President and Chief Operating Officer, Brooks H. Pierce; our Executive Vice President and Chief Strategy Officer, Daniel B. Silvers; our Executive Vice President and Chief Financial Officer, Stewart F.B. Baker; and our General Counsel, Carys Damon. The OEC executes the day-to-day management of the Company. Our management team has broad and deep experience in the gaming industry, working with lotteries, casino operators, betting platforms, and online operators. The members of the OEC have, on average, decades of experience in the gaming industry, including relationships with customers around the world, helping them build and sustain revenue growth. In addition, the members of the OEC have centered their careers on identifying, acquiring and integrating, through the implementation of value creation initiatives, complementary businesses.
Our Strategy
We seek to deliver innovative and differentiated products that provide value to our customers and exciting experiences to their players in multiple jurisdictions throughout the world while achieving long-term growth in revenues, profit and cash flow. We place great emphasis on developing creative solutions, in terms of game content and play that deliver and sustain superior performance through operators across interactive and location-based channels. Our technology often allows us to update our games and operating software remotely, keeping pace with evolving requirements in game play, security, technology and regulations. We seek to achieve these goals as we:
Extend our positions in each of the sectors in which we operate by developing new content and products which can often be utilized across multiple distribution channels.
We continually invest in new content and product development in each of the business segments in which we operate. We believe these investments can benefit our existing and prospective customers by making new content and products available to them and bringing exciting entertainment experiences to their players. Our approach, which seeks to distribute our content across a wide range of channels, protocols and regulatory standards, allows us to distribute our content across multiple sectors in which we operate on a cost-efficient basis. We have continued to focus on channels where we believe there is considerable growth available – especially interactive. We believe our technological approach allows us to quickly adapt to changes in player preferences.
Continue to invest in content and technology in order to grow our existing customers’ revenues and penetrate new customers in our existing markets.
Over the last three years, a substantial portion of our annual revenue has been recurring and based on long-term contracts with customers, where our revenues typically grow in line with the growth of our customers’ gaming revenues from our content and products. We seek to work closely with our customers to assist in the optimization of their operations so they can achieve growth in their revenues generated by our content and products, which we believe is to our benefit. Accordingly, we continually invest in new content and technology offerings that we believe will enable our customers to keep their offerings fresh and allow them to offer their players new forms of entertainment. As our content demonstrates successful commercial results, we seek to place it with additional customers who recognize its performance. We believe content development is a key aspect of our strategy and we intend to continue this strategic priority for each of the businesses in which we operate.
Add new customers by expanding into underpenetrated markets.
We believe our historical growth has been driven by our entry into new geographies, and supplemented by increasing our share in existing markets. We expect to continue to focus on North American markets in the Gaming, Virtual Sports and Interactive segments for such expansion. We believe North America is a major gaming market in which we currently have limited participation, but where our products are well positioned, or can be positioned, for future success. For example, in 2019 and 2020, we placed 116 and 313 VLT terminals, respectively, in Illinois.
Pursue targeted mergers and acquisitions to expand our product portfolio and distribution footprint.
In addition to growing our business organically, we have pursued, and continue to pursue, merger and acquisition opportunities that we believe will help strengthen and scale our operations and take further advantage of our competitive position. Our management team shares a combination of operating, investing, financial and transactional experience that we believe will serve the Company well as it seeks to identify opportunities for value-adding acquisitions and negotiate and close on beneficial acquisition transactions. For example, in October 2019, we completed the NTG Acquisition. We believe the NTG Acquisition added increased scale to our business while supplementing key technologies and content within our portfolio.
Our ability to execute the strategy above will be affected by the ongoing COVID-19 global pandemic, which may have further, unexpected effects on the business. We are currently focused on managing our cash flow and liquidity, as well as the segments of our business that remain operational to maximize near term revenues from those segments.
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Industry Overview
We operate within the global gaming and lottery industry. Global gaming and lottery growth has been resilient in the face of economic cycles over the last decade. According to the H2 Database, the global gaming and lottery industry has grown at a 3.1% compounded annual growth rate from 2009 to 2019, driven by increased consumer spend and the introduction of new regulated sectors.
During this period, the digital online and mobile gaming and lottery sectors have grown at a faster pace than the industry as a whole. According to the H2 Database, these industry sectors have grown at a 10.6% compound annual growth rate, driven by rapid growth in the deployment of digital games and technologies, including many of our products, into land-based venues in the primary sectors in which we operate, where regulators have supported the transition to digital, online and retail channels.
Subject to the impact of the COVID-19 global pandemic, we believe the global gaming and lottery industry will continue to grow, with more robust growth in the digital gaming and lottery sectors, as further described below. We believe the industry is content driven and, much like music, videogames and motion pictures, will continue to be transformed by the propagation of digitally-networked technologies.
As a gaming and lottery business-to-business supplier focused on digital products and technologies, we believe we are well-positioned to benefit from these trends.
Influencers of Digital Adoption
We believe the digital segment of the global gaming and lottery industry will continue to grow, including as a result of the following factors:
Governments: Opening of new gaming territories. Many national and state governments operating in developed economies in Europe and the United States are suffering from structural funding deficits. The regulation and liberalization of gaming and lottery is frequently relied upon to raise new sources of revenue for these governments. In most cases, we believe such liberalization does not favor buildouts of large new destination resort casinos, but rather focuses on smaller distributed gaming (“EDGE”) venues with lottery, gaming and sports betting, combined with online or mobile gaming.
Digital Multi-Channel Offerings: Replacement of legacy analog machines with larger volume of smart digital devices, both interactive and location based. In many established sectors, as existing gaming sectors mature, governments and regulatory authorities have implemented regulations to upgrade the established terminal base to digital operation.
Smartphones and Mobile Devices: Rapid adoption of gaming and lottery applications on growing volume. In certain sectors, mobile play on sports betting and gaming now exceeds such play on personal computers. According to the H2 Database, mobile gaming revenues in such sectors exhibited a 24.4% compound annual growth rate between 2009 and 2019. Mobile gaming and lottery is now expanding in other sectors, and mobile play has recently been approved in other sectors for gaming or lottery.
In addition to the foregoing, we believe there are significant benefits for our customers in adopting digitally networked gaming and lottery technologies. We believe our digitally-enabled products allow operators to remotely manage their operations with minimal disruption to their businesses. The system centralization enabled by digital operations offers flexibility to rotate or change games, tailor game availability to time-of-day, target specific player demographics and take advantage of seasonal and themed marketing opportunities. New games often can be phased in without the interim revenue declines often associated with replacing games on traditional slot machines. In addition, digital operations permit more games per terminal, enabling operators to test new games and new suppliers, seek to appeal to a broader base of players with minimal cost or risk, commission games from third-party party suppliers on an open game interface and reduce procurement risk. Moreover, digital operations can significantly reduce the need for on-site repairs, improve terminal up-time and should extend terminal life cycles as well as the time period over which capital costs can be depreciated.
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Regulatory Framework
We conduct business in a number of different jurisdictions, of which Great Britain, Italy and Greece have historically contributed the most significant recurring revenues. The gaming regulator responsible for our activities in Great Britain is the Gambling Commission of Great Britain (the “UK Gambling Commission” or the “Gambling Commission”). In Italy, the operation of gaming machines and remote gaming is regulated by L’Agenzia delle dogane e dei Monopoli (“ADM”). In Greece, the operation of gaming machines and remote gaming is regulated by the Hellenic Gaming Commission. In addition, we are licensed or certified (as applicable) in a number of other jurisdictions by regulators such as the Malta Gaming Authority, Licensing Authority of Gibraltar, the Alderney Gambling Control Commission, the Belgian Commission, Autorité Des Marchés Financiers (Quebec) and state regulators in various jurisdictions in North America.
Great Britain
In the British sector, we supply and distribute Category B3 gaming machines (with maximum betting stakes for players of £2) and ETG machines to third parties who are licensed to operate such machines in bricks-and-mortar premises. In addition to this we operate a number of Adult Entertainment Centers. We also supply virtual racing software to local retail venues and to online operators who are licensed to target the British sector. We also supply our Interactive product to remote operators who are licensed to target the British sector. The provision of our products and services in relation to the British sector is authorized by a series of licenses issued by the UK Gambling Commission, namely remote and non-remote Gaming Machine Technical (Full) operating licenses, a remote casino operating license, a remote and non-remote gambling software license and a remote general betting standard (virtual events) license gaming machine general adult gaming center license and a gaming machine general family entertainment center license.
British Betting and Gaming Laws and Regulations. The Gambling Act 2005 (the “GA05”) is the principal legislation in Great Britain governing gambling (other than in relation to the National Lottery, which is governed by separate legislation). The GA05 applies to both land-based gambling (referred to as “non-remote” gambling) and online and mobile gambling (referred to as “remote” gambling).
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The GA05 provides that it is an offense to make a gaming machine available for use without an appropriate operating license. There are a number of different categories of licensable gaming machines (the GA05 provides for category A to D machines, although no category A machines are currently in operation); each category is subject to different levels of maximum stakes and prize limits. In addition, there are limits on the numbers and types of gaming machines that can be operated from licensed premises: for example, a licensed betting office is permitted to house up to four category B2 to D machines, while a large casino may house up to 150 category B to D machines (subject to satisfying certain ratios of machines to gaming tables).
Gaming machine suppliers are required to hold an operating license in order to manufacture, supply, install, adapt, maintain or repair a gaming machine or part of a gaming machine. Gaming machine suppliers must also comply with the Gaming Machine Technical Standards published by the Gambling Commission in relation to each category of machine, and such machines must meet the appropriate testing requirements.
In relation to remote gambling, the GA05 (as amended by the Gambling (Licensing and Advertising) Act 2014 provides that it is an offense to “provide facilities” for remote gambling either (a) using “remote gambling equipment” situated in Great Britain, or (b) which are used by players situated in Great Britain, in each case without a remote gambling operating license. It is also an offense to manufacture, supply, install or adapt gambling software in Great Britain without an appropriate gambling software license.
A remote gambling operating license holder providing facilities for remote gambling to British players is required to use gambling software manufactured and supplied by the holder of a gambling software license (and to failure to do so is an offence). Where gambling software is used or supplied for use in relation to the British sector, it must satisfy the Remote Gambling and Software Technical Standards published by the Gambling Commission.
The holder of a British gambling operating license is subject to a variety of ongoing regulatory requirements, including but not limited to the following:
| ● | Shareholder disclosure: An entity holding a gambling license must notify the Gambling Commission of the identity of any shareholder holding 3% or more of the equity or voting rights in the entity (whether held or controlled either directly or indirectly). |
| ● | Change of corporate control: Whenever a new person becomes a “controller” (as defined in section 422 of the Financial Services and Markets Act 2000) of a company limited by shares that holds a gambling operating license, the licensed entity must apply to the Gambling Commission for permission to continue to rely on its operating license in light of the new controller. A new controller includes any person who holds or controls (directly or indirectly, including ultimate beneficial owners who hold their interest through a chain of ownership) 10% or more of the equity or voting rights in the licensed entity (or who is otherwise able to exercise “significant influence” over it). The Gambling Commission must be supplied with specified information regarding the new controller (which, in the case of an individual, includes detailed personal disclosure) and this information will be reviewed by the Gambling Commission to assess the suitability of the new controller to be associated with a licensed entity. If the Gambling Commission concludes that it would not have issued the operating license to the licensed entity had the new controller been a controller when the application for the operating license was made, the Gambling Commission is required to revoke the operating license. It is possible to apply for approval in advance from the Gambling Commission prior to becoming a new controller of a licensed entity. |
| ● | Compliance with the License Conditions and Codes of Practice (LCCP): The LCCP is a suite of license conditions and code provisions which attach to operating licenses issued by the Gambling Commission. The provision of gambling facilities in breach of a license condition is an offense under the GA05. Certain specified “Social Responsibility” code provisions are accorded the same weight as license conditions in this regard (whereas breach of an “ordinary” code provision is not an offense in itself, but may be evidence of unsuitability to continue to hold a gambling license). The LCCP imposes numerous operational requirements on licensees, including compliance with the Gambling Commission’s Remote Gambling and Software Technical Standards, segregation of customer funds, the implementation of a variety of social responsibility tools (such as self-exclusion), anti-money laundering measures, age verification of customers and a host of consumer protection measures. The Gambling Commission regularly reviews and revises the LCCP. |
| ● | Regulatory returns and reporting of key events: The LCCP requires licensees to submit quarterly returns to the Gambling Commission detailing prescribed operational data. Licensees are also required to notify the Gambling Commission as soon as practicable and in any event within 5 working days of becoming aware of the occurrence of certain specified “key events” which, in summary, are events which could have a significant impact on the nature or structure of the licensee’s business. Licensees are also required to notify suspicion of offenses and suspicious gambling activity. |
| ● | Personal licenses: Key management personnel are required to maintain personal licenses authorizing them to discharge certain responsibilities on behalf of the operator. These personal licenses are subject to renewal every five years. Personal licenses are subject to compliance with certain license conditions. |
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Italy
We operate two different gaming businesses in Italy. We supply video lottery terminals (“VLTs”), including the terminal machines themselves, the related online platforms and the games available on the machines, to brick-and-mortar gaming halls. We also supply Virtual Sports products, including online platforms and games, to betting shops and online platforms. Our businesses are operated through the Italian branches of certain of our UK subsidiaries. These branches hold police licenses and are enrolled in the Register of Gestori, as further described below. We supply our Italian VLTs and Virtual Sports products only to operators licensed under Italian gaming laws and regulations.
Our VLT and Virtual Sports platforms must be connected over the internet to servers operated by the ADM. Information regarding gaming sessions and the amounts wagered and won is provided in real time through the ADM servers, in order to enable the ADM to monitor the operation of machines and games and to verify the amount of taxes due.
Italian Betting and Gaming Laws and Regulations. Operators of betting premises offering VLTs (including the entities managing the networks connecting such VLTs to ADM servers), and operators of betting premises or online platforms offering Virtual Sports products, must hold an Italian gaming license. No gaming license is required in order to supply VLTs or Virtual Sports products to such operators. Such VLT platforms, machines and games, and Virtual Sports platforms and games, must be certified and approved by SOGEI, an entity authorized to conduct such certifications, and approved by the Italian Ministry of Finance. Such certifications and approvals must be obtained by such operators, rather than the suppliers of such VLT platforms, machines and games, and Virtual Sports platforms and games.
Suppliers of gaming machines, including VLTs, must hold a police license (as prescribed by article 86, paragraph 3, of the Italian United Text of Public Security Law (TULPS) provided by the Royal Decree 18 June 1931, No. 773) and be enrolled in a registry prescribed by article 1, paragraph 82 of Law No. 220/2010 (known as the “Register of Gestori”). If a supplier of gaming machines is not enrolled in the Register of Gestori, any agreement it enters into regarding the supply of gaming machines is null and void. In addition, if the enrollment is not renewed, existing agreements regarding the supply of gaming machines become null and void. Enrollment in the Register of Gestori is subject to, among other things, a review of the suitability of the applicant business entity and its directors. In the event of a change of control of the entity enrolled in the Register of Gestori (but not of such entity’s direct or indirect parent entities), the details of such change must be notified to the ADM and suitability must be reconfirmed.
Suppliers of Virtual Sports products are not required to hold a police license, be enrolled in the Register of Gestori or otherwise be licensed or registered.
Greece
In Greece, we supply VLTs, including the terminal machines themselves, the related online platforms and the games available on the machines, to brick-and-mortar gaming locations operated by OPAP, the country’s sole licensed operator of gaming machines. We supply such VLTs under a certification provided by the Hellenic Gaming Commission (the “HGC”). We also supply Virtual Sports products within retail venues operated by OPAP and via self-service betting terminals within OPAP venues and supply interactive games to online operators in Greece.
Greek Betting and Gaming Laws and Regulations: I. According to Article 44 par. 2 of Law 4002/2011, as well as according to HGC’s Decisions No 225/2/25.10.2016, 79314/05.08.2020 and 79305/05.08.2020, all suppliers of gaming machines in Greece must be certified by the HGC in order to legally supply, sell, lease, offer or distribute any VLT or virtual game or any other game of chance (i.e. games including wagers or bets and the result of which games depends, even partly, on the influence of luck). Moreover, a Suitability Licence is required for suppliers, who are further are divided into a) Manufacturers (Art. 11 of the HGC’s Decision No 79314/05.08.2020) and b) Importers/Distributors (Art. 12 of the HGC’s Decision No 79314/05.08.2020). Accordingly, manufacturers need to obtain a Suitability Licence Type B, while importers/distributors need to obtain a Suitability Licence Type E2.
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II. As regards online gaming, Articles 45 -52 of Law 4002/2011, which was recently amended by Law 4639/2019 (Government Gazette A/167/30.10.2019), introduces several new provisions such as the two exclusive types of online licenses for online gaming operators: a) Online Betting Licence; and b) a license for Other Online Games (it covers online casino games and online poker games and variants thereof). Furthermore, Article 14 of the HGC’s Decision No 79835/05.08.2020 states that all suppliers have to submit an application to the HGC, accompanied by the required compliance certificates, for the following elements: i. the Gaming Platform (Betting Platform); ii. the Random Number Generator (RNG) per type/group of Games that the Manufacturer offer to each Licence Holder; and iii. each individual game or multigame. Lastly, Suitability Licences for suppliers are also divided into two types: a) Manufacturers Suitability Licence and b) Importers/Distributors Suitability Licence (according to articles 9 and 10 of the HGC’s Decision No 79305/05.08.2020). Accordingly, manufacturers need to obtain a Suitability Licence Type A1 or A2 (depending on whether the manufacturer provides management services to the operator or not), while importers/distributors need to obtain a Suitability Licence Type E1.
Gaming Regulation and Changes in Ownership
In all of the jurisdictions in which we are subject to gaming regulations, regulators require us to keep them informed as to our ownership structure and composition and, to varying extents and in various circumstances, require us to disclose certain information regarding the persons who directly or indirectly hold our shares. Depending on the regulator, we may need to provide such information not only when we first seek licenses or certifications, but also when material changes (measured at different levels) occur in the ownership of our shares. As a result, material changes in our shareholdings may be subject to special procedures in order to ensure the continuation of our gaming licenses and certifications.
Content Development
We continually invest in new product development in each of our Virtual Sports, Interactive, Leisure and Gaming business segments. Inspired has a full stack game development structure, combining its proprietary technology frameworks together with some of the industry’s best math, art, creative and production personnel spread across 3 game studios (Inspired, Astra and Bell Fruit). We release over 100 games each year onto our own priority gaming system, Interactive RGS and to our G2S clients around the world in markets such as the North America, UK, Greece, Spain, Belgium, Italy, Sweden and more. Whilst many of our game launches are omni-channel, we have a focus on building the right game for the right market and take pride in tweaking and modifying the math and themes for the target player. In Virtual Sports we combine graphical assets and software that controls those assets to schedule events and generate results via a random number generator, as well as supplying on demand versions of our content. In 2020 we launched the Virtual Plug and Play (VPP) product range. Using our award winning Virtuals assets, with our Interactive RGS and the addition of a Virtuals Bet Management System, VPP gives our operators a Virtuals Sportsbook in a box, with ease of integrations and operation. We account for our development costs as software development costs and these are typically amortized over a two-year period.
We account for our development costs as software development costs and these are typically amortized over a two-year period.
Suppliers
Our principal supply arrangements concern the supply of our terminal components, content provision and outsourced labor. We work closely with our key suppliers to ensure a high level of quality of goods and services is obtained and have worked with many of these suppliers for many years. We have achieved significant cost savings through centralization of purchases.
Customers
Our customer base includes regulated operators of lotteries, licensed sports bookmakers, gaming and bingo halls, casinos, pubs, adult gaming centers, holiday parks and regulated online operators. We typically implement design and content variations to customize their terminals and player experiences. Our license agreements with customers for the provision of machines, content and Virtual Sports products include provisions to protect our intellectual property rights in our games and other content.
Customer Contracts – Gaming
Our contracts in the Gaming segment involve supplying gaming terminals and licensing gaming software and games for the terminals. We supply the terminals on an exclusive or non-exclusive basis for all terminals of a customer or for specific locations. Under these contracts, we have general obligations to deliver, install, upgrade and service the terminals and software. The contracts may be terminated early in various circumstances such as if we fail to meet performance targets in servicing the machines.
Under some contracts, we receive an upfront fee for the provision of the terminals but more typically generate revenue as a percentage of income generated on terminals. With our participation-driven business model, approximately 97% of service revenue (excluding VAT related income) for our Gaming segment is recurring in nature and derived under long-term contracts that are typically between three and five years (although may be shorter for contract extensions). Over the last three years, we have renewed a significant majority of contracts that were expiring.
