Inspired Entertainment, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period _______________

Commission File Number: 001-36689

INSPIRED ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

As of May 14, 2020, there were 23,021,843 shares of the Company’s common stock issued and outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

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

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(in millions, except share and per share data)

(Unaudited)

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

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

THREE MONTHS ENDED MARCH 31, 2020

(in millions, except share data)

(Unaudited)

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

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

THREE MONTHS ENDED MARCH 31, 2019

(in millions, except share data)

(Unaudited)

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

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

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

Company Description and Nature of Operations

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

Management Liquidity Plans

As of March 31, 2020, the Company’s cash on hand was $48.5 million, and the Company had working capital of $5.5 million. The Company recorded net losses of $17.4 million and $5.0 million for the three months ended March 31, 2020 and 2019, respectively. Net losses include non-cash stock-based compensation of $1.0 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively. Historically, the Company has generally had positive cash flows from operating activities and has relied on a combination of cash flows provided by operations and the incurrence of debt and/or the refinancing of existing debt to fund its obligations. Working capital of $5.5 million includes a non-cash settled item of $10.0 million of deferred income. Management currently believes that, absent any unanticipated COVID-19 impact (see below), the Company’s cash balances on hand, cash flows expected to be generated from operations, ability to control and defer capital projects and amounts available from the Company’s external borrowings will be sufficient to fund the Company’s net cash requirements through May 2021.

Our business is being and will continue to be adversely affected by the rapidly expanding nature of the coronavirus (“COVID-19”) pandemic. All venues offering land-based gaming, including our products, are closed for an indeterminate period of time in the jurisdictions in which we operate through governmental mandate. In addition, the extent of a significant economic impact from the pandemic may result in a decrease in the willingness or ability of consumers to engage in gambling activities. Land-based customers globally, and the United States, United Kingdom, Greece and Italy specifically, are impacted by the COVID-19 pandemic due to the closure of venues. There is also a possibility that player behavior may change following any resolution of the pandemic, including that consumers may spend less time or wager smaller amounts at gambling facilities. The pandemic is adversely affecting a broad range of our operations, including our ability to obtain and ship our products, our ability to continue to develop new products and services and the ability of our customers to pay outstanding amounts due to us. As a result of the significant reductions in revenue and other changes to our business, at least in the short term (which also affects other companies in our industry), we are working to protect our existing available liquidity by pro-actively managing capital expenditures and working capital as well as identifying both immediate and longer term opportunities for cost savings.

As part of these efforts to preserve liquidity, the Company drew all remaining availability (£18.0 million ($22.3 million using rates prevailing at March 31, 2020)) under its £20 million ($24.8 million using rates prevailing at March 31, 2020) revolving credit facility on March 13, 2020 and took other measures including deferring payment of 2019 bonuses, waiving cash payments of Board retainers due to be disbursed during the second quarter of 2020 and furloughing of over 80% of the workforce with the remainder on reduced time and/or pay.

Basis of Presentation

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

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

Inventory consists of the following:

Component parts include parts for gaming terminals. Included in component parts are reserves for excess and slow-moving inventory of $1.0 million and $0.9 million as of March 31, 2020 and December 31, 2019, respectively. Our finished goods inventory primarily consists of gaming terminals which are ready for sale.

The following table summarizes contract related balances:

Revenue recognized that was included in the deferred income balance at the beginning of the period amounted to $3.5 million and $9.6 million for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively.

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

Hedges of Multiple Risks

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

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $1.2 million will be reclassified as an increase to interest expense.

As of March 31, 2020, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheet as of March 31, 2020.

The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income for the three months ended March 31, 2020.

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the three months ended March 31, 2020.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheet.

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

Credit-risk-related Contingent Features

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

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

As of March 31, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to the ISDA Agreements was $1.4 million. As of March 31, 2020, the Company has not posted any collateral related to the ISDA Agreement, as no collateral is required under the terms of such ISDA Agreement. If the Company had breached any of the provision under the ISDA Agreement which resulted in an acceleration of the ISDA Agreement at March 31, 2020, it could have been required to settle its obligations under the ISDA Agreement at its termination value of $1.7 million 

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

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

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

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

Level 3 financial liabilities consisted of the earnout liability for which there was no current market for these securities such that the determination of fair value required significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate (see Note 16).

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

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

As of March 31, 2020, there were (i) 2,429,011 shares subject to outstanding awards under the Prior Plans, including 1,092,633 shares subject to market-price vesting conditions, and (ii) 1,149,598 shares subject to outstanding awards under the 2018 Plan, including 100,000 shares subject to performance-based target awards and 243,982 shares subject to awards that were previously subject to performance criteria that were determined to be met in March 2020 (at a level equal to approximately 87% of the target awards) which awards continue to remain subject to a time-based vesting schedule. As of March 31, 2020, there were 1,127,086 shares available for new awards under the 2018 Plan and no shares available for new awards under the Prior Plans. All awards consist of RSUs and Restricted Stock.

The Company also has an employee stock purchase plan (“ESPP”) that authorizes the issuance of up to an aggregate of 500,000 shares of common stock pursuant to purchases thereunder by employees. The ESPP, which was approved by stockholders in July 2017, is administered by the Compensation Committee which has discretion to designate the length of offering periods and other terms subject to the requirements of the ESPP. The Company began a twelve-month offering period under the ESPP on June 3, 2019 that authorizes employees to contribute up to 10% of their base compensation to purchase a maximum of 1,000 shares. The shares will be purchased on the last day of the offering period at a discounted price that will be equal to 85% of the lower of: (i) the closing price at the beginning of the offering period and (ii) the closing price at the end of the offering period. The Company estimates that approximately 10,000 shares will be purchased during this offering period. As of March 31, 2020, a total of 475,400 shares remain available for purchase under the ESPP.

A summary of the Company’s RSU activity during the three months ended March 31, 2020 is as follows:

In addition, the Company issued a total of 166,959 shares during the three months ended March 31, 2020 in connection with the net settlement of RSUs that vested on December 31, 2019.

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

The Company recognized $1.0 million and $2.1 million of stock-based compensation expense during the three months ended March 31, 2020 and 2019, respectively. Total unrecognized compensation expense related to unvested stock awards and unvested RSUs at March 31, 2020 amounts to $7.1 million and is expected to be recognized over a weighted average period of 2.1 years.

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

Included within accumulated other comprehensive income is an amount of $1.0 million relating to the change in fair value of discontinued hedging instruments. This amount will be amortized as a charge to income over the life of the original instrument, to August 2021 in accordance with US GAAP. The remaining $1.5 million relates to currently active hedging instruments.

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

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

Other finance income (costs) consisted of the following:

The effective income tax rate for the three months ended March 31, 2020 and 2019 was 1.2% and (1.8)%, respectively, resulting in a $0.2 million and ($0.1) million income tax expense/(credit), respectively. The Company’s