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Customer Contracts – Virtual Sports
Our contracts in the Virtual Sports segment typically involve the supply of licenses to operators to make available, either via online or retail channels, virtual sporting events such as darts, cricket, or basketball, and to enable end-users to place bets on these events. These are typically one-time non-exclusive licenses specific to the virtual sporting event. We may agree to customize and brand the virtual sporting events for the operator or to provide language variations of the event. The contracts may be terminated early in various circumstances, including, for example, if the operator fails to pay an invoice within 60 days of receipt.
Our Virtual Sports products are typically offered to operators on a participation basis, whereby we receive a portion of the gaming revenues generated, plus an upfront software license fee. With our participation-driven business model, our Virtual Sports segment produces approximately 94% of total revenue on a recurring basis under long-term contracts that average four years when entered into and we have historically had a 99% renewal rate over the last three years for contracts that expired.
Customer Contracts – Interactive
Our contracts in the Interactive segment vary but generally involve the provision of a limited, non-exclusive, non-transferable, revocable license to operators to display certain slot and casino content on which online bets are placed or to make our games available for play by end-users of an operator’s online gaming business operations. The contracts may be terminated early in various circumstances, including material breach or inability to operate due to a change in regulatory status.
Our Interactive products are typically offered to operators on a participation basis, whereby we receive a percentage of total amount of stakes wagered or a percentage of net gaming revenue. With our participation-driven business model, approximately 99% of revenue for our Interactive segment is recurring in nature and derived under long-term contracts that averaged three years from when we entered into these contracts. Over the last three years, we have renewed approximately 100% of these contracts for those customers that have continued to trade.
Customer Contracts – Leisure
Our contracts in the Leisure segment vary but generally involve (i) agreement whereby the operator or proprietor of certain leisure resorts contributes premises and we provide, on an exclusive basis, gaming and amusement terminals as well as gaming software and games for the machines provided, (ii) contracts to supply gaming terminals as well as gaming software and games for the terminals provided to leisure operators on a non-exclusive basis, and (iii) rental agreements, which we enter into with certain motorway services providers, whereby we rent unit space in motorway service areas and populate this space with our gaming terminals.
Depending on the contract type, we have general obligations to deliver, install, upgrade and service the terminals and software provided, to acquire licensing for the various prizes and toys, which may be used in the terminals, to keep the premises open for minimum operating hours and not to use the premises for certain business. These contracts may be terminated early in various circumstances, including for material breach or insolvency events.
Under our leisure contracts, we typically generate revenue on a participation-basis by participating, typically as a function of gross revenue from each terminal, in a percentage of volumes generated by these terminals. With our participation-driven or fixed weekly fee business model, approximately 100% of service revenue for our Leisure segment is recurring in nature and derived under long-term contracts that are usually between three and five years. Since the NTG Acquisition, within the Leisure segment we have successfully renewed or extended all major contracts that have expired.
Operations and Employees
Our operations include game production, platform and hardware design, production, testing, and distribution; the maintenance, management, and extension of our centralized network for product distribution and product monitoring; the delivery and, in certain circumstances, maintenance of SBG terminals; gaming machine engineering, assembly, repair and storage; parts supply; change and release management; remote operational services; problem management; business development; market account management; and general administration and management, including Finance, Legal, People (Human Resources), Investor Relations, Marketing and Communications, Quality, Compliance and Information Security.
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As at December 31, 2020, we had approximately 1,500 full time employees. Of those employees, over 600 were dedicated to delivering our digital gaming platforms, content and manufacturing. Approximately 80 of our employees were assigned to the ongoing operation of our network, through which we supply and maintain our products. Approximately 595 of our employees were involved in UK field operations. Our management, sales and administration teams accounted for approximately 180 employees. We have been in the process of consolidating a number of offices and functions as part of our integration project which will result in an overall reduction in employees.
As at December 31, 2020, approximately 1200 of our employees were in the UK government furlough scheme, a broadly similar percentage as in April 2020, when the first UK COVID lockdown occurred.
Intellectual Property
Our intellectual property consists principally of the propriety software we develop to operate our network and in the design and distribution of our games. We depend upon agreements relating to trade secrets and proprietary know-how to protect our rights in this intellectual property. We require all our employees, contractors and other collaborators to enter into agreements that prohibit the disclosure of our confidential information to other parties. In addition, it is our policy to require our employees, contractors and other collaborators who have access to proprietary and trade secret material to enter into agreements that require them to assign any and all intellectual property rights to us that arise as a result of their work on our behalf. We also require our employees to review and acknowledge our intellectual property policies regarding how we handle intellectual property. These agreements, acknowledgements and policies may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure in violation of these agreements, and may not be sufficient to secure for us the value in such developments that they are designed to secure.
We also hold certain patents, trademarks, design rights and other intellectual property rights in respect of our products, systems, web domains, and other intellectual property. We also rely on certain products and technologies that we license from third parties. Proprietary licenses typically limit our use of intellectual property to specific uses and for specific time periods.
The terms of our intellectual property registrations vary based on the type of registration and the date and jurisdiction of filing or grant. European and U.K trademark registration lasts for 10 years but can be renewed indefinitely. European and U.K design registration lasts for five years but it can be renewed four times (giving a maximum total of 25 years of protection). European and U.K patents can only be renewed for up to 20 years. U.S. design patents expires 15 years from the date of grant, and the term of utility patents generally expires 20 years from the date of filing of the first non-provisional patent application in a family of patents. The actual protection afforded by a patent depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the applicable country.
Competition
We operate in a highly competitive industry, and in highly competitive business segments. We face competition from a number of worldwide businesses, many of which have substantially greater financial resources and operating scale than we do. Such competition could adversely affect our ability to win new contracts and sales and renew existing contracts. We operate in a period of intense price-based competition in some key sectors, which could affect the profitability of the contracts and sales we do win. In certain sectors, our businesses also face competition from suppliers, operators or licensees who offer products for internet gaming in illegal or unregulated sectors, but are still able or permitted to supply products and compete with us in regulated sectors. These competitors often have substantially greater financial resources and operating scale than we do. Our principal competitors include, among others, certain businesses that have vertically integrated gaming machine and retail betting operations and businesses that operate in both regulated and unregulated sectors and thereby effectively subsidize their regulated operations with unregulated operations.
Corporate Information
We maintain a website at www.inseinc.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act are available free of charge through the Investors link on our website as soon as reasonably practical after they are electronically filed with or furnished to the SEC. Also available on our website are our Code of Ethics, as well as the charters of the audit, compensation and nominating and corporate governance committees of the Board of Directors. Information on our website is not incorporated into this report.
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Our business is subject to a high degree of risk. You should carefully read and assess our discussion of the risk factors facing our business, below. Any of these risks could materially and adversely affect our business, operating results, financial condition and prospects, and cause the value of our common stock to decline, which could cause investors in our common stock to lose all or part of their investments.
Summary of Risk Factors
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below and include, but are not limited to, risks related to the following:
| ● | The ongoing coronavirus (COVID-19) pandemic is adversely affecting our business. |
| ● | We rely on a relatively small number of customers for a significant portion of our sales, and the loss of, or material reduction in, sales to any of our top customers could have an adverse effect on our business, results of operations, financial condition and prospects. |
| ● | We are dependent on our relationships with key suppliers to obtain equipment and other supplies for our business on acceptable terms. |
| ● | The UK Government’s impending review of the Gambling Act, together with other rules that may be considered in the UK in response to recent consultations, could have, a material negative impact on our business. |
| ● | Data privacy and security laws and regulations in the jurisdictions in which we do business could increase the cost of our operations and subject us to possible sanctions and other penalties |
| ● | Our results of operations fluctuate due to seasonality and other factors and, therefore, our periodic operating results are not guarantees of future performance. |
| ● | Our industry is subject to strict government regulations that could limit our existing operations and have a negative impact on our ability to grow. |
| ● | Our industry is subject to regulations that set parameters for levels of gaming or wagering duty, tax, stake, prize and return to player. |
| ● | We may be adversely affected by disruptions to our transaction gaming and lottery systems, as well as disruptions to our internal enterprise and information technology systems. |
| ● | Our directors and key personnel are subject to the approval of certain regulatory authorities, which, if withheld, would require us to sever our relationship with non-approved individuals, which could adversely impact our operations. |
| ● | Licensing and gaming authorities have significant control over our operations and ownership, and could cause us to redeem certain stockholders on potentially disadvantageous terms. |
| ● | Certain of our executive officers and directors are affiliated with entities engaged in business activities similar to those conducted by us (or may enter into similar business activities in the future) and, accordingly, may have conflicts of interest in determining whether a particular business opportunity should be presented to us or to another entity. |
| ● | We have operations in a variety of countries, which subjects us to additional risks. |
| ● | We may have future capital needs and may not be able to obtain additional financing on acceptable terms. |
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| ● | We may be unable to develop sufficient new products and product lines and integrate them into our existing business, which may adversely affect our ability to compete; our expansion into new sectors may present competitive and regulatory challenges that differ from current ones. |
| ● | We may be required to recognize impairment charges related to goodwill, identified intangible assets and property and equipment or to take write-downs or write-offs, restructuring or other charges that could have a significant negative effect on our financial condition, results of operations and stock price, which could have an adverse effect on your investment. |
| ● | Volatility or disruption in the financial markets could materially adversely affect our business and the trading price of our common stock. |
| ● | Global economic conditions could have an adverse effect on our business, operating results and financial condition. |
| ● | We face risks and uncertainty arising from the United Kingdom’s withdrawal from the European Union. |
Risks Relating to Our Business and Industry
The ongoing coronavirus (COVID-19) pandemic is adversely affecting our business.
Our business continues to be affected by the coronavirus (COVID-19) pandemic and future epidemics or pandemics could do the same. Our ability to offer land-based gaming generally has been affected by the closures (and reclosures), for an indeterminate period of time, of all venues that offer gaming in the jurisdictions in which we operate (including, but not limited to, the UK, Greece and Italy, from which we derive a substantial portion of our income). In addition, the economic impact of the pandemic may result in the permanent closure of certain venues and/or a decrease in the willingness or ability of consumers to engage in gambling activities or to be able to access land-based gaming to the same extent, both during and possibly after the pandemic. The pandemic may also adversely affect a broad range of our operations, including our ability to retain and recruit employees, obtain and ship our products, our ability to continue to develop new products and services as effectively when remote working as well as the ability of our customers to pay outstanding amounts due to us. The pandemic and the economic impact on employment may reduce the disposable incomes of players and may result in a decrease in the number of customers willing to visit retail locations. The UK government furlough scheme (where the Company has the majority of its employees) may not continue for the duration of the closures. More information about the effect of the COVID-19 pandemic on our business can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We operate in a highly competitive industry and our success depends upon our ability to effectively compete with numerous worldwide businesses.
We face competition from a number of businesses, including worldwide businesses, many of which have substantially greater financial resources and operating scale than we do. Such competition could adversely affect our ability to win new contracts and sales and renew existing contracts. We operate in a period of intense price-based competition in some key sectors, which could affect the profitability of the contracts and sales we do win.
In certain sectors, our businesses also face competition from suppliers, operators or licensees who offer products for internet gaming in illegal or unregulated sectors, but are still able or permitted to supply products and compete with us in regulated sectors. These competitors often have substantially greater financial resources and operating scale than we do.
If we cannot successfully compete in our industry and business segments, our business, results, financial condition and prospects could suffer.
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We are heavily dependent on our ability to renew our long-term contracts with our customers and we could lose substantial revenue if we are unable to renew certain of these contracts.
Generally, customer contracts in our Gaming, Virtual Sports and Interactive business segments are for initial terms of three to five years, but longer in certain territories, with renewals at the customer’s option. Generally, our customer contracts within the Leisure business segment are for terms of four to six years (although in certain cases they are longer), but certain customers have options for early termination under certain circumstances or to reduce machines volumes in certain circumstances, and we may face pressure to renew or upgrade terminals during the lives of these contracts, which could adversely affect revenues or our return on capital and leave us with surplus terminals. At any given time, we have multiple substantial customer contracts that have years to run and others that may be nearing expiration or renewal, which we may lose if we cannot compete effectively to retain their business.
There can be no assurance that current contracts will be extended or that we will be awarded contract extensions or new contracts as a result of competitive bidding processes or otherwise. The termination, expiration or failure to renew one or more of our contracts could cause us to lose substantial revenue.
Changes in applicable gambling regulations or taxation regimes may affect the revenues or profits generated by the contracts we enter into with our customers. Many of the contracts have with our customers are on revenue-sharing (net of gaming taxes) terms, and therefore changes which adversely affect our customers may also adversely affect us. In addition, any such changes may cause our customers to seek to renegotiate their contracts, may alter the terms on which such customers are prepared to renew their contracts and may affect their ability or willingness to renew their contracts.
We rely on a relatively small number of customers for a significant portion of our sales, and the loss of, or material reduction in, sales to any of our top customers could have an adverse effect on our business, results of operations, financial condition and prospects.
Certain key customers, including certain UK, Italian and Greek gaming terminal customers and certain Virtual Sports customers, make a significant contribution to our revenues and profitability. Our top ten customers generated approximately 60% of total revenues in the year ended December 31, 2020. During the year ended December 31, 2020, one customer represented 22% of the Company’s revenues (this increase year on year was driven by VAT related income, the same customer represented 14% in 2019). We expect that these customers will continue to represent a significant portion of our sales in the future. However, the loss of any of our top customers, whether through contract expiry and non-renewal, breach of contract or other adverse factors could materially adversely affect our revenues or return on capital and leave us with surplus terminals. Moreover, if any of these customers experience reduced revenue, such reduction could adversely affect any revenue-sharing arrangements we have with those customers, reduce our own revenues and adversely affect our financial results.
We are dependent on our relationships with key suppliers to obtain equipment and other supplies for our business on acceptable terms.
We have achieved significant cost savings through our centralization of equipment and non-equipment purchases. However, as a result, we are exposed to the credit and other risks of a group of key suppliers. While we make every effort to evaluate our counterparties prior to entering into long-term and other significant procurement contracts, we cannot predict the impact on our suppliers of the current economic environment and other developments in their respective businesses. Insolvency, financial difficulties, supply chain delays or other factors may result in our suppliers not being able to fulfill the terms of their agreements with us. Further, such factors may render suppliers unwilling to extend contracts that provide favorable terms to us, or may force them to seek to renegotiate existing contracts with us. In addition, our business has signed a number of significant contracts whose performance depends upon third party suppliers delivering equipment on schedule for us to meet its contract commitments. Failure of the suppliers to meet their delivery commitments could result in us being in breach of and subsequently losing those contracts. Although we believe we have alternative sources of supply for the equipment and other supplies used in our business, concentration in the number of our suppliers could lead to delays in the delivery of products or components, and possible resultant breaches of contracts that we have entered into with our customers; increases in the prices we must pay for products or components; problems with product quality or components coming to the end of their life; and other concerns.
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Our ability to bid on new contracts may be dependent upon our ability to fund any required up-front capital expenditures through our cash from operations, the incurrence of indebtedness or the raising of additional equity capital.
Our Gaming and Leisure terminal contracts in the UK, Italy and Greece often require significant up-front capital expenditures for terminal assembly, software customization and implementation, systems and equipment installation and telecommunications configuration. Historically, we have funded these up-front costs through cash flows generated from operations and external borrowings. Our ability to continue to procure new contracts, including in new jurisdictions, will depend upon, among other things, our liquidity levels at the time or our ability to obtain additional debt or equity funding at commercially acceptable terms to finance the initial up-front costs. If we do not have adequate liquidity or are unable to obtain other funding for these up-front costs on favorable terms or at all, we may not be able to bid on certain contracts, which could restrict our ability to grow and have an adverse effect on our ability to retain existing contracts and therefore on future profitability. Certain contracts within the Leisure business segment also require injections of capital expenditure during the term for new or replacement hardware.
The UK Government’s impending review of the Gambling Act, together with other rules that may be considered in the UK in response to recent consultations, could have, a material negative impact on our business.
In December 2020, DCMS announced that it is reviewing the Gambling Act, the consultation period for which closes on 31 March 2021 with the objective of (i) examining whether changes are needed to the system of gambling regulation in Great Britain to reflect changes to the gambling landscape since 2005, particularly due to technological advances (ii) ensuring there is an appropriate balance between consumer freedoms and choice on the one hand, and prevention of harm to vulnerable groups and wider communities on the other and (iii) making sure customers are suitably protected whenever and wherever they are gambling, and that there is an equitable approach to the regulation of the online and the land based industries. There have a been a number of similar consultations launched, including a DCMS consultation in relation to fees which closes on 25 March 2021 and a Gambling Commission consultation in relation to Remote Customer Interaction which closed on 9 February 2021. The potential outcomes of such reviews are not currently known but new legislation or regulations could adversely affect our business. A recent example of legislative change implemented by the UK Government which adversely affected our business was the reduction of maximum permitted bets from £100 to £2 on B2 Gaming Machines which became effective as of April 1, 2019. As a result of this change, a number of land-based operators commenced a rationalization of their retail operations, which among other measures led to the closure of certain land-based operator shops.
Our business depends on our ability to prevent or mitigate the effects of a cybersecurity attack.
Our information technology may be subject to cyber-attacks, security breaches or computer hacking including a widespread ransomware attack encrypting corporate IT equipment, a directed motivated attack against us or a data breach or cyber incident happening to a third-party network and affecting us. Regardless of our efforts, there may still be a breach and the costs to eliminate, mitigate or address the aforementioned threats and vulnerabilities before or after a cyber incident could be significant. Any such breaches or attacks could result in interruptions, delays or cessation of service, and loss of existing or potential suppliers or customers. In addition, breaches of our security measures and the unauthorized dissemination of sensitive personal, proprietary or confidential information about the Company, our business partners or other third parties could expose us to significant potential liability and reputational harm. We could also be negatively impacted by existing and proposed laws and regulations, and government policies and practices related to cybersecurity, data privacy, data localization and data protection.
Our business depends upon the protection of our intellectual property and proprietary information.
We believe that our success depends, in part, on protecting our intellectual property in the UK and in other countries. Our intellectual property includes certain trademarks relating to our systems, as well as certain patents and proprietary or confidential information that is not subject to patent or similar protection. Our intellectual property protects the integrity of our games, systems, products and services, which is a core value of the industries in which we operate. Protecting our intellectual property can be expensive and time-consuming, may not always be successful depending on local laws or other circumstances, and we also may choose not to pursue registrations in certain countries. Competitors may independently develop similar or superior products, software, systems or business models. In cases where our intellectual property is not protected by an enforceable patent, or other intellectual property protection, such independent development may result in a significant diminution in the value of its intellectual property.
There can be no assurance that we will be able to protect our intellectual property. We enter into confidentiality or license agreements with our employees, vendors, consultants and, to the extent legally permissible, our customers, and generally control access to, and the distribution of, our game designs, systems and other software documentation and other proprietary information, as well as the designs, systems and other software documentation and other information we license from others. Despite our effort to protect these proprietary rights, parties may try to copy our gaming products, business models or systems, use certain of our confidential information to develop competing products, or independently develop or otherwise obtain and use our gaming products or technology, any of which could have an adverse effect on our business. Policing unauthorized use of our technology is difficult and expensive, particularly because of the global nature of our operations. The laws of some countries may not adequately protect our intellectual property.
There can be no assurance that our business activities, games, products and systems will not infringe upon, misappropriate of otherwise violate the proprietary rights of others, or that other parties will not assert infringement or misappropriation claims against us. Any such claim and any resulting litigation, should it occur, could subject us to significant liability for costs and damages and could result in invalidation of our proprietary rights, distract management, and/or require us to enter into costly and burdensome royalty and licensing agreements. Such royalty and licensing agreements, if required, may not be available on terms acceptable to us, or may not be available at all. In the future, we may also need to file lawsuits to defend the validity of our intellectual property rights and trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources.
We also rely on certain products and technologies that we license from third parties. Proprietary licenses typically limit our use of intellectual property to specific uses and for specific time periods. There can be no assurance that these third-party licenses, or the support for such licenses, will continue to be available to us on commercially reasonable terms. In the event that we cannot renew and/or expand existing licenses, we may be required to discontinue or limit our use of the products that include, incorporate, or rely on licensed intellectual property.
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Data privacy and security laws and regulations in the jurisdictions in which we do business could increase the cost of our operations and subject us to possible sanctions and other penalties
Our business is subject to a number of federal, state, local and foreign laws and regulations governing data privacy and security, including with respect to the collection, storage, use, transmission and protection of personal information. In particular, we are subject to the EU General Data Protection Regulation (the “EU GDPR”) where we are established in the EEA or where we are not established in the EEA but process personal data of individuals in the EEA in relation to the offering of goods or services to, or the monitoring the behavior of, individuals in the EEA.
Following the end of the Brexit Transition Period on 31 December 2020, the EU GDPR has been implemented in the UK as the “UK GDPR”. The requirements of the UK GDPR are (for the time being) virtually identical to those of the EU GDPR.
The EU GDPR and the UK GDPR (collectively the “GDPR”) set out a number of requirements that must be complied with when handling personal data including (amongst others): (i) accountability and transparency requirements, and enhanced requirements for obtaining valid consent; (ii) obligations to consider data protection as any new products or services are developed and to limit the amount of personal data processed; (iii) obligations to comply with data protection rights of data subjects; and (iv) reporting of personal data breaches to the supervisory authority without undue delay (and no later than 72 hours where feasible).
The GDPR also prohibits the international transfer of personal data from the EEA/UK to countries outside of the EEA/UK unless made to a country deemed to have adequate data privacy laws by the European Commission or UK Government or a data transfer mechanism has been put in place. In July 2020, the Court of Justice of the European Union (“CJEU”) in its Schrems II ruling invalidated the EU-US Privacy Shield framework, a self-certification mechanism that facilitated the lawful transfer of personal data from the EEA/UK to the United States, with immediate effect. The CJEU upheld the validity of standard contractual clauses (“SCCs”) as a legal mechanism to transfer personal data but companies relying on SCCs will need to carry out a transfer privacy impact assessment, which among other things, assesses laws governing access to personal data in the recipient country and considers whether supplementary measures that provide privacy protections additional to those provided under SCCs will need to be implemented to ensure an essentially equivalent level of data protection to that afforded in the EU. This may have implications for our cross-border data flows and may result in compliance costs.
In addition, Brexit has implications for transfers of personal data between the UK and the EU and vice versa. Transfers of personal data from the UK to the EU are unrestricted and do not require additional safeguards as the UK has approved the adequacy of the EU and all 12 nations deemed adequate by the EU. As regards transfers of personal data from the EEA to the UK, under the terms of the Trade and Cooperation Agreement agreed between the EU and UK on 24 December 2020, such data flows remain unrestricted until the end of June 2021, provided the UK makes no substantive changes to its data protection laws. During this “bridging period”, the European Commission will assess the adequacy of the UK from a data protection law perspective. If the European Commission were to grant the UK an “adequacy decision”, transfers of personal data from the EEA to the UK would continue unrestricted and would not require any additional safeguards. To the extent the European Commission does not grant the UK an adequacy decision as at the end of the bridging period, data transfer mechanisms will need to be put in place to legitimize the transfer of personal data from the EEA to the UK.
Compliance with the GDPR will incur compliance and operational costs. In addition, a data supervisory authority may find our data processing practices and compliance steps to be inconsistent with the GDPR’s application in their respective jurisdiction. Data supervisory authorities also have the power to issue fines for non-compliance of the GDPR of up to 4% of an organization’s annual worldwide turnover or €20m (£17.5 million under the UK GDPR), whichever is higher. Data subjects also have a right to compensation, as a result of an organization’s breach of the GDPR that has affected them, for financial or non-financial losses (e.g., distress).
Our results of operations fluctuate due to seasonality and other factors and, therefore, our periodic operating results are not guarantees of future performance.
Our revenues are subject to a number of variations. Equipment sales and software license revenues usually reflect a limited number of large transactions, which may not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period to period as a result of the timing of equipment sales and software licensing. In addition, revenues may vary depending on the timing of contract awards and renewals, changes in customer budgets and general economic conditions. A proportion of our revenues are subject to regular seasonal variations of the sort often related to seasonal consumer behavior, income from the Leisure business segment is generally strongest in the spring and summer, predominantly in Leisure parks and in Italy and Greece we experience reductions in revenue in the summer.
Our industry is subject to strict government regulations that could limit our existing operations and have a negative impact on our ability to grow.
In certain jurisdictions, forms of wagering, betting and lottery may be expressly authorized and governed by law and in other jurisdictions forms of wagering, betting and lottery may be expressly prohibited by law. If expressly authorized, such activities are typically subject to extensive and evolving governmental regulation. Gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore, we are subject to a wide range of complex gaming laws, rules and regulations in the jurisdictions in which we are licensed or may seek to be licensed. Most jurisdictions require that we are licensed or authorized, that our key personnel and certain of our security holders are found to be suitable or are licensed, and that our products are reviewed, tested and certified or approved before placement. If a license, approval, certification or finding of suitability is required by a regulatory or national authority and we fail to seek or do not receive the necessary approval, license, certification or finding of suitability, or if it is revoked, then we may be prohibited from distributing our products for use in the respective jurisdiction. Additionally, such prohibition could trigger reviews of our Company by regulatory bodies in other jurisdictions and adversely affect our ability to obtain or retain the required licenses and approvals in those jurisdictions.
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The regulatory environment in any particular jurisdiction may change in the future, and any such change could have an adverse effect on our results of operations or business in general. Moreover, there can be no assurance that the operation of Server Based Gaming terminals, Video Lottery Terminals or other Terminals, Virtual Sports betting, betting online, lottery or other forms of wagering systems will be approved, certified or found suitable by additional jurisdictions or that those jurisdictions in which these activities are currently permitted will continue to permit such activities in their existing forms (stricter regulations, including regulation relating to age verification, could come into force which could have adverse impacts on the Company) or at all. While we believe that we have the means to continue to develop procedures and policies designed to comply with and monitor the requirements of evolving laws, there can be no assurance that law enforcement agencies, governmental agencies or gaming regulatory authorities, whether in existing or new jurisdictions, will not seek to restrict our business or otherwise institute enforcement proceedings or other legal claims against the Company. Moreover, in addition to the risk of such enforcement actions or claims, we are also at risk from loss of business reputation in the event of any potential legal or regulatory investigation whether or not we are ultimately accused of or found to have committed any violations.
We supply our products to operators of gaming venues, platforms and websites who typically must themselves be licensed by gaming regulators. If any one of these operators fails to maintain its gaming licenses, or violates gaming laws or regulations, our business may suffer, due to our loss of a viable customer and, in instances where we have a revenue-sharing arrangement with the operator, due to our loss of our shares of the revenue generated by that operator’s business.
We supply certain of our products to operators who operate gaming websites. Some of those operators may take bets from customers in sectors where no gaming laws or regulations exist and where the provision of online gaming is effectively unregulated. Although the Company seeks to ensure that its customers only take bets in sectors where online gaming is legal, if any of those operators is subjected to investigatory or enforcement action for acting otherwise, this could result in the operator suffering interventions ranging from special conditions being applied to its licenses, license suspension or license loss, or the operator otherwise withdrawing from or curtailing its activities in its sector. Any such developments could adversely affect such operator’s revenues and in turn adversely affect our earnings from such operator. The Company may itself be subject to investigatory or enforcement action (if and to the extent that local laws or the laws of other jurisdictions in which the Company operates impose liability on suppliers for the activities of the customers that they supply or for receiving funds that are deemed to be illegal because of such activities). We seek to protect ourselves against any such liability for the activities of the operators that we supply, including by contractually requiring those operators not to operate in certain territories and only supplying operators who we have reviewed to determine whether they uphold the requisite standards of regulatory and legal compliance. Nonetheless, there is a risk that we may fail to undertake sufficient due diligence, fail to receive accurate information on which to conduct due diligence, or become subject to investigatory or enforcement action should we or any of our customers be accused of breaching any regulations or laws. Any such action may adversely affect our standing with gaming regulators and our ability to obtain and retain required licenses and other approvals in other jurisdictions.
We may be required to obtain and maintain licenses and certifications from various state and local jurisdictions in order to operate certain aspects of our business and we and our key personnel and certain security holders may be subject to extensive background investigations and suitability standards. We may also become subject to regulation in any other jurisdiction where our customers are permitted to operate in the future. Licenses and ongoing regulatory compliance can be costly. There can be no assurance that we will be able to obtain new licenses or renew any of our existing licenses, and the loss, denial or non-renewal of any of our licenses could have an adverse effect on our business. Generally, regulatory authorities have broad discretion when granting, renewing or revoking approvals and licenses. Our failure, or the failure of any of our key personnel, systems or machines, in obtaining or retaining a required license or approval in one jurisdiction could have a negative impact on our ability (or the ability of any of our key personnel, systems or gaming machines) to obtain or retain required licenses and approvals in other jurisdictions. The failure to obtain or retain a required license or approval in any jurisdiction would decrease the geographic area where we may operate and generate revenues, decrease our share in the gaming marketplace and put us at a disadvantage compared with our competitors. In addition, the levy of substantial fines or forfeiture of assets could significantly harm our business, financial condition and results of operations.
Some jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage of equity securities of licensed or regulated businesses. The failure of beneficial owners of our common stock to submit to such background checks and provide required disclosure could jeopardize our business. In light of these regulations and the potential impact on our business, our second amended and restated certificate of incorporation provides for the prohibition of stock ownership by persons or entities who fail to comply with informational or other regulatory requirements under applicable gaming law, who are found unsuitable to hold our stock by gaming authorities or whose stock ownership adversely affects our ability to obtain, maintain, renew or qualify for a license, contract, franchise or other regulatory approval from a gaming authority. The licensing procedures and background investigations of the authorities that regulate our businesses and the proposed amendment may inhibit potential investors from becoming significant stockholders or inhibit existing stockholders from retaining or increasing their ownership.
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Our businesses are subject to a number of federal, state, local and foreign laws and regulations governing data privacy and security, including with respect to the collection, storage, use, transmission and protection of personal information and other consumer data. In particular, the EU has adopted strict data privacy regulations. Following recent developments such as the European Court of Justice’s 2015 ruling that the transfer of personal data from the EU to the U.S. under the EU/U.S. Safe Harbor was an invalid mechanism of personal data transfer, the adoption of the EU-U.S. Privacy Shield as a replacement for the Safe Harbor (which has since been declared invalid by Schrems II), and coming into effect of the EU’s General Data Protection Regulation, data privacy and security compliance in the EU are increasingly complex and challenging. The scope of data privacy and security regulations continues to evolve, and we believe that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions. Compliance with data privacy and security restrictions could increase the cost of our operations and failure to comply with such restrictions could subject us to criminal and civil sanctions as well as other penalties.
We are subject to the provisions of the UK Bribery Act 2010, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws. The UK Bribery Act generally prohibits giving a financial or other advantage to another person with the intention of inducing that person to improperly perform a relevant function or activity. The U.S. Foreign Corrupt Practices Act generally prohibits U.S. persons and companies and their agents from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business. Certain of these anti-corruption laws also contain provisions that require accurate record keeping and further require companies to devise and maintain an adequate system of internal accounting controls. Because a significant percentage of our revenue derives from foreign sources, and our business activities involve continuing relationships with governmental regulators, there exists a risk that certain provisions of these anti-corruption laws may be breached. We are also subject to anti-money laundering and anti-terrorist financing laws and regulations, and to economic and trade sanctions programs administered by the Office of Foreign Assets Control (OFAC) in the United States relating to our ability to engage in transactions with entities that are domiciled in countries or territories subject to comprehensive OFAC trade sanctions (currently, Cuba, Iran, North Korea, Syria, and Crimea), or that are included on OFAC’s list of Specially Designated Nationals and Blocked Persons. Although we have policies and controls in place that are designed to ensure compliance with these laws, if those controls are ineffective or an employee or intermediary fails to comply with the applicable regulations, we may be subject to criminal and civil sanctions as well as other penalties. Any such violation could disrupt our business and adversely affect our reputation, results of operations, cash flows and financial condition.
We review and develop our internal compliance programs in an effort to ensure that we comply with legal requirements imposed in connection with our business activities. The compliance program is run on a day-to-day basis by our in-house legal department with compliance and technical advice provided by our compliance manager and outside professionals. There can be no assurance that such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of administrative, civil and even criminal sanctions, monetary fines or suspension or revocation of one or more of our licenses.
Our industry is subject to regulations that set parameters for levels of gaming or wagering duty, tax, stake, prize and return to player.
In most jurisdictions in which we operate or expect to seek to operate, the level of duty or taxation, the stake, prize and return to player of wagering, betting and lottery games and the speed at which players can participate in gaming are defined in government regulations which are subject to change. Those regulations may also affect the premises in which gaming activities may take place (i.e., by limiting the number of gaming machines which may be housed in a licensed gaming location, or by restricting the locations in which licensed gaming premises may be situated). Once authorized, such parameters are subject to extensive and evolving governmental regulation. Moreover, such gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore, we are subject to a wide range of complex gaming parameters in the jurisdictions in which we are licensed. If a key parameter is changed, such as the level of taxation or duty or the maximum stake or prize or return to player of a game, then it may be to the detriment of our business, financial condition, results and prospects or we may be unable to distribute our products profitably.
Our business is subject to evolving technology.
The sectors for our products are affected by changing technology, new regulations and evolving industry standards. Our ability to anticipate or respond to such changes and to develop and introduce new and enhanced products and services on a timely basis will be a significant factor in our ability to expand, remain competitive, attract new customers and retain existing contracts. For example, some of our contracts with customers require that the technology being licensed by the customer remain compliant with applicable regulations. Because regulatory changes cannot always be foreseen, such contractual requirements can from time-to-time result in us having to incur unforeseen costs to adapt our technology to changes in regulation.
Generally, there can be no assurance that we will achieve the necessary technological advances, have the financial resources, introduce new products or services on a timely basis or otherwise have the ability to compete effectively on a technological basis in the sectors we serve.
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Our business competes on the basis of the stability, security and integrity of our software, networks, systems, games and products.
We believe that our success depends, in significant part, on providing secure products and systems to our vendors and customers with high levels of uptime, quality and availability. Attempts to penetrate security measures may come from various combinations of customers, retailers, vendors, players, employees and others. Our ability to monitor and ensure quality of our products is continually reviewed and enhanced. There can be no assurance that our business might not be affected by a security breach, virus, Denial of Service attack, or technical error, failure or lapse which could have an adverse impact on our business.
Additionally, we maintain a large number of games and terminals and jackpot systems, which rely on algorithms and software designed to pay out winnings to players at certain ratios. Our systems, testing and processes to monitor and ensure the payout of games are continually reviewed and enhanced, and are additionally reviewed and tested by third-party expert test houses. There can be no assurance that our business might not be affected by a malicious or unintentional breach or technical error, failure or lapse which could have an adverse impact on payout ratios which would consequently have an adverse effect on our business in the form of lost revenues or penalty payments to players or customers. Gaming regulators may take enforcement action against us (including the imposition of significant fines) where the payout ratios fall below the ratios advertised to customers, or our software, networks, systems, games and/or products otherwise suffer from technical error, failure or lapse.
We may be adversely affected by disruptions to our transaction gaming and lottery systems, as well as disruptions to our internal enterprise and information technology systems.
Our operations are dependent upon our transactional gaming, lottery and information technology systems. We rely upon such systems to manage customer systems on a timely basis, to coordinate our sales and installation activities across all of our locations and to manage invoicing. A substantial disruption in our transactional gaming, lottery and information technology systems for any prolonged time period (arising from, for example, system capacity limits from unexpected increases in our volume of business, outages, computer viruses, unauthorized access or delays in its service) could result in delays in serving our customers, which could adversely affect our reputation and customer relationships and could result in monetary penalties pursuant to the terms of customer contracts. Our systems might be damaged or interrupted by natural or man-made events or by computer viruses, physical or electronic break-ins, or similar disruptions affecting the Internet and our disaster recovery plan may be ineffective at mitigating the effects of these risks. Such delays, problems or costs could have an adverse effect on our financial condition, results of operations and cash flows.
Gaming opponents persist in their efforts to curtail legalized gaming, which, if successful, could limit our existing operations.
Legalized gaming is subject to opposition from gaming opponents, including in the UK, Italy and other sectors where we are active. There can be no assurance that this opposition will not succeed in either preventing the legalization of gaming in jurisdictions where these activities are presently prohibited or prohibiting or limiting the expansion or continuance of gaming where it is currently permitted, in either case to the detriment of our business, financial condition, results and prospects.
Our directors and key personnel are subject to the approval of certain regulatory authorities, which, if withheld, would require us to sever our relationship with non-approved individuals, which could adversely impact our operations.
Our members, managers, directors, officers and key employees must also be approved by certain government and state regulatory authorities. If such regulatory authorities were to find a person occupying any such position unsuitable, we would be required to sever our relationship with that person. We may thereby lose key personnel which would have a negative effect on our operations. Certain public and private issuances of securities and certain other transactions by us also require the approval of certain state regulatory authorities. Further, our gaming regulators can require us to disassociate ourselves from suppliers or business partners found unsuitable by the regulators. The regulatory environment in any particular jurisdiction may change in the future and any such change could have an adverse effect on our results of operations. In addition, we are subject to various gaming taxes, which are subject to increase at any time.
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Licensing and gaming authorities have significant control over our operations and ownership, and could cause us to redeem certain stockholders on potentially disadvantageous terms.
Regulatory authorities have broad powers to request detailed financial and other information, to limit, condition, suspend or revoke a registration, gaming license or related approval and to approve changes in our operations. Some jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage of equity securities of licensed or regulated businesses. For example, in the UK, an entity holding a gambling license must notify the Gambling Commission of the identity of any stockholder holding, directly or indirectly, 3% or more of its equity or voting rights, and must apply for permission to continue to rely on its operating license whenever a new person acquires, directly or indirectly, 10% or more of its equity or voting rights. The failure of beneficial owners of our common stock to submit to such background checks and provide required disclosure could jeopardize our business. Our second amended and restated certificate of incorporation provides that, to the extent required by the gaming authority making the determination of unsuitability or to the extent the board of directors determines, in its sole discretion, that a person is likely to jeopardize the Company’s or any affiliate’s application for, receipt of, approval for, right to the use of, or entitlement to, any gaming license, shares of our capital stock that are owned or controlled by an unsuitable person or its affiliates are subject to mandatory redemption by us. The redemption price may be paid in cash, by promissory note, or both, as required, and pursuant to the terms established by, the applicable gaming authority and, if not, as we elect. Such a redemption could occur on terms or at a time that a stockholder believes to be disadvantageous.
Changes in laws or regulations, or a failure to comply with, or liabilities under, any laws and regulations, may adversely affect our business, investments and results of operations.
We are subject to laws and regulations enacted by national, regional, state and local governments, including non-U.S. governments. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have an adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, or liabilities thereunder, could have an adverse effect on our business and results of operations.
Certain of our executive officers and directors are affiliated with entities engaged in business activities similar to those conducted by us (or may enter into similar business activities in the future) and, accordingly, may have conflicts of interest in determining whether a particular business opportunity should be presented to us or to another entity.
Certain of our executive officers and directors are affiliated with entities that are engaged in businesses similar to the ones we operate (or may enter into similar business activities in the future). As a result, any of them may become aware of business opportunities which may be appropriate for presentation to us and to other entities to which they owe certain fiduciary or contractual duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented — to us or to another entity. These conflicts may not be resolved in our favor and a potential business opportunity may be presented to another entity prior to its presentation to us. Our second amended and restated certificate of incorporation provides that we renounce our interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of our Company and such opportunity is one that we are legally and contractually permitted to undertake and would otherwise be reasonable for us to pursue.
We are a holding company and conduct all of our operations through our subsidiaries.
We are a holding company and derive all of our operating income from our subsidiaries. Other than any cash we retain, all of our assets are held by our direct and indirect subsidiaries. We rely on the earnings and cash flows of our subsidiaries, which are paid to us by our subsidiaries, if and only to the extent available, in the form of dividends and other payments or distributions, to meet our debt service obligations. The ability of our subsidiaries to pay dividends or make other payments or distributions to us will depend upon their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends and other distributions to us), the terms of existing and future indebtedness and other agreements of our subsidiaries and the covenants of any future outstanding indebtedness we or our subsidiaries incur.
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Our inability to complete future acquisitions of gaming and related businesses we acquire in the future could limit our future growth, if any.
We continue to pursue expansion and acquisition opportunities in gaming and related businesses. There can be no assurance that acquisition opportunities will be available on acceptable terms or at all or that we will be able to obtain necessary financing or regulatory approvals to complete potential acquisitions. Our ability to succeed in implementing our strategy will depend upon the ability of our management to identify, complete and successfully integrate commercially viable acquisitions. Acquisition transactions may disrupt our ongoing business and distract management from other responsibilities. Any future acquisition transactions involving the use of company stock would dilute our existing stockholders and earnings per share.
Our business may be affected by changes in general and local economic and political conditions.
The demand for our services is sensitive to general and local economic conditions over which we have no control, including changes in the levels of consumer disposable income and geographic exposure to macro-economic trends and taxation. In addition, the economic stability of certain Eurozone countries where we conduct or intend to conduct business may become affected by sovereign debt crises or other general and local economic and political conditions. Adverse changes in economic conditions may affect our business generally or may be more prevalent or concentrated in particular sectors in which we operate. Any deterioration in economic conditions or the continuation of uncertain economic conditions could have an adverse effect on our business, financial condition, results of operations and prospects. Other economic risks which may adversely affect our performance include high interest rates, inflation and volatile foreign exchange markets, and effects arising from Great Britain’s exit from the European Union (“Brexit”).
The performance of our business may also be subject to political risks in certain jurisdictions where we operate, including change of government, political unrest, war or terrorism.
Our revenues can vary substantially from period to period and you should not rely upon our periodic operating results as indications of future performance.
Our revenues are subject to variations. Wagering equipment sales and software license revenues usually reflect a limited number of large transactions, which may not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period to period as a result of the timing of major equipment sales and software license revenue. In addition, revenues may vary depending on the timing of contract awards and renewals, changes in customer budgets and general economic conditions. Revenues may also vary based on adverse sequences of payouts of prizes, unusual jackpot wins, and other variations in game margin.
Our business could also be affected by natural or man-made disasters such as floods, storms or terrorist attacks. We have taken steps to have disaster recovery plans in place but there can be no assurance that such an event would not have a significant adverse impact on our business.
We have operations in a variety of countries, which subjects us to additional risks.
We are a global business and derived substantially all of our revenue outside the United States during the year December 31, 2020. In the year ended December 31, 2020, we earned approximately 76% of our revenue from our operations in the UK, 4% of our revenue from our operations in Italy, 9% of our revenue from our operations in Greece, and 11% of our revenue from our operations in the rest of the world. Our business in foreign markets subject us to risks customarily associated with such operations, including:
| ● | foreign withholding taxes on, or bank regulatory restrictions on expatriating, our subsidiaries’ earnings that could reduce cash flow available to meet our required debt service and other obligations; |
| ● | the complexity of foreign laws, regulations and markets; |
| ● | the impact of foreign labor laws and disputes; |
| ● | potential risks relating to our ability to manage our foreign operations, monitor our customers’ activities or our partners’ activities which may subject us to risks involving such other entities’ financial condition or to inconsistent interests or goals; |
| ● | recent gaming tax increases in Italy; |
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| ● | other economic, tax and regulatory policies of foreign governments; and |
| ● | the ability to attract and retain key personnel in foreign jurisdictions. |
Our consolidated financial results are significantly affected by foreign currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated transactions denominated in currencies other than U.S. Dollars, and from the translation of foreign currency balance sheet accounts into GBP-denominated or USD-denominated balance sheet accounts. Exposure to currency exchange rate fluctuations exists and will continue because a significant portion of our revenues are denominated in currencies other than the USD, particularly GBP and the Euro. Exchange rate fluctuations have in the past adversely affected operating results and cash flows and may continue to adversely affect results of operations and cash flows and the value of assets.
As a result of the geographic concentration of our operations in the UK, Italy and Greece, our operating results and cash flow depend significantly on economic conditions and the other factors listed above in these sector areas. There can be no assurance that we will be able to operate on a continuing successful basis in these sectors or in any combination of different geographical sectors.
Our business could be negatively affected by ownership changes and consolidation in the gaming industry.
Because a substantial part of our revenue is recurring in nature, our medium to long term results of operations, cash flows and financial condition could be negatively affected if any of our customers were sold to or merged with other customers, or if consolidation in the gaming industry were otherwise effected. Consolidation among gaming operators could result in our customers using more products and services of our competitors or reducing their spending on our products, or could otherwise cause downward pricing pressures, any of which outcomes could negatively affect our business.
We may not be able to capitalize on the expansion of interactive gaming or other trends and changes in the gaming and lottery industries, including due to laws and regulations governing these industries, and other factors.
We participate in new and evolving aspects of the interactive gaming and lottery industries. Part of our strategy is to take advantage of the liberalization of regulations covering these industries on a global basis. These industries involve significant risks and uncertainties, including legal, business and financial risks. The fast-changing environment in these industries can make it difficult to plan strategically and can provide opportunities for competitors to grow their businesses at our expense. Consequently, our future results of operations, cash flows and financial condition are difficult to predict and may not grow at the rates we expect.
Laws relating to internet gaming are evolving. To varying degrees, governments have taken steps to change the regulation of internet wagering through the implementation of new or revised licensing and taxation regimes, including the possible imposition of sanctions on unlicensed providers. We cannot predict the timing, scope or terms of the implementation or revision of any such state, federal or foreign laws or regulations, or the extent to which any such laws and regulations may facilitate or hinder our strategy.
In jurisdictions that authorize internet gaming, we cannot assure that we will be successful in offering our technology, content and services to internet gaming operators, because we expect to face intense competition from our traditional competitors in the gaming and lottery industries as well as a number of other domestic and foreign competitors (and, in some cases, the operators themselves), many of which have substantially greater financial resources or experience in this area than we do.
Know-your-customer and geo-location programs and technologies supplied by third parties are an important aspect of certain internet and mobile gaming products and services, because they can confirm certain information with respect to players and prospective players, such as age, identity and location. Payment processing programs and technologies, typically provided by third parties, are also a necessary feature of interactive wagering products and services. These programs and technologies are costly, and our use of them may have an adverse impact on our results of operations, cash flows and financial condition. Additionally, we cannot assure that products or services containing these programs and technologies will be available to us on commercially reasonable terms, if at all, or that they will perform accurately or otherwise in accordance with required specifications.
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Our business is capital intensive and our ability to retain customers may be influenced by our ability to deploy additional capital.
Customers of our server based gaming products may request us to incur capital expenditures to provide gaming terminals to support their land-based operations. While we seek to obtain what we believe to be satisfactory rates of return on such investments, these capital expenditures can be meaningful and may be concentrated within short periods of time. To the extent that we have insufficient access to capital or liquidity at the time that a customer, or prospective customer, makes such a request, we may be at a competitive disadvantage in retaining or attracting such customer. Such a circumstance could have an adverse effect on our business, financial condition, results of operations or prospects.
We may be subject to claims arising from the operations of our various businesses for periods prior to the dates we acquired them.
We may be subject to claims or liabilities arising from the ownership or operation businesses we have acquired, for the periods prior to our acquisition of them, including environmental, employee-related and other liabilities and claims not covered by insurance.
Our success depends upon our key personnel.
Our business results depend largely upon the continued contributions of various members of our management team, as well as certain key technical specialists, game designers, operational experts and other developers and operators of key intellectual property and processes. If we lose the services of one or more members of our management team or key employees, our business, financial condition and results of operations, as well as the market price of our securities, could be adversely affected.
The long-term performance of our business relies on our ability to attract, develop and retain talented personnel and our labor force while controlling our labor costs.
To be successful, we must attract, develop and retain highly qualified and talented personnel who have the experience, knowledge and expertise to successfully implement our key business strategies. We also must attract, develop and retain our labor force while maintaining labor costs. We compete for employees, including sales people, regional management, executive officers and others, with a broad range of employers in many different industries, including large multinational firms, and we invest significant resources in recruiting, developing, motivating and retaining them. The failure to attract and retain key employees, or to develop effective succession planning to assure smooth transitions of those employees and the knowledge, customer relationships and expertise they possess, could negatively affect our competitive position and our operating results. Further, if we are unable to cost-effectively recruit, train and retain sufficient skilled personnel, we may not be able to adequately satisfy increased demand for our products and services, which could adversely affect our operating results.
Restrictions in our existing borrowings, including covenants set forth in our existing debt facilities, or any other indebtedness we may incur in the future, could adversely affect our business, financial condition, or results of operations, and our ability to make distributions to stockholders and the value of our common stock.
Our existing borrowings, and any other indebtedness we may enter into, may limit our ability to, among other things:
| ● | incur or guarantee additional debt; |
| ● | make distributions or dividends on or redeem or repurchase shares of common stock; |
| ● | make certain investments and acquisitions; |
| ● | make capital expenditures; |
| ● | incur certain liens or permit them to exist; |
| ● | enter into certain types of transactions with affiliates; |
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| ● | acquire, merge or consolidate with another company; and |
| ● | transfer, sell or otherwise dispose of all or substantially all of our assets. |
The provisions of our existing borrowings may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions.
In connection with the Acquisition on September 27, 2019, we refinanced the business with an effective date of October 1, 2019. The new debt consisted of two senior secured five year Term Loans of £140m and €90m together with a secured revolving facility loan in an original principal amount of £20m.
The facilities are subject to covenant testing. These tests comprise a leverage ratio (consolidated total net debt/consolidated pro forma EBITDA) and a capital expenditure level. The leverage ratio is tested quarterly with the first test date being June 30, 2020. The capital expenditure level is tested annually with the first test date being December 31, 2019. There is also an annual excess cash flow calculation required, which, if positive and over certain de minimis limits, could require early prepayment of part of the facilities.
The £140m term loan initially carried a cash interest rate of 7.25% plus 3-month LIBOR, the €90m loan initially carried a cash interest rate of 6.75% plus 3-month EURIBOR. The £20m revolving credit facility initially carried a cash interest rate on any utilization at 5.50% plus 3-month LIBOR, with any unutilized amount initially carrying a cash interest cost at 30% of the applicable margin on the revolving credit facility loan.
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 £10m, (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 £16m 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%, to 8.25% plus 3-month LIBOR on the £145.8m loan (including capitalized interest payments of £5.8m), and to 7.75% plus 3-month EURIBOR on the €93.1m loan (including capitalized interest payments of €3.1m), respectively, 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
The outstanding principal amount of the Term Loans is payable on October 1, 2024. The outstanding principal amount of each advance under the RCF Loan is payable on the last day of the interest period relating to such advance, unless such advance is rolled over on a cashless basis in accordance with customary rollover provisions contained in the SFA.
Meeting the covenant testing requirements of our existing borrowings may only be possible if we exercise “equity cure” rights, which could involve the Company issuing additional shares in transactions that dilute the Company’s existing shareholders. Failure to comply with the provisions of our existing borrowings or any other indebtedness we may enter into, including the covenants set forth in our existing debt facilities, could result in a default or an event of default that could enable our lenders or other debt holders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. In addition, some of our debt could be subject to cross-acceleration terms, pursuant to which repayment of that debt would be accelerated if the repayment of other debt we owe is accelerated. If the payment of some or all of our debt is accelerated, our assets may be insufficient to repay such debt in full.
We may have future capital needs and may not be able to obtain additional financing on acceptable terms.
Economic and credit market conditions, the performance of the gaming industry and our financial performance, as well as other factors, may constrain our financing abilities. Our ability to secure additional financing, if available, and to satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, the availability of credit, economic conditions and financial, business and other factors, many of which are beyond our control.
We may require additional financing to fund our operations and growth. The failure to secure additional financing could have an adverse effect on our continued development or growth. None of our officers, directors or stockholders is required to provide any financing to us.
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We may be unable to identify and develop sufficient new products and product lines and integrate them into our existing business, which may adversely affect our ability to compete; our expansion into new sectors may present competitive and regulatory challenges that differ from current ones.
Our business depends in part on our ability to identify and develop future products and product lines that complement existing products and product lines and that respond to our customers’ and players’ needs. We may not be able to compete effectively unless our product selection keeps up with trends in the sectors in which it competes or trends in new products. If our new products and product lines do not meet our customers’ and players’ expectations, or if they are not brought to market in a timely and effective manner, our revenue (especially our revenue under revenue participation-based contracts) and financial performance will be negatively affected. In addition to market factors, our ability to develop new products and their ability to achieve commercial success will depend on a number of factors, including our ability to:
| ● | effectively market our games to our customers and to existing and new players; |
| ● | adapt to changing customer needs and player preferences; |
| ● | adapt to new technologies; |
| ● | adapt game features and contents for an increasingly diverse set of devices and specifications; |
| ● | minimize launch delays and cost overruns on the development of new products and features; |
| ● | expand and enhance games and content after their initial release; |
| ● | attract, retain and motivate talented and experienced game designers, product managers and engineers; |
| ● | achieve and maintain player engagement; |
| ● | develop games that can build upon or become franchise games; |
| ● | maintain quality content and game experience; |
| ● | compete successfully against a large and growing number of market participants; |
| ● | integrate new products and product lines into our existing business; and |
| ● | minimize and quickly resolve bugs or outages. |
In addition, if new technologies are protected by the intellectual property rights of others, including our competitors, we may be prevented from introducing new products and product lines based on these technologies or expanding into sectors created by these technologies. Even if we are able to develop new products and product lines that achieve success, it is possible that these products and product lines could divert players of our other games without growing our overall user base, which could harm our operating results. Furthermore, the success of new products and product lines will depend upon market demand and there is a risk that new products and product lines will not deliver expected results, which could adversely affect our future sales and results of operations. It is difficult to know whether we will succeed in continuing to develop successful new products and product lines.
Our expansion into new sectors may present competitive, distribution and regulatory challenges that differ from current ones. We may be less familiar with new product categories and may face different or additional risks, as well as increased or unexpected costs, compared to existing operations.
Changes in customer and player preferences could adversely affect our results of operation.
Competition in the gaming industry is intense and subject to rapid change, including changes from evolving customer and player preferences Accordingly, our success in the gaming industry is dependent on our ability to offer attractive products to our customers and players. In the markets in which we operate, we compete with various other gaming vendors and our customers and players now have access to many other forms of recreational and leisure activities. Our participation-based revenue will depend on the appeal of our gaming offerings to our customers and players relative to our competitors. If we are not able to anticipate and react to changes in customer and player preferences, our competitive and financial position may be adversely affected.
In addition, our future success will also depend on the success of the gaming industry as a whole in attracting and retaining players. Gaming may lose popularity as new leisure activities arise or as other leisure activities become more popular. Alternatively, changes in social mores and demographics could result in reduced acceptance of gaming as a leisure activity. If the popularity of gaming declines for any reason, our business, financial condition and results of operations may be adversely affected.
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Our financial success is dependent on our customers’ ability to attract and maintain players.
We have a participation-driven business model, whereby a significant amount of our revenues are generated from the gaming revenue of our customers, typically as a percentage of gross revenue. Accordingly, our results of operation and financial condition have been and are expected to continue to be influenced by the ability of our customers to attract and maintain players. The ability of our customers to attract and maintain players depends on a number of factors, including player gaming preferences, marketing of our products and player perceptions of our customers. If we are unable to provide our customers with products that players find engaging or fail to perform our obligations in maintaining the products we provide to our customers, players may reduce the amount they spend with our customers, which in turn may have an adverse effect on our results of operations (see “—We may be unable to identify and develop sufficient new products and product lines and integrate them into our existing business, which may adversely affect our ability to compete; our expansion into new sectors may present competitive and regulatory challenges that differ from current ones.”). Under most of our contracts, our customers are under no obligation to market our products and therefore we are dependent on our customers in promoting our products to maintain and attract players. Failure by our customers to effectively market our products may result in decreased gaming revenue for our customers from our products, which may have an adverse effect on our results of operations. Player perception of our customers may also impact the willingness of players to engage with our customers, which in turn may have an adverse effect on our results of operation.
Risks Relating to Our Status as a Public Company and Ownership of Our Common Stock
We may be required to recognize impairment charges related to goodwill, identified intangible assets and property and equipment or to take write-downs or write-offs, restructuring or other charges that could have a significant negative effect on our financial condition, results of operations and stock price, which could have an adverse effect on your investment.
We are required to test goodwill and any other intangible asset with an indefinite life for possible impairment on the same date each year and on an interim basis if there are indicators of a possible impairment. We are also required to evaluate amortizable intangible assets and property and equipment for impairment if there are indicators of a possible impairment. There is significant judgment required in the analysis of a potential impairment of goodwill, identified intangible assets and property and equipment. If, as a result of a general economic slowdown, deterioration in one or more of the sectors in which we operate or impairment in our financial performance and/or future outlook, the estimated fair value of our long-lived assets decreases, we may determine that one or more of our long-lived assets is impaired. An impairment charge would be determined based on the estimated fair value of the assets and any such impairment charge could have an adverse effect on our financial condition and results of operations.
Even though these charges may be non-cash items and would not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about the Company or our securities. In addition, charges of this nature may cause us to be unable to obtain future financing on favorable terms or at all.
The liquidity of the trading markets for our securities and other factors may adversely affect the price of our securities.
The price of our securities may be affected by the light volume of the trading markets for our securities as well as a variety of other factors including due to general economic conditions and forecasts, our general business condition and the release of our financial reports. If our results do not meet the expectations of investors or securities analysts, the market price of our securities may decline. In addition, fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Any of the factors listed below could have an adverse effect on the price of our securities, and our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors affecting the trading price of the Company’s securities may include:
| ● | market conditions affecting the gaming industry; |
| ● | quarterly variations in our results of operations; |
| ● | changes in government regulations; |
| ● | the announcement of acquisitions by us or our competitors; |
| ● | changes in general economic and political conditions; |
| ● | volatility in the financial markets; |
| ● | results of our operations and the operations of others in our industry; |
| ● | changes in interest rates; |
| ● | threatened or actual litigation and government investigations; |
| ● | the determination by the UK Government, announced in November 2018, to reduce maximum permitted bets on B2 gaming machines in the UK to £2 effective as of April 2019; |
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| ● | the addition or departure of key personnel; |
| ● | actions taken by our stockholders, including the sale or disposition of their shares of our common stock; and |
| ● | differences between our actual financial and operating results and those expected by investors and analysts and changes in analysts’ recommendations or projections. |
Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general, and NASDAQ in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial condition or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
Depending on the number of shares you hold and other factors, you may not be able to sell your shares at the times you prefer at desirable market prices.
Our warrants trade in over-the-counter markets operated by OTC Markets Group which may limit the ability of investors to effect transactions in the warrants.
Our warrants could expire worthless, the terms could be amended and we may redeem them at a time that is disadvantageous to holders.
Our warrants have an exercise price of $5.75 per one-half of one share ($11.50 per whole share), subject to adjustment, and may be exercised only for a whole number of shares of our common stock. There is no guarantee that the warrants will be in-the-money when warrant holders choose to exercise their warrants and they may expire worthless. The expiration date of the warrants is December 23, 2021.
In addition, the warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us provides that the terms of the warrants may be amended without the consent of any holder in order to cure any ambiguity, correct any defective provision or to add or change a provision with respect to a matter or question that the parties may deem necessary or desirable and that the parties deem not to adversely affect the interest of the holders. Other modifications or amendments, including to increase the warrant exercise price or shorten the period of exercise, would require the approval of the holders of at least 65% of the then outstanding warrants.
We also have the ability to redeem our warrants upon 30 days’ notice of redemption at a redemption price of $0.01 per warrant, provided that (i) the last reported sale price of our common stock equals or exceeds $24.00 per share on any 20 trading days within the 30 trading-day period ending on the third business day before we send the notice of such redemption and (ii) on the date we give notice of redemption and during the entire period thereafter until the time the warrants are redeemed, there is an effective registration statement under the Securities Act covering the shares of our common stock issuable upon exercise of the warrants and a current prospectus relating to them is available unless we have notified holders in the notice of redemption that we have elected to require the warrants to be exercised on a cashless basis. Redemption of the outstanding warrants could force holders:
| ● | to exercise their warrants and pay the exercise price therefor at a time when it may be disadvantageous for them to do so; |
| ● | to sell their warrants at the then-current market price when they might otherwise wish to hold their warrants; or |
| ● | to accept the nominal redemption price if their warrants remain unexercised on the redemption date regardless of the market value of the shares underlying the warrants at the time of the redemption. |
The redemption rights that we have under the warrant agreement do not extend to the private warrants provided they continue to be held by the initial purchasers or their permitted transferees.
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Sales of substantial numbers of our shares by our largest stockholders may adversely impact the market price of our shares.
Our three largest stockholders collectively hold approximately 58% of our common stock as of March 23, 2021. Our largest stockholder, Landgame S.à.r.l, transferred its holdings of our common stock to a trust pursuant to a trust agreement dated December 23, 2020, the terms of which require the trustee to dispose of such shares in public or private transactions over a period of time (the “Landgame Trust”). The Landgame Trust holds approximately 28% of our outstanding common stock as of March 23, 2021. If any of our large stockholders sell substantial amounts of their shares in the public market, the market price of our common stock could decrease significantly. In addition, the perception in the public market that the Landgame Trust or any of our other large stockholders will sell shares of common stock could also depress our market price. A decline in the price of the shares of our common stock could impede our ability to raise capital through the issuance of additional shares or other equity securities. Moreover, any such decline could result in our common stock trading at prices significantly below the price you paid.
We do not currently intend to pay dividends on our common stock.
We do not currently expect to pay cash dividends on our common stock and have not paid cash dividends on our common stock to date. Any future dividend payments are within the absolute discretion of our board of directors and will depend upon, among other things, our results of operations, working capital requirements, capital expenditure requirements, financial condition, level of indebtedness, contractual restrictions with respect to payment of dividends, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant.
Our business and stock price may suffer if securities or industry analysts do not publish or cease publishing research or reports about the Company, our business, or our sector, or if they change their recommendations regarding our common stock adversely, the price and trading volume of our common stock could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our sector, or our competitors. If securities or industry analysts do not continue to cover the Company, our stock price and trading volume would likely be negatively affected. If any of the analysts who may cover the Company change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports on the Company, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
We may issue a significant number of shares of our common stock or other securities from time to time.
We may issue shares of our common stock or other securities from time to time as consideration for, or to finance, future acquisitions and investments or for other capital needs. We cannot predict the size of future issuances of our shares or the effect, if any, that future sales and issuances of shares would have on the market price of our common stock. If any such acquisition or investment is significant, the number of shares of common stock or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial and may result in additional dilution to our stockholders. We may also grant registration rights covering shares of our common stock or other securities that we may issue in connection with any such acquisitions and investments. On February 16, 2021, the company filed a registration statement pursuant to which the Company may offer and sell from time to time, in one or more series, any one of the following securities of our company, for total gross proceeds up to $300,000,000:
| ● | common stock; |
| ● | preferred stock; |
| ● | secured or unsecured debt securities consisting of notes, debentures or other evidences of indebtedness which may be senior debt securities, senior subordinated debt securities or subordinated debt securities, each of which may be convertible into equity securities; |
| ● | warrants to purchase our securities; |
| ● | rights to purchase any of the foregoing securities; or |
| ● | units comprised of, or other combinations of, the foregoing securities. |
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Anti-takeover provisions contained in our second amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our second amended and restated certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors. These provisions include:
| ● | no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; |
| ● | the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death, or removal of a director with or without cause by stockholders, which prevents stockholders from being able to fill vacancies on our board of directors; |
| ● | the ability of our board of directors to determine whether to issue shares of our preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; |
| ● | limiting the liability of, and providing indemnification to, our directors and officers; |
| ● | the Court of Chancery of the State of Delaware as the exclusive forum for adjudication of disputes; |
| ● | controlling the procedures for the conduct and scheduling of stockholder meetings; and |
| ● | advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company. |
These provisions, alone or together, could delay hostile takeovers and changes in control of the Company or changes in our board of directors and management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our second amended and restated certificate of incorporation or bylaws, or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
Risks Relating to Economic and Political Conditions
Volatility or disruption in the financial markets could materially adversely affect our business and the trading price of our common stock.
Our business relies on stable and efficient financial markets. Any disruption in the credit and capital markets could adversely impact our ability to obtain financing on acceptable terms. Volatility in the financial markets could also result in difficulties for financial institutions and other parties that we do business with, which could potentially affect the ability to access financing under existing arrangements. We are exposed to the impact of any global or domestic economic disruption, including any potential impact of the decision by the United Kingdom to exit the EU and the sovereign debt crises in certain Eurozone countries where we do business. Our ability to continue to fund operating expenses, capital expenditures and other cash requirements over the long term may require access to additional sources of funds, including equity and debt capital markets, and market volatility and general economic conditions may adversely affect our ability to access capital markets. In addition, the inability of our vendors to access capital and liquidity with which to maintain their inventory, production levels and product quality and to operate their businesses, or the insolvency of our vendors, could lead to their failure to deliver merchandise. If we are unable to purchase products when needed, our sales could be materially adversely affected. Accordingly, volatility or disruption in the financial markets could impair our ability to execute our growth strategy and could have an adverse effect on the trading price of our common stock.
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Currency exchange rate fluctuations could result in lower revenues, higher costs and decreased margins and earnings.
We conduct purchase and sale transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates globally. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom’s June 23, 2016 referendum in which voters approved Brexit and subsequent entry into and ratification of a withdrawal agreement as of January 29, 2020 followed by an agreement of the terms of a trade and cooperation agreement effective as of December 31, 2020. It is possible that sovereign debt crises in certain Eurozone countries could lead to the abandonment of the Euro and the reintroduction of national currencies in those countries. International revenues and expenses generally are derived from sales and operations in various foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into USD for consolidated financial reporting, as weakening of foreign currencies relative to the USD will adversely affect the USD value of the Company’s foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations could have an adverse effect on our results of operations and financial condition.
We may hedge other foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger USD or other trading currency, but they also reduce the positive impact of a weaker USD or other trading currency. Our future financial results could be significantly affected by the value of the USD in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities, and there can be no assurance that our hedging activities will be effective.
Global economic conditions could have an adverse effect on our business, operating results and financial condition.
The uncertain state of the global economy continues to affect businesses around the world, most acutely in emerging markets and developing economies. If global economic and financial market conditions do not improve or deteriorate, the following factors could have an adverse effect on our business, operating results and financial condition:
| ● | Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased inventories and lower gross margins; |
| ● | In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so; |
| ● | We conduct transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the USD. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported operating results and financial condition; |
| ● | Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain could have an adverse effect on our costs, gross margins and profitability; |
| ● | If operators or distributors of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense; |
| ● | If operators or distributors of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively affect the sale of our products to consumers; and |
| ● | If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. |
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International hostilities, terrorist or cyber-terrorist activities, natural disasters, pandemics, and infrastructure disruptions could prevent us from effectively serving our customers and thus adversely affect our results of operations.
Acts of terrorist violence, cyber-terrorism, political unrest, armed regional and international hostilities and international responses to these hostilities, natural disasters, including hurricanes or floods, global health risks or pandemics or the threat of or perceived potential for these events could have a negative impact on us. These events could adversely affect our customers’ levels of business activity and precipitate sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our employees and our physical facilities and operations around the world, whether the facilities are ours or those of our third-party service providers or customers. By disrupting communications and travel and increasing the difficulty of obtaining and retaining highly skilled and qualified personnel, these events could make it difficult or impossible for us to deliver products and services to our customers. Extended disruptions of electricity, other public utilities or network services at our facilities, as well as system failures at our facilities or otherwise, could also adversely affect our ability to serve our customers. We may be unable to protect our employees, facilities and systems against all such occurrences. We generally do not have insurance for losses and interruptions caused by terrorist attacks, conflicts and wars. If these disruptions prevent us from effectively serving our customers, our results of operations could be adversely affected.
We face risks and uncertainty arising from the United Kingdom’s withdrawal from the European Union.
Following from the United Kingdom’s public referendum vote to exit from the European Union in June 2016, a withdrawal agreement was signed by both the United Kingdom and European Union and formally ratified as of January 29, 2020. In accordance with the terms of the agreement, the terms of a trade and cooperation agreement were agreed between officials from the European Union and United Kingdom on December 31, 2020. As with other businesses operating in the UK and Europe, the measures could potentially have corporate structural consequences, adversely affect manufacturing and other costs, adversely change tax benefits or liabilities in these or other jurisdictions and could disrupt some of the markets and jurisdictions in which we operate. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. In addition, the announcement of Brexit has caused significant volatility in global stock markets and currency exchange rate fluctuations, including the strengthening of the USD against some foreign currencies, and the Brexit negotiations may continue to cause significant volatility. The outcomes of these provisional and further trade deal negotiations also may create global economic uncertainty, which may cause customers and potential customers to monitor their costs and reduce their budgets for products and services. Any of these effects of Brexit, among others, could materially adversely affect the business, business opportunities, results of operations, financial condition and cash flows of our Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
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As of December 31, 2020, the Company occupied approximately 270,000 square feet of leased space in the United Kingdom, 3,300 square feet of leased space elsewhere in Europe, 2,000 square feet in New York and 17,000 square feet in Kochi, India. The primary locations were as follows:
| ● | Approximately 40,000 square feet of office space on one floor in Burton-on-Trent, East Midlands, UK. |
| ● | Approximately 2,250 square feet of flexible office space in Manchester, UK. |
| ● | Approximately 120,000 square feet of administrative offices, workshop and warehousing in Bridgend, South Wales, UK. |
| ● | Approximately 11,000 square feet of office space across two leases in the same property in Leeds, Yorkshire, UK. |
| ● | Approximately 2,000 square feet of offices on one floor in Rome, Italy. |
| ● | Approximately 17,000 square feet of office space on one floor in Kochi, India. |
| ● | Approximately 3,200 square feet of office space on one floor in New York. |
During the first half of 2021, we plan to consolidate the UK property estate and reduce the overall UK estate by a further 11,000 square footage.
From time to time, the Company is involved in legal matters arising in the ordinary course of business. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is, or could be, involved in litigation, will not have an adverse effect on its business, financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is listed and traded on the Nasdaq Capital Market under the symbol “INSE”. Our public warrants trade on the over-the-counter markets operated by OTC Markets Group under the symbol “INSEW”.
Holders
As of March 22, 2021, there were 52 holders of record of our common stock and 11 holders of record of our warrants.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not required.
ITEM 7. 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 elsewhere in this report.
Forward-Looking Statements
We make forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. For definitions of the term Forward-Looking Statements, see the definitions provided in the Cautionary Note Regarding Forward-Looking Statements at the start of the Annual Report on Form 10-K for the year ended December 31, 2020.
Segment Reporting Recharacterizations
For full information on this, see Part IV, Item 15, ‘Exhibits, Financial Statement Schedules’ Note 26 ’Segment Reporting and Geographic Information’.
Revenue
We generate revenue in four principal ways: i) on a participation basis, ii) on a fixed rental fee basis, iii) through product sales and iv) through software license fees. Participation revenue generally includes a right to receive a share of our customers’ gaming revenue, typically as a share of net win but sometimes as a share of the handle or “coin in”.
Geographic Range
Geographically, a majority of our revenue is derived from, and majority of our non-current assets are attributable to our UK operations. The remainder of our revenue is derived from, and non-current assets attributable to, Italy, Greece and the rest of the world.
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For the twelve months ended December 31, 2020, we earned approximately 76.2% of our revenue in the UK, 8.5% in Greece, 4.3% in Italy and the remaining 11.0% across the rest of the world. During the twelve months ended December 31, 2019, we earned approximately 67.6%, 13.5%, 10.6% and 8.3% of our revenue in those regions, respectively.
As of December 31, 2020, approximately 77%, 14%, 2%, and 7% of our non-current assets (excluding goodwill) were 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 twelve months ended December 31, 2020, we derived approximately 24% of our revenue from sales to customers outside the UK, compared to 32% during the twelve months ended December 31, 2019.
In the section “Results of Operations” below, currency impacts shown have been calculated as the current-period average GBP:USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP:USD rate. This is not 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
Our fiscal year begins on January 1 and ends on December 31 of each calendar year.
Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). In the twelve-month periods ended December 31, 2020 and December 31, 2019, the average GBP:USD rates were 1.29 and 1.28, respectively.
In the discussion and analysis below, any reference to organic variances and organic growth refers to variances in the results of operations of the Company excluding results from the NTG Acquisition for the nine-month period ended September 30, 2020, on a functional currency at constant rate basis. As a result, in order to facilitate a like-for-like comparison between the twelve-month periods ended December 31, 2020 and December 31, 2019, respectively, organic variances and organic growth refer to results of operations that only include results from the NTG Acquisition for the three-month period ended December 31, 2020, and December 31, 2019. In addition, certain data may vary from the amounts presented in our consolidated financial statements due to rounding.
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Twelve Months ended December 31, 2020 compared to Twelve Months ended December 31, 2019
| For the Twelve-Month Period ended |
Variance | Variance | ||||||||||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | Organic Variance % |
Total Functional Currency % | Total Variance % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Service | $ | 178.7 | $ | 134.5 | $ | 44.2 | (0.6 | )% | 31.5 | % | 32.9 | % | ||||||||||||
| Product | 21.1 | 18.9 | 2.1 | (35.3 | )% | 10.9 | % | 11.3 | % | |||||||||||||||
| Total revenue | 199.8 | 153.4 | 46.4 | (4.8 | )% | 29.0 | % | 30.2 | % | |||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||
| Cost of service | (30.1 | ) | (25.4 | ) | (4.7 | ) | (17.8 | )% | 17.0 | % | 18.3 | % | ||||||||||||
| Cost of product | (14.4 | ) | (12.9 | ) | (1.5 | ) | (42.5 | )% | 11.3 | % | 11.7 | % | ||||||||||||
| Selling, general and administrative expenses | (84.8 | ) | (70.4 | ) | (14.4 | ) | (25.4 | )% | 19.6 | % | 20.5 | % | ||||||||||||
| Stock-based compensation | (4.8 | ) | (9.0 | ) | 4.2 | (48.6 | )% | (47.9 | )% | (47.0 | )% | |||||||||||||
| Acquisition and integration related transaction expenses | (7.0 | ) | (6.7 | ) | (0.3 | ) | (0.2 | )% | (0.2 | )% | 4.1 | % | ||||||||||||
| Depreciation and amortization | (52.3 | ) | (42.0 | ) | (10.4 | ) | (16.6 | )% | 24.5 | % | 24.7 | % | ||||||||||||
| Net operating Income (Loss) | 6.4 | (13.0 | ) | 19.4 | (237 | )% | (141 | )% | (149 | )% | ||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Interest income | 0.6 | 0.1 | 0.5 | 824 | % | 823 | % | |||||||||||||||||
| Interest expense | (30.6 | ) | (27.8 | ) | (2.8 | ) | 9.9 | % | 9.9 | % | ||||||||||||||
| Change in fair value of earnout liability | - | (2.3 | ) | 2.3 | (100 | )% | (100 | )% | ||||||||||||||||
| Change in fair value of derivative liability | - | 3.0 | (3.0 | ) | (100 | )% | (100 | )% | ||||||||||||||||
| Other finance income (expense) | (4.7 | ) | 3.2 | (7.9 | ) | (256 | )% | (247 | )% | |||||||||||||||
| Loss from equity method investee | (0.5 | ) | (0.1 | ) | (0.5 | ) | 967 | % | 900 | % | ||||||||||||||
| Total other income (expense), net | (35.2 | ) | (23.9 | ) | (11.3 | ) | 48.9 | % | 47.3 | % | ||||||||||||||
| Net loss from continuing operations before income taxes | (28.8 | ) | (36.9 | ) | 8.1 | (19.7 | )% | (21.9 | )% | |||||||||||||||
| Income tax expense | (0.4 | ) | (0.1 | ) | (0.3 | ) | 198 | % | 354 | % | ||||||||||||||
| Net loss | $ | (29.2 | ) | $ | (37.0 | ) | $ | 7.8 | (19.1 | )% | (21.0 | )% | ||||||||||||
| Exchange Rate - $ to £ | 1.29 | 1.28 | ||||||||||||||||||||||
Revenue
Total reported revenue for the twelve months ended December 31, 2020 increased by $46.4 million, or 30.2%, to $199.8 million on a reported basis. This includes increases from Leisure of $19.8 million, Gaming of $19.0 million and Interactive of $8.6 million, partly offset by Virtual Sports decline of $1.1 million. This growth includes Gaming revenue of $42.2 million remitted to us by two of our major UK customers, to which we were entitled because of a UK tax ruling, which created a rebate of value added tax that had otherwise been incorrectly applied to certain gaming machines in their estate (the “VAT-related revenue”) in the past. As our contracts with these customers are based on a revenue share after appropriate taxes, we are entitled to a pro rata share of this tax rebate, which we have recorded as revenue during the period in line with accounting standards. Favorable currency movements accounted for a $1.9 million impact. On a functional currency at constant rate basis, revenue increased by $44.4 million, or 29.0%, as detailed below:
| ● | Gaming revenue increased by $17.6 million, comprised of an increase in Service revenue of $17.0 million and an increase in Product Sales of $0.6 million. The increase in Service revenue was comprised of $9.4 million in organic growth, including the VAT-related revenue of $40.9 million (using prior year exchange rate), and $7.6 million attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth). Excluding the VAT-related revenue, Service revenue would have declined by $31.5 million primarily due to COVID-19, as many of our customers’ venues were closed during much of the period. Customer gross win also declined from the comparative period, reflecting the impact of COVID-19, with shop closures occurring throughout the year and restrictions in place during much of the time when venues were open (the “COVID-19 closures”). |
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| ● | Virtual Sports revenue decreased by $1.2 million, or 3.5%. This decrease included a $8.5 million decrease in retail/land-based revenue primarily as a result of the COVID-19 closures, partially offset by growth in Online Virtuals of $7.4 million. |
| ● | Interactive revenue increased by $8.5 million, or 181%. This increase was comprised of $5.5 million of organic growth and $3.1 million attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth). Organic growth was driven primarily by recurring revenue growth due to the increase in online demand as a result of the COVID-19 closures, the addition of new customers and territories and the consistent launch of new high-quality content, all of which, we believe, has led to our enjoying an increase in market share. |
| ● | Leisure revenue increased by $19.6 million, comprised of an increase in Service revenue of $18.1 million and an increase in Product Sales of $1.5 million. The Service revenue increase was comprised of $32.6 million attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth), offset by a $14.5 million decline in revenue due to the impact of the COVID-19 closures, as venues were closed during much of the period. |
Cost of sales, excluding depreciation and amortization
Cost of sales, excluding depreciation and amortization, increased by $6.2 million, or 16.1%, on a reported basis, to $44.5 million, including the impact of $0.4 million from unfavorable currency movements. Of this increase, $4.7 million was attributable to cost of Service and $1.5 million was attributable to cost of Product sales. On a functional currency (at constant rate) basis, cost of sales increased by $5.8 million, or 15.1%, as detailed below:
| ● | Gaming cost of sales decreased by $2.2 million, comprised of a decrease in Service costs of $2.6 million, partly offset by a $0.3 million increase in Product costs. The Service cost decrease was driven primarily by a $4.0 million decrease due to the decline in cost of Service, offset by a $1.5 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth). |
| ● | Virtual Sports cost of sales increased by $0.3 million, or 9.6%. This increase was driven by the organic growth of Online Virtuals. |
| ● | Interactive cost of sales increased by $1.2 million, or 166%. This increase was driven by $1.1 million from organic growth. |
| ● | Leisure cost of sales increased by $6.6 million, comprised of an increase in Service costs of $5.5 million and an increase in Product sales of $1.1 million. The Service cost increase was comprised of a $7.4 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth), offset by a $1.9 million decrease due to the organic revenue decline. |
Selling, general and administrative expenses
SG&A expenses increased by $14.4 million, or 20.5%, on a reported basis, to $84.8 million. This included $0.7 million of unfavorable currency movements. On a functional currency at constant rate basis, SG&A increased by $13.8 million, or 19.6%. This increase was comprised of incremental SG&A expenses of $31.7 million attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth), offset by a $17.9 million decrease driven primarily by temporary furlough savings and permanent synergy savings realized during the period.
Stock-based compensation
During the year ended December 31, 2020, the Company recorded an expense of $4.8 million with respect to outstanding awards. Of this expense, $0.2 million related to costs from awards made under a 2016 long term incentive plan, $4.5 million from awards made under the 2018 Plan and $0.1 million related to costs from the vesting of awards in December 2020. All costs related to recurring costs. During the year ended December 31, 2019, the charge for stock-based compensation was $9.0 million. Of this expense, $6.0 million related to costs from awards made under a 2016 long term incentive plan, $2.8 million from awards made under the 2018 Plan and $0.3 million related to costs from the vesting of awards in December 2019.
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Acquisition and integration related transaction expenses
Acquisition related transaction expenses increased by $0.3 million to $7.0 million, on a reported basis. The entirety of the 2019 and the majority of the 2020 expenses were related to the NTG Acquisition and the fees associated with the integration of this transaction. During 2020, $0.6 million of costs incurred related to potential merger and acquisition activity (outside of the NTG Acquisition) which did not come to fruition.
Depreciation and amortization
Depreciation and amortization increased by $10.4 million, or 24.7%, to $52.3 million on a reported basis. This included the impact of unfavorable currency movements of $0.1 million. On a functional currency at constant rate basis, depreciation and amortization increased by $10.3 million, or 24.5%, driven primarily by the addition of $17.3 million in depreciation and amortization attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth), offset by a reduction in depreciation and amortization of $7.0 million due to machines in the UK estate and Italy, each within our Gaming segment, reaching fully depreciated status. Our future growth initiatives are focused on expanding our digital and online gaming. Accordingly, we expect that depreciation and amortization expense will be reduced in future periods as our investments in digital and online gaming are less capital intensive than our investments in gaming terminals.
Net operating profit
During the period, net operating income was $6.4 million compared to a net operating loss of $13.0 million in the prior period. The increase of $19.4 million in operating profit was attributable to an increase of $31.8 million in operating profit from organic growth, largely attributable to the VAT-related income as well as growth in our Interactive segment, along with cost savings across our segments on an organic basis. This was offset by a decrease of $12.9 million in operating income in businesses acquired through the NTG Acquisition. This increase also included a $0.4 million favorable impact from foreign currency translation.
Interest expense
Net interest expense increased by $2.2 million in the year ended December 31, 2020 to $30.0 million, on a reported basis due to a $8.7 million increase in debt interest offset by a $0.6 million decrease in bank interest paid and a $5.8 million decrease in debt fee amortization following the write-off of $7.3 million of debt fees in the year ended December 31, 2019 following the refinancing in October 2019.
Change in fair value of earnout liability
Due solely to changes in the share price ($6.51 at March 25, 2019 and $4.80 at December 31, 2018), the charge in the year ended December 31, 2019 from a change in the fair value of earnout liability was $2.3 million. On March 25, 2019, the shares relating to the earnout liability were issued. In the year ended December 31, 2020, no gain or loss was recognized.
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 year ended December 31, 2020. The current swaps qualify for hedge accounting and accordingly are not shown as derivative liability movements. For the year ended December 31, 2019, the change in fair value of derivative liability was a $3.0 million credit.
Other finance income
Other finance income for the year ended December 31, 2020 resulted in a $4.7 million charge compared to a $3.2 million credit in the year ended December 31, 2019. This variance was driven by movements in the retranslation with respect to the principal balance of our senior debt facilities. In addition, the year ended December 31, 2019 also included a $3.2 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 December 31, 2020 was 1.4% and our effective tax rate for the period ended December 31, 2019 was 0.2%.
Net loss
During the period, net loss was $29.2 million compared to a net loss of $37.0 million in the prior period. On a functional currency at constant rate basis, net loss improved by $7.1 million, primarily due to the VAT-related income and growth in Interactive revenue.
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Twelve Months ended December 31, 2020 compared to Twelve Months ended December 31, 2019 – Gaming Segment
We generate revenue from our Gaming segment through the selling and rental of our gaming machines. We receive rental fees for machines, typically on a long-term contract basis, on both a participation and fixed fee basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming terminals placed in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue growth for our Gaming business is principally driven by the number of operator customers we have, the number of Gaming machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
Gaming Segment, Key Performance Indicators
| For the Twelve-Month Period ended | Variance | |||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | % | |||||||||||||
| Gaming | ||||||||||||||||
| End of period installed base (# of terminals) | 31,515 | 32,520 | (1,005 | ) | (3.1 | )% | ||||||||||
| Total Gaming - Average installed base (# of terminals) | 32,069 | 34,966 | (2,897 | ) | (8.3 | )% | ||||||||||
| Participation - Average installed base (# of terminals) | 30,165 | 33,297 | (3,131 | ) | (9.4 | )% | ||||||||||
| Fixed Rental - Average installed base (# of terminals) | 1,903 | 1,670 | 234 | 14.0 | % | |||||||||||
| Service Only - Average installed base (# of terminals) | 21,015 | 6,681 | 14,334 | 214.6 | % | |||||||||||
| Customer Gross Win per unit per day (1) (2) | £ | 46.69 | £ | 82.69 | £ | (36.00 | ) | (43.5 | )% | |||||||
| Customer Net Win per unit per day (1) (2) | £ | 34.57 | £ | 58.41 | £ | (23.84 | ) | (40.8 | )% | |||||||
| Inspired Blended Participation Rate | 6.5 | % | 6.4 | % | 0.1 | % | 1.5 | % | ||||||||
| Inspired Fixed Rental Revenue per Gaming Machine per week | £ | 26.33 | £ | 11.51 | £ | 15 | 128.8 | % | ||||||||
| Inspired Service Rental Revenue per Gaming Machine per week | £ | 3.30 | £ | 4.01 | £ | (1 | ) | (17.7 | )% | |||||||
Gaming Long term license amortization £(‘m) | £ | 5.1 | £ | 4.0 | £ | 1.1 | 27.6 | % | ||||||||
| Number of Machine sales | 2,227 | 2,521 | (294 | ) | (11.7 | )% | ||||||||||
| Average selling price per terminal | £ | 4,495 | £ | 4,588 | £ | (93 | ) | (2.0 | )% | |||||||
| (1) | Includes all Gaming terminals in which the company takes a participation revenue share across all territories |
| (2) | Includes all days of the year, including the days during which the Gaming terminals were not operating due to COVID-19 closures. |
In the table above:
“End of Period Installed Base” is equal to the number of deployed Gaming terminals at the end of each period that have been placed on a participation or fixed rental basis. Gaming participation revenue, which comprises the majority of Gaming Service revenue, is directly related to the participation terminal installed base. This is the medium by which our customers generate revenue and distribute a revenue share to the Company. To the extent all other KPIs and certain other factors remain constant, the larger the installed base, the higher the Company’s revenue would be for a given period. Management gives careful consideration to this KPI in terms of driving growth across the segment. This does not include Service Only terminals.
Revenue is derived from the performance of the installed base as described by the Gross and Net Win KPIs.
If the End of Period Installed Base is materially different from the Average Installed Base (described below), we believe this gives an indication as to potential future performance. We believe the End of Period Installed Base is particularly useful for assessing new customers or markets, to indicate the progress being made with respect to entering new territories or jurisdictions.
“Total Gaming - Average Installed Base” is the average number of deployed Gaming terminals during the period split by Participation terminals and Fixed Rental terminals. Therefore, it is more closely aligned to revenue in the period. We believe this measure is particularly useful for assessing existing customers or markets to provide comparisons of historical size and performance. This does not include Service Only terminals.
“Participation - Average Installed Base” is the average number of deployed Gaming terminals that generated revenue on a participation basis.
“Fixed Rental - Average Installed Base” is the average number of deployed Gaming terminals that generated revenue on a fixed rental basis.
“Service Only - Average Installed Base” is the average number of terminals that generated revenue on a Service only basis.
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“Customer Gross Win per unit per day” is a KPI used by our management to (i) assess impact on the Company’s revenue, (ii) determine changes in the performance of the overall market and (iii) evaluate the impacts of regulatory change and our new content releases on our customers. Customer Gross Win per unit per day is the average per unit cash generated across all Gaming terminals in which the Company takes a participation revenue share across all territories in the period, defined as the difference between the amounts staked less winnings to players divided by the Average Installed Base in the period, then divided by the number of days in the period.
Gaming revenue accrued in the period is derived from Customer Gross Win accrued in the period after deducting gaming taxes (defined as a regulatory levy paid by the Customer to government bodies) and applying the Company’s contractual revenue share percentage.
Our management believes Customer Gross Win measures are meaningful because they represent a view of customer operating performance that is unaffected by our revenue share percentage and allow management to (1) readily view operating trends, (2) perform analytical comparisons and benchmarking between customers and (3) identify strategies to improve operating performance in the different markets in which we operate.
“Customer 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 participation terminals where revenue is earned on a participation basis, weighted by Customer Net Win per unit per day.
“Inspired Fixed Rental Revenue per Gaming Machine per week” is the Company’s average fixed rental amount across all fixed rental terminals where revenue is generated on a fixed fee basis, per unit per week.
“Inspired Service Rental Revenue per Gaming Machine per week” is the Company’s average service rental amount across all service only rental terminals where revenue is generated on a service only fixed fee basis, per unit per week.
“Gaming Long term license amortization” is the upfront license fee per terminal which is typically spread over the life of the terminal.
Our overall Gaming revenue from terminals placed on a participation basis can therefore be calculated as the product of the Participation - Average Installed Base, the Customer Net Win per unit per day, the number of days in the period, and the Inspired Blended Participation Rate, which is equal to “Participation Revenue”.
“Number of Machine sales” is the number of terminals sold during the period.
“Average selling price per terminal” is the total revenue in GBP of the Gaming terminals sold divided by the “number of Machine sales”.
Gaming Segment, Recurring Revenue
Set forth below is a breakdown of our Gaming recurring revenue. Gaming recurring revenue consists principally of Gaming participation revenue and fixed rental revenue.
| For the Twelve-Month Period ended | Variance | |||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | % | |||||||||||||
| (In £ millions) | ||||||||||||||||
| Gaming Recurring Revenue | ||||||||||||||||
| Total Gaming Revenue | £ | 85.1 | £ | 71.4 | £ | 13.7 | 19.2 | % | ||||||||
| Gaming Participation Revenue | £ | 25.1 | £ | 44.8 | £ | (19.6 | ) | (43.8 | )% | |||||||
| Gaming Other Fixed Fee Recurring Revenue | £ | 7.5 | £ | 4.2 | £ | 3.3 | 79.6 | % | ||||||||
| Gaming Long term License amortization | £ | 5.1 | £ | 4.0 | £ | 1.1 | 27.6 | % | ||||||||
| Total Gaming Recurring Revenue * | £ | 37.8 | £ | 53.0 | £ | (15.2 | ) | (28.6 | )% | |||||||
Gaming Recurring Revenue as a % of Total Gaming Revenue † | 44.4 | % | 74.2 | % | (29.8 | )% | ||||||||||
| * | Does not reflect VAT-related revenue |
| † | Total Gaming Revenue for the twelve-month period ended December 31, 2020 includes the £32.0 million for one time VAT-related revenue, which is not reflected in Gaming Recurring Revenue for that period. Excluding VAT-related revenue, Gaming Recurring Revenue was 71.2% of Total Gaming Revenue for such period. |
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In the table above:
“Gaming Participation Revenue” includes our share of revenue generated from (i) our Gaming terminals placed in gaming and lottery venues; and (ii) licensing of our game content and intellectual property to third parties.
“Gaming Other Fixed Fee Recurring Revenue” includes service revenue in which the Company earns a periodic fixed fee on a contracted basis.
“Gaming Long term license amortization” – see the definition provided above
“Total Gaming Recurring Revenue” is equal to Gaming Participation Revenue plus Gaming Other Fixed Fee Recurring Revenue.
Gaming Segment, Service Revenue by Region
Set forth below is a breakdown of our Gaming service revenue by geographic region. Gaming service revenue consists principally of Gaming participation revenue, Gaming other fixed fee revenue, Gaming long term license amortization and Gaming other non-recurring revenue. See “— Gaming Segment Revenue” below for a discussion of gaming service revenue between the periods under review.
Gaming Service Revenue by Region
| For the Twelve-Month Period ended | Variance | Variance | ||||||||||||||||||||||
Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | Organic Variance % | Total Functional Currency % | Total Variance % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Service Revenue: | ||||||||||||||||||||||||
UK Licensed Betting Offices | $ | 26.7 | $ | 40.8 | $ | (14.1 | ) | (43.8 | )% | (34.5 | )% | (34.5 | )% | |||||||||||
| UK VAT - Related Revenue | $ | 42.2 | - | $ | 42.2 | - | - | - | ||||||||||||||||
| UK Other | 6.4 | 7.0 | (0.6 | ) | (61.4 | )% | (9.9 | )% | (8.9 | )% | ||||||||||||||
| Italy | 2.1 | 7.9 | (5.8 | ) | (73.8 | )% | (73.8 | )% | (73.6 | )% | ||||||||||||||
| Greece | 14.3 | 17.4 | (3.0 | ) | (18.1 | )% | (18.1 | )% | (17.5 | )% | ||||||||||||||
| Rest of the World | 0.6 | 0.7 | (0.2 | ) | (47.6 | )% | (23.0 | )% | (22.5 | )% | ||||||||||||||
| Total service revenue | $ | 92.2 | $ | 73.8 | $ | 18.4 | 12.8 | % | 23.1 | % | 25.0 | % | ||||||||||||
| Exchange Rate - $ to £ | 1.30 | 1.28 | ||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD total service revenue by the GBP total service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Gaming Segment, key events that affected results for the Twelve Months ended December 31, 2020
During the period, Customer Gross Win per unit per day in the total UK market (including non- Licensed Betting Offices markets) declined by 32.9%. This decline was primarily due to the shutdowns and tier restrictions of UK LBO retail venues related to the COVID-19 closures during the period. Additionally, during the first quarter of 2019, our customers experienced strong performance compared to the first quarter of 2020 because the period pre-dated the reduction in maximum permitted bets on B2 gaming machines in the UK, effective as of April 1, 2019 (“the Triennial Implementation”).
The recently acquired manufacturing business which we purchased as part of the NTG Acquisition forms part of the new Gaming segment. During the second quarter of 2020, the Gaming group reduced its manufacturing facilities from three to one which has enabled us to achieve significant synergy savings in terms of both staff and non-staff costs. This change is expected to result in a lower cost base and in a more efficient business moving forward.
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Inspired received VAT-related revenue of $9.7 million and $32.5 million in July 2020 and November 2020, respectively, from two major UK customers. Both payments have been recorded as revenue in our results.
During the period, a two-year contract extension was agreed for the supply of product, platform, content and service with a major UK LBO customer. The agreement includes no requirement for additional machine capital expenditure and represents an improvement in our revenue share terms.
In the UK Electronic Table Games (ETG) market, we sold 157 “Sabre Hydra” terminals to a major casino customer. These terminals were installed during the third and fourth quarters of 2020.
In the Italian market, Inspired sold 774 existing installed VLTs to Sisal in the fourth quarter 2020 with a further 850 existing installed VLTs agreed to be sold in 2021 as part of our strategy to focus on technology and games in Italy rather than on hardware operations.
During the period, Inspired sold 313 “Valor™” terminals to a number of customers in Illinois, increasing the total number of North American unit sales since launch in December 2019 to 429. Retail venues in Illinois were shut down in the second quarter due to COVID-19, which negatively impacted sales during this period as well as during the third and fourth quarters of 2020.
In August 2020, Inspired signed an agreement with the Western Canada Lottery Corporation (“WCLC”) to enter its second jurisdiction in North America. Inspired delivered 100 “Valor™” terminals to WCLC. We anticipate recognizing a product sale for these terminals during the second quarter of 2021.
In Italy, Customer Net Win per unit per day (in EUR) decreased by 72.8% vs the comparable period, primarily driven by the impact of COVID-19 closures, an increase in gaming tax on value played of 0.6% and the impact of card readers implemented in January 2020.
In Greece, Customer Gross Win per unit per day (in EUR) decreased by 39.6% primarily driven by the impact of COVID-19 closures. These closures resulted in retail venues being closed for an aggregate of over five months of the year during the second and fourth quarters of 2020.
Across our entire estate, Customer Gross Win per unit per day (in our functional currency, GBP) decreased by £36.00, or 43.5%, primarily due to COVID-19 closures during the second and fourth quarters, which resulted in the closure of retail venues, along with the introduction of card readers and increased taxes in the Italian market. The blended participation rate increased by 0.1% to 6.5%.
Gaming Segment, Twelve Months ended December 31, 2020 compared to Twelve Months ended December 31, 2019
| For the Twelve-Month Period ended | Variance | Variance | ||||||||||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | Organic Variance % | Total Functional Currency % | Total Variance % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Service | $ | 92.2 | $ | 73.8 | $ | 18.4 | 12.8 | % | 23.1 | % | 25.0 | % | ||||||||||||
| Product | $ | 18.3 | $ | 17.7 | 0.6 | (36.3 | )% | 3.1 | % | 3.5 | % | |||||||||||||
| Total revenue | $ | 110.5 | $ | 91.5 | 19.0 | 3.3 | % | 19.2 | % | 20.8 | % | |||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||
| Cost of service | (15.7 | ) | $ | (18.1 | ) | 2.4 | (22.2 | )% | (14.2 | )% | (13.2 | )% | ||||||||||||
| Cost of product | (12.4 | ) | $ | (12.0 | ) | (0.4 | ) | (45.1 | )% | 2.9 | % | 3.3 | % | |||||||||||
| Total cost of sales | (28.1 | ) | $ | (30.1 | ) | 2.0 | (31.3 | )% | (7.4 | )% | (6.6 | )% | ||||||||||||
| Selling, general and administrative expenses | (24.5 | ) | $ | (29.7 | ) | 5.1 | (38.6 | )% | (18.1 | )% | (17.3 | )% | ||||||||||||
| Stock-based compensation | (0.8 | ) | $ | (1.0 | ) | 0.3 | (15.7 | )% | (9.4 | )% | (24.6 | )% | ||||||||||||
| Depreciation and amortization | (27.6 | ) | $ | (30.4 | ) | 2.8 | (21.2 | )% | (9.5 | )% | (9.1 | )% | ||||||||||||
| Net operating Income (Loss) | $ | 29.5 | $ | 0.3 | $ | 29.2 | 10,241 | % | 9,448 | % | 10,345 | % | ||||||||||||
| Exchange Rate - $ to £ | 1.30 | 1.28 | ||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
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Gaming Segment Revenue
During the period, Gaming revenue increased by $19.0 million, or 20.8%, to $110.5 million on a reported basis. This increase was due, partially, to favorable currency movements of $1.5 million. On a functional currency at constant rate basis, Gaming revenue increased by $17.6 million, or 19.2%.
Service revenue increased by $18.4 million on a reported basis. Favorable currency movements accounted for $1.4 million. On a functional currency (at constant rate) basis, Gaming Service revenue increased by $17.0 million, or 23.1%, to $92.2 million. This was driven by a $7.6 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth) and $9.4 million in organic growth. This organic growth was primarily due to the VAT-related revenue of $40.9 million. This was partly offset by a decline in UK LBO of $17.9 million primarily driven by COVID-19 closures throughout the period, and the fact that first quarter 2019 revenue was not impacted by triennial stakes and prizes changes. Italy and Greece had revenue declines of $5.9 million and $3.1 million, respectively, driven by tax and card reader changes in Italy, as well as COVID-19 closures.
Product revenue increased by $0.6 million to $18.3 million on a reported basis. On a functional currency (at constant rate) basis, the revenue increase was $0.6 million, or 3.1%. This increase was driven by $6.9 million attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth), partly offset by a decline in Product sales of $6.4 million. This decrease was due to a reduction of Product sales in the UK market of $3.9 million from SSBTs (Self Service Betting Terminals), $1.0 million from “Prismatic” machines, $0.9 million from “AWP” machines and $0.7 million from “Flex Cabinets” as well as the reduction of “Sabre Hydra” sales of $1.1 million. This was partly offset by an increase in North America “Valor™” sales of $2.6 million.
Gaming Segment Operating Income
Cost of sales (excluding depreciation and amortization) decreased by $2.0 million to $28.1 million on reported basis, which included adverse currency movements of $0.2 million. On a functional currency (at constant rate) basis, Gaming cost of sales decreased by $2.2 million, or 7.4%.
Service cost of sales decreased by $2.4 million to $15.7 million on a reported basis, including adverse currency movements of $0.2 million. On a functional currency at constant rate basis, Service cost of sales decreased by $2.6 million, or 14.2%, driven by $4.0 million lower costs due to the decline in Service revenue related to the COVID-19 closures, partly offset by an increase of $1.5 million in costs attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth).
Product cost of sales increased by $0.4 million to $12.4 million on a reported basis, which included adverse currency movements of $0.1 million. On a functional currency basis this increase was $0.3 million, due to a $5.7 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth), partially offset by a decline in Product cost of sales of $5.4 million.
Gaming SG&A expense declined by $5.1 million on a reported basis. This decrease includes the impact of unfavorable currency movements of $0.2 million. On a functional currency (at constant rate) basis, Gaming SG&A decreased by $5.4 million, or 18.1%. This was driven by an $11.5 million decrease attributable to reduced staffing costs related to both staff reductions and reduced salaries implemented due to the COVID-19 closures as well as cost savings synergies. This was partially offset by an increase of $6.1 million attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth).
Depreciation and amortization declined by $2.8 million on a reported basis, or 9.1%. This included the impact of unfavorable currency movements of $0.1 million. On a functional currency at constant rate basis, Gaming depreciation and amortization decreased by $2.9 million, or 9.5%. This was driven by a $6.4 million decrease due to the machines in the UK estate and Italy reaching fully depreciated status, partially offset by additional depreciation from new machines in the Greek estate as well as an increase of $3.6 million attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth).
Operating income increased by $29.2 million on a reported basis, from $0.3 million to $29.5 million. This was primarily due to the VAT-related income and favorable currency movements of $1.0 million.
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Virtual Sports Segment, Twelve Months ended December 31, 2020 compared to Twelve Months ended December 31, 2019
We generate revenue from our Virtual Sports segment through the licensing of our products. We receive fees in exchange for the licensing of our products, typically on a long-term contract basis, on a participation basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and other promotional costs and any relevant regulatory levies) from Virtual Sports content placed on our customers’ websites or in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue growth for our Virtual Sports segment is principally driven by the number of customers we have, the net win performance of the games and the net win percentage that we receive pursuant to our contracts with our customers.
Virtual Sports Segment, Key Performance Indicators
For
the Twelve-Month | Variance | |||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | % | |||||||||||||
| Virtuals | ||||||||||||||||
| No. of Live Customers at the end of the period | 58 | 60 | (2 | ) | (3.3 | )% | ||||||||||
| Average No. of Live Customers | 61 | 62 | (1 | ) | (2.0 | )% | ||||||||||
| Total Revenue (£‘m) | £ | 25.2 | £ | 26.1 | £ | (0.9 | ) | (3.5 | )% | |||||||
| Total Revenue £‘m - Retail | £ | 9.5 | £ | 16.2 | £ | (6.7 | ) | (41.3 | )% | |||||||
| Total Revenue £‘m - Online Virtuals | £ | 15.7 | £ | 10.0 | £ | 5.8 | 57.7 | % | ||||||||
In the table above:
“No. of Live Customers at the end of the period” and “Average No. of Live Customers” represent the number of customers from which there 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) – Online Virtuals,” which consists of revenue earned through players wagering on Virtual Sports online,
Virtual Sports Segment, Recurring Revenue
Set forth below is a breakdown of our Virtual Sports recurring revenue.
For
the Twelve-Month | Variance | |||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | % | |||||||||||||
| (In £ millions) | ||||||||||||||||
| Virtual Sports Recurring Revenue | ||||||||||||||||
| Total Virtual Sports Revenue | £ | 25.2 | £ | 26.1 | £ | (0.9 | ) | (3.5 | )% | |||||||
| Recurring Revenue - Retail Virtuals | £ | 8.4 | £ | 14.4 | £ | (6.0 | ) | (41.8 | )% | |||||||
| Recurring Revenue - Online Virtuals | £ | 13.8 | £ | 9.1 | £ | 4.7 | 51.6 | % | ||||||||
| Total Virtual Sports Long term -license amortization | £ | 1.5 | £ | 1.9 | £ | (0.3 | ) | (18.7 | )% | |||||||
| Total Virtual Sports Recurring Revenue | £ | 23.7 | £ | 25.3 | £ | (1.7 | ) | (6.6 | )% | |||||||
| Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue | 93.9 | % | 97.0 | % | (3.0 | )% | ||||||||||
“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.
“Virtual Sports Long term license amortization” is the upfront license fee which is typically spread over the life of the contract
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Virtual Sports Segment, key events that affected results for the Twelve Months ended December 31, 2020
Most retail territories, including the UK, Italy, Greece and Belgium, were in either full or partial lockdown due to COVID-19 for a portion of the year, resulting in a $7.8 million recurring revenue decline year over year. There was also a decline of $1.0 million from the unwind of historical license fees terminating in 2019 which did not recur in 2020. This decline was offset by an increase in online virtual recurring revenues of $6.1 million and an increase in project revenue of $1.6 million.
Virtual Events
The Virtual Grand National was broadcast in April 2020 on prime-time UK television to replace the live race, which was not held due to the COVID-19 closures. Over four million viewers tuned in to watch the event. The event was run as a charity event, ultimately generating over $3.0 million for the National Health Service (“NHS”) COVID-19 charity from various operators.
The Virtual Kentucky Derby Triple Crown Showdown race aired on May 2, 2020 on NBC. The race featured 13 all-time great Triple Crown winners. The event was held to raise money for COVID-19 relief.
The Virtual “Greatest Ever Cox Plate” commissioned by GVC Australia was streamed live online on October 23, 2020.
On November 3, 2020, The Lexus Melbourne Cup Race of Dreams was broadcast live across Australia on Network 10.
Customers
In April 2020, Inspired launched Online Virtual Soccer, Horses and Greyhounds products with Ladbrokes Belgium which was our first launch that utilized our own Cloud platform via Amazon Web Services.
In June 2020, Retail Virtuals products were deployed in Malta via Intralot with Maltco, the Maltese lottery.
During the third quarter of 2020, Online Virtuals were deployed with several GVC websites including BWIN, Sportingbet and Partypoker.
In New Jersey, Online Virtuals products were launched during the third quarter of 2020 with DraftKings, our first deployment in North America via our proprietary Virtuals Plug and Play platform.
In September 2020, our Online Virtuals products were launched via our new Virtuals Plug and Play platform in Turkey with Misli, a major online operator.
In December 2020, Online Virtuals were launched with Fortuna’s brand Casa Pariurilor, a major online brand in the Romanian market.
During 2020, Virtual Plug and Play launched with numerous RGS aggregators including Scientific Games, SBTech, iForium and Playtech and on social channels with Fendoff.
The overall number of live customers declined from 60 to 58 during the period as we re-focused our business on our highest value customers.
Products
In June 2020, OPAP launched our brand-new proprietary V-Play Soccer 3.0 product in Greece with significantly improved graphics, betting markets and overall design.
OPAP subsequently launched our brand-new proprietary V-Play Basketball product in October 2020.
Our Virtual Interactive division launched V-Play Basketball and our NFL Alumni V-Play Football product with Bet365 in New Jersey. Our new V-Play Basketball product and an additional stream of V-Play Cricket were also launched with Bet365.com during the year.
In December 2020 we increased our language capability by adding multiple new languages to our Virtual Sports products.
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| For the Twelve-Month Period ended |
Variance | Variance | ||||||||||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | Organic Growth % |
Total Functional Currency % | Total Growth % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Service Revenue | $ | 32.4 | $ | 33.4 | $ | (1.1 | ) | (3.5 | )% | (3.5 | )% | (3.2 | )% | |||||||||||
| Cost of service | (2.9 | ) | (2.6 | ) | (0.3 | ) | 9.6 | % | 9.6 | % | 9.7 | % | ||||||||||||
| Selling, general and administrative expenses | (4.4 | ) | (6.0 | ) | 1.7 | (28.6 | )% | (28.6 | )% | (27.7 | )% | |||||||||||||
| Stock-based compensation | (0.4 | ) | (0.6 | ) | 0.1 | (22.1 | )% | (22.1 | )% | (22.7 | )% | |||||||||||||
| Depreciation and amortization | (3.7 | ) | (2.6 | ) | (1.1 | ) | 44.0 | % | 44.0 | % | 43.8 | % | ||||||||||||
| Net operating Income (Loss) | $ | 21.0 | $ | 21.6 | $ | (0.7 | ) | (3.4 | )% | (3.4 | )% | (3.1 | )% | |||||||||||
Exchange Rate - $ to £ | 1.28 | 1.28 | ||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Virtual Sports Segment revenue.
During the period, revenue decreased by $1.1 million, or 3.2%, on a reported basis. This increase includes the impact of favorable currency movements of $0.1 million. On a functional currency (at constant rate) basis, revenue decreased by $1.2 million, or 3.5%. This decrease was driven by an $8.5 million decrease in retail revenue due to COVID-19 closures. This decline was partially offset by growth in Online Virtuals of $7.4 million.
Virtual Sports Segment operating income.
Cost of Service increased by $0.3 million to $2.9 million on a reported basis, with no impact from currency movements. This was driven by the growth of Online Virtuals, in line with the revenue increase for the period.
SG&A expenses decreased by $1.7 million on a reported basis, with no impact from currency movements. This decrease was driven by staff-related cost savings from the Covid-19 closures related furlough scheme and reduction in staff salaries.
Depreciation and amortization increased by $1.1 million on a reported basis, with no impact from currency movements. This increase was due to new projects going live in the period.
Operating profit decreased by $0.7 million on a reported basis which included the impact of favorable currency movements of $0.1 million. On a functional currency (at constant rate) basis operating profit decreased by $0.7 million. This was primarily due to the decrease in revenues resulting from COVID-19 closures and the increase in depreciation and amortization, partly offset by the reduction in SG&A expenses.
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Interactive Segment, Twelve Months ended December 31, 2020 compared to Twelve Months ended December 31, 2019
We generate revenue from our Interactive segment through the licensing of our products. We receive fees in exchange for the licensing of our products, typically on a long-term contract basis, on a participation basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and other promotional costs and any relevant regulatory levies) from Interactive content placed on our customers’ websites. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue growth for our Interactive segment is principally driven by the number of customers we have, the number of live games, the net win performance of the games and the net win percentage that we receive pursuant to our contracts with our customers.
Interactive Segment, Key Performance Indicators
For
the Twelve-Month | Variance | |||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | % | |||||||||||||
| Interactive | ||||||||||||||||
| No. of Live Customers at the end of the period | 92 | 54 | 38 | 70.4 | % | |||||||||||
| Average No. of Live Customers | 80 | 44 | 36 | 82.3 | % | |||||||||||
| No. of Live Games at the end of the period | 208 | 171 | 37 | 21.6 | % | |||||||||||
| Average No. of Live Games | 196 | 162 | 34 | 21.3 | % | |||||||||||
| Total Revenue (£‘m) | £ | 10.3 | £ | 3.7 | £ | 6.7 | 181 | % | ||||||||
In the table above:
“No. of Live Customers at the end of the period” and “Average No. of Live Customers” represent the number of customers from which there is Interactive revenue at the end of the period and the average number of customers from which there is Interactive revenue during the period, respectively.
“No. of Live Games at the end of the period” and “Average No. of Live Games” represents the number of games from which there is Interactive revenue at the end of the period and the average number of games from which there is Interactive revenue during the period, respectively.
“Total Revenue (£m)” represents total revenue for the Interactive segment, including recurring and upfront service revenue.
Interactive Segment, Recurring Revenue
Set forth below is a breakdown of our Interactive recurring revenue which consists principally of Interactive participation revenue. See "— Interactive Segment Revenue" below for a discussion of Interactive service revenue between the periods under review.
| For the Twelve-Month Period ended | Variance | |||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | % | |||||||||||||
| (In £ millions) | ||||||||||||||||
| Interactive Recurring Revenue | ||||||||||||||||
| Total Interactive Revenue | £ | 10.3 | £ | 3.7 | £ | 6.7 | 181 | % | ||||||||
| Total Recurring Revenue - Interactive | £ | 10.2 | £ | 3.6 | £ | 6.7 | 187 | % | ||||||||
| Interactive Recurring Revenue as a Percentage of Total Interactive Revenue | 98.9 | % | 96.7 | % | 2.2 | % | ||||||||||
Interactive Segment, key events that affected results for the Twelve Months ended December 31, 2020
Customers
North America
In New Jersey, launches with Draftkings, Resorts Casino and WSOP drove significant growth during the year. In addition, our business experienced strong growth from our existing customer base.
In Mexico we deployed Interactive content with Caliente further enhancing our North American footprint.
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Europe
The addition of the Sky Vegas brand and new customers 888 and Kindred have performed exceptionally well during the year, with 888 launching in Casino, Bingo, Germany, NJ, Spain and Sweden, with Italy following in 2021. The three operators generated 9.6% of our gross Interactive Revenue for the year, including 12.3% during the fourth quarter of 2020.
Launches with OPAP and Stoiximan in Greece and Boylesports in Ireland enhanced our presence outside the core UK market.
Content
During the second quarter, our Summer blockbuster titles, Reel King Megaways and Centurion Megaways were launched, utilizing brands we obtained as part of the NTG Acquisition. Both titles have seen strong performance and contributed significantly to growth in 2020.
During the year we had several seasonal content launches that benefitted from priority positioning and promotional activity from our customers. These launches include Chocolate Cashpots, Book of Independence, Book of Halloween and three Christmas titles: Santa King Megaways, Christmas Cashpots and Santa Stacked Freespins.
| For the Twelve-Month Period ended |
Variance | Variance | ||||||||||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | Organic Variance % |
Total Functional Currency % | Total Variance % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Service Revenue | $ | 13.3 | $ | 4.7 | $ | 8.6 | 116 | % | 181 | % | 182 | % | ||||||||||||
| Cost of service | (1.9 | ) | (0.7 | ) | (1.2 | ) | 159 | % | 166 | % | 168 | % | ||||||||||||
| Selling, general and administrative expenses | (3.9 | ) | (4.0 | ) | 0.1 | (15.2 | )% | (3.8 | )% | (1.5 | )% | |||||||||||||
| Stock-based compensation | (0.3 | ) | (0.2 | ) | (0.0 | ) | 19.7 | % | 27.0 | % | 9.3 | % | ||||||||||||
| Depreciation and amortization | (2.3 | ) | (2.9 | ) | 0.5 | (18.7 | )% | (18.7 | )% | (18.6 | )% | |||||||||||||
| Net operating Income (Loss) | $ | 4.9 | $ | (3.1 | ) | $ | 8.0 | (177 | )% | (260 | )% | (261 | )% | |||||||||||
| Exchange Rate - $ to £ | 1.29 | 1.28 | ||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Interactive Segment revenue.
During the period, revenue increased by $8.6 million, or 182%, on a reported basis. On a functional currency at constant rate basis, revenue increased by $8.5 million, or 181%. This increase included a $3.1 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth) and $5.5 million from organic growth driven by recurring revenue growth due to the increase in online demand driven by COVID-19 closures, the addition of new customers and territories and from the consistent launch of quality content.
Interactive Segment operating income.
Cost of Service increased by $1.2 million to $1.9 million on a reported basis, with no impact from currency movements. $1.1 million of this increase was due to increased third party platform provider costs, in line with the significant revenue increase for the period.
SG&A expenses decreased by $0.1 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 $0.2 million, driven by a $0.5 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth) which was fully offset by a reduction of $0.6 million from staff-related cost savings.
Depreciation and amortization decreased by $0.5 million on a reported basis, with no impact of currency movements, from projects going live in the prior period.
Operating profit increased by $8.0 million on a reported basis. On a functional currency at constant rate basis operating profit increased by $8.0 million. This was primarily due to the increase in revenue.
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Leisure Segment - Twelve Months ended December 31, 2020 compared to Twelve Months ended December 31, 2019
We generate revenue from our Leisure segment through the rental of our gaming and amusement machines. We receive rental fees for machines, typically on a long-term contract basis, on both a participation and fixed fee basis, with our newer digital pub machines typically contracted on a fixed fee basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming terminals placed in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.
Revenue growth for our Leisure segment is principally driven by the number of customers we have, the number of gaming machines in operation, the net win performance of the machines and the net win percentage that we receive pursuant to our contracts with our customers.
Leisure segment, Key Performance Indicators
| For the Twelve-Month Period ended | Variance | |||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | % | |||||||||||||
| Leisure | ||||||||||||||||
| End of period installed base Gaming Machines (# of terminals) | 11,667 | 12,383 | (716 | ) | (5.8 | )% | ||||||||||
| Average installed base Gaming Machines (# of terminals) | 12,083 | 12,403 | (320 | ) | (2.6 | )% | ||||||||||
| End of period installed base Other (# of terminals) | 7,193 | 8,368 | (1,175 | ) | (14.0 | )% | ||||||||||
| Average installed base Other (# of terminals) | 7,925 | 8,400 | (475 | ) | (5.7 | )% | ||||||||||
| Pub Digital Gaming Machines - Average installed base (# of terminals) | 5,772 | 5,413 | 359 | 6.6 | % | |||||||||||
| Pub Analogue Gaming Machines - Average installed base (# of terminals) | 2,570 | 3,177 | (607 | ) | (19.1 | )% | ||||||||||
| MSA and Bingo Gaming Machines - Average installed base (# of terminals)(1) | 3,461 | 3,546 | (85 | ) | (2.4 | )% | ||||||||||
| Inspired Leisure Revenue per Gaming Machine per week | £ | 29.20 | £ | 60.11 | £ | (30.91 | ) | (51.4 | )% | |||||||
| Inspired Pub Digital Revenue per Gaming Machine per week | £ | 32.79 | £ | 68.47 | £ | (35.68 | ) | (52.1 | )% | |||||||
| Inspired Pub Analogue Revenue per Gaming Machine per week | £ | 18.69 | £ | 42.81 | £ | (24.12 | ) | (56.3 | )% | |||||||
| Inspired MSA and Bingo Revenue per Gaming Machine per week | £ | 32.37 | £ | 64.83 | £ | (32.46 | ) | (50.1 | )% | |||||||
| Inspired Other Revenue per Machine per week | £ | 6.93 | £ | 19.85 | £ | (12.92 | ) | (65.1 | )% | |||||||
| Total Leisure Parks Revenue (Gaming and Non Gaming) (£‘m) | £ | 9.1 | £ | 4.4 | £ | 4.6 | 104 | % | ||||||||
| (1) | Motorway Service Area machines |
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In the table above:
“End of period installed base Gaming” and “Average installed base Gaming” represent the number of gaming machines installed (excluding Leisure park machines) that are Category B and Category C only, from which there is participation or rental revenue at the end of the period or as an average over the period.
“End of period installed base Other” and “Average installed base Other” represent the number of all other category machines installed (excluding Leisure park machines) from which there is participation or rental revenue at the end of the period or as an average over the period.
“Revenue per machine unit per week” represents the average weekly participation or rental revenue recognized during the period.
Leisure Segment, Recurring Revenue
Set forth below is a breakdown of our Leisure recurring revenue which consists principally of Leisure participation revenue and Leisure other fixed fee revenue. See "— Leisure Segment Revenue" below for a discussion of leisure service revenue between the periods under review.
Set forth below is a breakdown of our Leisure recurring revenue.
For
the Twelve-Month | Variance | |||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | % | |||||||||||||
| (In £ millions) | ||||||||||||||||
| Leisure Recurring Revenue | ||||||||||||||||
| Total Leisure Revenue | £ | 33.7 | £ | 18.5 | £ | 15.2 | 82.2 | % | ||||||||
| Total Leisure Recurring Revenue | £ | 31.6 | £ | 17.5 | £ | 14.0 | 80.2 | % | ||||||||
| Leisure Recurring Revenue as a Percentage of Total Leisure Revenue | 93.5 | % | 94.6 | % | (1.0 | )% | ||||||||||
Leisure Segment, key events that affected results for the Twelve Months ended December 31, 2020
During the period, Revenue per Gaming Machine per week declined by 51.4%. This decline is almost entirely due to shutdowns and tier restrictions in place across all retail venues due to the COVID-19 closures. Other Revenue per Machine per week was impacted more severely, with revenue declining by 65.1% due to social distancing measures affecting space availability.
Gaming machine performance was impacted across all sectors and products within the Leisure segment with Pub Digital Revenue per Gaming Machine declining by 52.1%, Pub Analogue Revenue per Gaming Machine declining by 56.3% and MSA and Bingo Revenue per Gaming Machine declining by 50.1%
During periods when venues were allowed to re-open, Revenue per Gaming Machine per week performed at approximately 63.6% of prior year average, with reductions caused by ongoing social distancing measures.
Revenue from Leisure Parks increased by £4.6 million in the period, largely due to revenue representing a full year in 2020 compared to 3 months for 2019. On a proforma basis revenue declined by approximately £16.6 million, or 64.6%, almost entirely due to COVID-19 closures and restrictions that severely limited the ability of Leisure Parks to open at all and, when they could, restricted the number of machines that could be switched on and the number of people that could enter the premises.
During the year a limited reduction in installed gaming machine base occurred, with a 5.8% decline to 11,667 terminals installed. The reduction in machines largely related to lower margin Category C machines in pubs and MSAs.
The percentage of installed gaming machine base that were digital terminals increased to 72.2% of the total by the end of 2020, an increase from 66.2% at the end of 2019.
During the period, we signed five-year supply deals with two of our main Motorway Service Area customers, including Moto, signed December 2020, and Welcome Break, signed October 2020. We also signed a contract extension with three of our key Leisure Park customers, including two of them by 18 months and one by two years, as well as contract extensions with two significant Pub customers for 12 and 18 months, respectively.
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Leisure Segment, Twelve Months ended December 31, 2020
| For the Twelve-Month Period ended | Variance | Variance | ||||||||||||||||||||||
| Dec 31, 2020 | Dec 31, 2019 | 2020 vs 2019 | Organic Growth % | Total Functional Currency % | Total Growth % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Service | $ | 40.8 | $ | 22.6 | $ | 18.3 | (64.4 | )% | 80.1 | % | 81.0 | % | ||||||||||||
| Product | 2.8 | 1.2 | 1.5 | (20.9 | )% | 120 | % | 123 | % | |||||||||||||||
| Total revenue | 43.6 | 23.8 | 19.8 | (62.1 | )% | 82.2 | % | 83.1 | % | |||||||||||||||
| Cost of sales, excluding depreciation and amortization: | ||||||||||||||||||||||||
| Cost of service | (9.6 | ) | (4.0 | ) | (5.6 | ) | (46.3 | )% | 138 | % | 139 | % | ||||||||||||
| Cost of product | (2.0 | ) | (0.9 | ) | (1.1 | ) | (6.1 | )% | 127 | % | 130 | % | ||||||||||||
| Total cost of sales | (11.6 | ) | (4.9 | ) | (6.7 | ) | (39.1 | )% | 136 | % | 138 | % | ||||||||||||
| Selling, general and administrative expenses | (30.8 | ) | (12.7 | ) | (18.0 | ) | (32.6 | )% | 141 | % | 141 | % | ||||||||||||
| Stock-based compensation | (0.1 | ) | (0.1 | ) | (0.1 | ) | 101 | % | 182 | % | 162 | % | ||||||||||||
| Depreciation and amortization | (16.9 | ) | (3.8 | ) | (13.1 | ) | (3.2 | )% | 346 | % | 346 | % | ||||||||||||
| Net operating Income (Loss) | $ | (15.8 | ) | $ | 2.3 | $ | (18.1 | ) | (368 | )% | (775 | )% | (772 | )% | ||||||||||
| Exchange Rate - $ to £ | 1.29 | 1.29 | ||||||||||||||||||||||
Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.
Leisure Segment Revenue
During the period, revenue increased by $19.8 million, or 83.1%, to $43.6 million on a reported basis. This increase was partly due to favorable currency movements of $0.2 million. On a functional currency at constant rate basis, Leisure revenue increased by $19.6 million, or 82.2%.
Service revenue increased by $18.3 million on a reported basis. Favorable currency movements accounted for $0.2 million. On a functional currency at constant rate basis, Leisure Service revenue increased by $18.1 million, or 80.1%, to $40.8 million. This was driven by the addition of $32.6 million attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth). This is partly offset by a reduction of $14.5 million driven by COVID-19 closures in the fourth quarter.
Product revenue increased by $1.5 million to $2.8 million on a reported basis. On a functional currency at constant rate basis, the revenue increase was $1.5 million or 120%. This increase was driven by $1.8 million attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth), partly offset by a decline in Product sales of $0.3 million.
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Leisure Segment Operating Income
Cost of sales (excluding depreciation and amortization) increased by $6.7 million to $11.6 million on reported basis. On a functional currency at constant rate basis, Leisure cost of sales increased by $6.6 million or 136%.
Service cost of sales increased by $5.6 million to $9.6 million on a reported basis. On a functional currency at constant rate basis, Service cost of sales increased by $5.5 million or 138%, driven by an increase of $7.4 million in Service costs attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth), offset by $1.9 million of lower Service costs driven by the reduction in Service revenue driven by the COVID-19 closures.
Product cost of sales increased by $1.1 million to $2.0 million on a reported basis and on a functional currency at constant rate basis. This was primarily due to an increase in Product cost of sales attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth) of $1.2 million.
SG&A expenses increased by $18.0 million on a reported basis to $30.8 million, which included the impact of unfavorable currency movements of $0.1 million. On a functional currency at constant rate basis SG&A expenses increased by $17.9 million or 141%. This increase was driven by a $22.0 million increase attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth), partly offset by a reduction of $4.1 million from staff-related cost savings generated from synergies and use of the government furlough scheme.
Depreciation and amortization increased by $13.1 million on a reported basis to $16.9 million. This included an impact of favorable currency movements of $0.1 million. On a functional currency at constant rate basis, Leisure depreciation increased by $13.2 million or 346%. This was driven by a $13.3 million increase in depreciation and amortization attributable to the addition of the NTG Acquisition for the nine months of 2020 ended September 30 (not reflected in organic growth).
Operating income decreased by $18.1 million on a reported basis from an income of $2.3 million to a loss of $15.8 million, which included the impact of favorable currency movements of $0.1 million. On a functional currency at constant rate basis operating income decreased by $18.2 million. This was primarily due to the COVID-19 closures.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA, to analyze our operating performance. We use these financial measures to manage our business on a day-to-day basis. We believe that these measures are also commonly used in our industry to measure performance. For these reasons, we believe that these non-GAAP financial measures provide expanded insight into our business, in addition to standard U.S. GAAP financial measures. There are no specific rules or regulations for defining and using non-GAAP financial measures, and as a result the measures we use may not be comparable to measures used by other companies, even if they have similar labels. The presentation of non-GAAP financial information should not be considered in isolation from, or as a substitute for, or superior to, financial information prepared and presented in accordance with U.S. GAAP. You should consider our non-GAAP financial measures in conjunction with our U.S. GAAP financial measures.
We define our non-GAAP financial measures as follows:
EBITDA is defined as net loss excluding depreciation and amortization, interest expense, interest income and income tax expense.
Adjusted EBITDA is defined as net loss excluding depreciation and amortization, interest expense, interest income and income tax expense, and other additional exclusions and adjustments. Such additional excluded amounts include stock-based compensation U.S. GAAP charges where the associated liability is expected to be settled in stock, and changes in the value of earnout liabilities and income and expenditure in relation to legacy portions of the business (being those portions where trading no longer occurs) including closed defined benefit pension schemes. Additional adjustments are made for items considered outside the normal course of business, including (1) restructuring costs, which include charges attributable to employee severance, management changes, restructuring, dual running costs, costs related to facility closures and integration costs, (2) merger and acquisition costs and (3) gains or losses not in the ordinary course of business. This does not include any adjustments related to COVID-19.
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We believe Adjusted EBITDA, when considered along with other performance measures, is a particularly useful performance measure, because it focuses on certain operating drivers of the business, including sales growth, operating costs, selling and administrative expense and other operating income and expense. We believe Adjusted EBITDA can provide a more complete understanding of our operating results and the trends to which we are subject, and an enhanced overall understanding of our financial performance and prospects for the future. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income or loss, because it does not take into account certain aspects of our operating performance (for example, it excludes non-recurring gains and losses which are not deemed to be a normal part of underlying business activities). Our use of Adjusted EBITDA may not be comparable to the use by other companies of similarly termed measures. Management compensates for these limitations by using Adjusted EBITDA as only one of several measures for evaluating our operating performance. In addition, capital expenditures, which affect depreciation and amortization, interest expense, and income tax benefit (expense), are evaluated separately by management.
Functional Currency at Constant rate. Currency impacts discussed have been calculated as the current-period average GBP: USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP: USD rate, as a proxy for functional currency at constant rate movement.
Currency Movement represents the difference between the results in our reporting currency (USD) and the results on a functional currency at constant rate basis.
Reconciliations from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Loss, to Adjusted EBITDA are shown below.
Reconciliation to Adjusted EBITDA
| For the Twelve-Month Period ended | ||||||||
| Dec 31, | Dec 31, | |||||||
| 2020 | 2019 | |||||||
| (In millions) | ||||||||
| Net loss | $ | (29.2 | ) | $ | (37.0 | ) | ||
| Items Relating to Legacy Activities: | ||||||||
| Pension charges (1) | 0.6 | 0.6 | ||||||
| Items outside the normal course of business: | ||||||||
Costs of group restructure (2) | 0.8 | 3.3 | ||||||
| Acquisition and integration related transaction expenses (3) | 7.0 | 6.7 | ||||||
| Impairment on interest in equity method investee (4) | 0.7 | - | ||||||
| Italian tax related costs relating to prior years | - | 0.4 | ||||||
| Stock-based compensation expense | 4.8 | 9.0 | ||||||
| Depreciation and amortization | 52.3 | 42.0 | ||||||
| Interest Income | (0.6 | ) | (0.1 | ) | ||||
| Interest Expense | 30.6 | 27.8 | ||||||
| Change in fair value of earnout liability | - | 2.3 | ||||||
| Change in fair value of derivative liability | - | (3.0 | ) | |||||
| Other finance expenses / (income) | 4.7 | (3.2 | ) | |||||
| Income tax | 0.4 | 0.1 | ||||||
| Adjusted EBITDA | $ | 72.1 | $ | 49.0 | ||||
Adjusted EBITDA | £ | 55.5 | £ | 38.2 | ||||
| Exchange Rate - $ to £ (5) | 1.30 | 1.28 | ||||||
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Reconciliation to Adjusted EBITDA by segment for the Twelve Months ended December 31, 2020
| For the Twelve-Month Period ended | ||||||||||||||||||||||||
| Dec 31, 2020 | ||||||||||||||||||||||||
| Total | Gaming | Virtual Sports | Interactive | Leisure | Corporate | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Net Income/(loss) | $ | (29.2 | ) | $ | 29.5 | $ | 21.0 | $ | 4.9 | $ | (15.8 | ) | $ | (68.8 | ) | |||||||||
| Items Relating to Legacy Activities: | ||||||||||||||||||||||||
| Pension charges (1) | 0.6 | 0.6 | ||||||||||||||||||||||
| Items outside the normal course of business: | ||||||||||||||||||||||||
| Costs of group restructure (2) | 0.8 | 0.8 | ||||||||||||||||||||||
| Acquisition and integration related transaction expenses (3) | 7.0 | 7.0 | ||||||||||||||||||||||
| Impairment on interest in equity method investee(4) | 0.7 | 0.7 | ||||||||||||||||||||||
| Italian tax related costs relating to prior years (5) | - | - | ||||||||||||||||||||||
| Stock-based compensation expense | 4.8 | 0.8 | 0.4 | 0.3 | 0.1 | 3.2 | ||||||||||||||||||
| Depreciation and amortization | 52.3 | 27.6 | 3.7 | 2.3 | 16.9 | 1.8 | ||||||||||||||||||
| Interest Income | (0.6 | ) | (0.6 | ) | ||||||||||||||||||||
| Interest Expense | 30.6 | 30.6 | ||||||||||||||||||||||
| Change in fair value of earnout liability | - | - | ||||||||||||||||||||||
| Change in fair value of derivative liability | - | - | ||||||||||||||||||||||
| Other finance expenses / (income) | 4.7 | 4.7 | ||||||||||||||||||||||
| Income tax | 0.4 | 0.4 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 72.1 | $ | 57.9 | $ | 25.1 | $ | 7.5 | $ | 1.3 | $ | (19.7 | ) | |||||||||||
| Adjusted EBITDA | £ | 55.5 | ||||||||||||||||||||||
| Exchange Rate - $ to £ (6) | 1.30 | |||||||||||||||||||||||
Note: Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these costs are not allocable and to do so would not be practical, these are shown in the Corporate category.
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Reconciliation to Adjusted EBITDA by segment for the Twelve Months ended December 31, 2019
| For the Twelve-Month Period ended | ||||||||||||||||||||||||
| Dec 31, 2019 | ||||||||||||||||||||||||
| Total | Gaming | Virtual Sports | Interactive | Leisure | Corporate | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Net Income/(loss) | $ | (37.0 | ) | $ | 0.3 | $ | 21.6 | $ | (3.1 | ) | $ | 2.3 | $ | (58.1 | ) | |||||||||
| Items Relating to Legacy Activities: | ||||||||||||||||||||||||
| Pension charges (1) | 0.6 | 0.6 | ||||||||||||||||||||||
| Items outside the normal course of business: | ||||||||||||||||||||||||
| Costs of group restructure (2) | 3.3 | 1.1 | 0.1 | 2.1 | ||||||||||||||||||||
| Acquisition and integration related transaction expenses (3) | 6.7 | 6.7 | ||||||||||||||||||||||
| Impairment on interest in equity method investee(4) | - | - | ||||||||||||||||||||||
| Italian tax related costs relating to prior years (5) | 0.4 | 0.4 | - | |||||||||||||||||||||
| Stock-based compensation expense | 9.0 | 1.0 | 0.6 | 0.2 | 0.1 | 7.1 | ||||||||||||||||||
| Depreciation and amortization | 42.0 | 30.4 | 2.6 | 2.9 | 3.8 | 2.3 | ||||||||||||||||||
| Interest Income | (0.1 | ) | (0.1 | ) | ||||||||||||||||||||
| Interest Expense | 27.8 | 27.8 | ||||||||||||||||||||||
| Change in fair value of earnout liability | 2.3 | 2.3 | ||||||||||||||||||||||
| Change in fair value of derivative liability | (3.0 | ) | (3.0 | ) | ||||||||||||||||||||
| Other finance expenses / (income) | (3.2 | ) | (3.2 | ) | ||||||||||||||||||||
| Income tax | 0.1 | 0.1 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 49.0 | $ | 32.8 | $ | 25.2 | $ | 0.1 | $ | 6.2 | $ | (15.3 | ) | |||||||||||
| Adjusted EBITDA | £ | 38.2 | ||||||||||||||||||||||
| Exchange Rate - $ to £ (5) | 1.28 | |||||||||||||||||||||||
Notes to EBITDA tables above:
| (1) | “Pension charges” are profit and loss charges included within selling, general and administrative expenses, relating to a defined benefit scheme which was closed to new entrants in 1999 and to future accrual in 2010. As well as the amortization of net loss, the figure also includes charges relating to the Pension Protection Fund (which were historically borne by the pension scheme) and a small amount of associated professional services expenses. These costs are included within Corporate Functions. |
| (2) | “Costs of group restructure” include redundancy costs, Payments In Lieu of Notice costs, any associated employer taxes and costs associated with onerous property leases. To qualify as being an adjusting item, costs must be part of a large restructuring project, which will net save ongoing future costs. These costs were primarily incurred in connection with the property consolidation. |
| (3) | Acquisition and integration related transaction expenses, Stock-based compensation expense, Depreciation and amortization, Total other expense, net and Income tax are as described above in the Results of Operations line item discussions. Total expense, net includes interest income, interest expense, change in fair value of earnout liability, change in fair value of derivative liability and other finance income. |
| (4) | In April 2020, the Company disposed of its 40% non-controlling equity interest in Innov8 Gaming Limited which resulted in the investment of $0.7 million being written off. |
| (5) | “Italian tax related costs relating to prior years invoicing” relate to VAT charges and associated costs, relating to prior years, imposed on our Virtual Sports segment following changes in interpretation of legislation and an ongoing VAT audit in line with prior years disclosure. |
| (6) | Exchange rate in the table is calculated by dividing the USD Adjusted EBITDA by the GBP Adjusted EBITDA, therefore this could be slightly different from the average rate during the period depending on timing of transactions. |
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Liquidity and Capital Resources
Year ended December 31, 2020 compared to Year ended December 31, 2019
| 12 Months ended | Variance | |||||||||||
Dec 31, 2020 | Dec 31, 2019 | 2020 to 2019 | ||||||||||
| (in millions) | ||||||||||||
| Net loss | $ | (29.2 | ) | $ | (37.0 | ) | $ | 7.8 | ||||
| Amortization of debt fees | 3.4 | 9.0 | (5.6 | ) | ||||||||
| Change in fair value of derivative and earnout liabilities and stock-based compensation expense | 5.7 | 8.3 | (2.6 | ) | ||||||||
| Impairment expense | 0.7 | 0.0 | 0.7 | |||||||||
| Foreign currency translation on senior bank debt and cross currency swaps | 5.6 | (1.3 | ) | 6.9 | ||||||||
| Depreciation and amortization (incl RoU assets) | 55.9 | 43.0 | 12.9 | |||||||||
| Other net cash generated by operating activities | 10.8 | 8.7 | 2.1 | |||||||||
| Net cash provided by operating activities | 52.9 | 30.7 | 22.2 | |||||||||
Net cash used in investing activities | (29.9 | ) | (133.4 | ) | 103.5 | |||||||
| Net cash (used)/generated by financing activities | (8.2 | ) | 113.5 | (121.7 | ) | |||||||
| Effect of exchange rates on cash | 3.2 | 2.3 | 0.9 | |||||||||
| Net increase in cash and cash equivalents | $ | 18.0 | $ | 13.1 | $ | 4.9 | ||||||
Net cash provided by operating activities.
For the year ended December 31, 2020, net cash inflow provided by operating activities was $52.9 million, compared to a $30.7 million inflow for the year ended December 31, 2019, representing a $22.2 million increase in cash generation.
Amortization of debt fees decreased by $5.6 million to $3.4 million. The current year’s non-cash interest expense was related to amortization of debt fees incurred in relation to the business refinancing in October 2019. The prior year’s expense was related to the amortization of debt fees incurred in relation to the business refinancing in October 2019 and in August 2018. The remainder of debt fees relating to the August 2018 refinancing were amortized in October 2019 resulting in a one-off amortization charge of $7.3 million.
Change in fair value of derivative and earnout liabilities and stock-based compensation expense reduced by $2.6 million, from an inflow of $8.3 million to an inflow of $5.7 million. Movements in the market value of the stock price in the year ended December 31, 2019 resulted in a $2.3 million higher earnout inflow. There was also a $4.3 million higher inflow relating to stock-based compensation expense in the year ended December 31, 2019. These were offset by a $3.9 million movement relating to cross-currency swaps. On March 25, 2019, the shares relating to the earnout liability were issued resulting in no further inflows or outflows after this date.
Foreign currency translation on senior bank debt and cross currency swaps following the refinancing on October 1, 2019 resulted in a gain in the year ended December 31, 2020 of $5.6 million as a result of the movement in exchange rates during the period, compared to a $1.3 million loss in the year ended December 31, 2019.
Depreciation and amortization increased by $12.9 million to $55.9 million with increases of $8.0 million in depreciation and $3.3 million in development costs and licenses following the NTG Acquisition. In addition, a full year expense of $3.6 million was incurred in the year ended December 31, 2020, relating to the amortization of Right of Use assets under ASC842, an increase of $2.6 million over the year ended December 31, 2019 when the expense only incurred in the final quarter of that year.
Other net cash generated by operating activities increased by $2.1 million, to a $10.8 million inflow despite the significant impact in the current year of the COVID-19 closures. Movements in trading levels generated a $10.2 million benefit in current taxes with further favorable movements in deferred revenue and accruals of $2.0 million and $3.7 million, respectively. These were partly offset by adverse movements in accounts receivable of $1.4 million, accounts payable $11.7 million and inventory $0.7 million. Throughout the year ended December 31, 2020, and especially upon the outbreak of the COVID-19 closures, management actively managed our cash levels to seek to optimize our liquidity position.
Included within net cash provided by operating activities were $41.0 million of receipts relating to VAT reclaims and $7.9 million of payments relating to transaction and integration expenses and $1.0 million of payments relating to restructuring costs. This compares to $6.1 million relating to transaction expenses and $3.3 million relating to restructuring costs in the prior year. There were no receipts related to VAT reclaims in the prior year.
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Net cash used in investing activities.
Net cash used in investing activities decreased by $103.5 million to $29.9 million in the year ended December 31, 2020. The year ended December 31, 2019 included a payment of $105.9 million in respect of the NTG Acquisition. During the year ended December 31, 2020, we increased capital spending by $1.8 million, largely as a result of the addition of the NTG Acquisition for the full year, compared with only 3 months during the prior year. Capital spending during 2020 was reduced significantly from planned levels as a direct consequence of the COVID-19 closures.
Net cash used by financing activities. During the year ended December 31, 2020, net cash used by financing activities was $8.2 million, compared to a $113.5 million inflow in the year ended December 31, 2019. Repayment of all amounts drawn on our revolver during the year ended December 31, 2020 resulted in an outflow of $4.2 million. Further outflows in the year related to finance lease payments of $0.9 million and a $3.1 million payment of lender fees associated with the changes made to the debt terms and covenant levels as a result of the COVID-19 closures. The year ended December 31, 2019 included a net debt inflow of $111.1 million plus a $2.8 million increase in the level of revolver drawn offset by $0.4 million of finance lease payments, the result of the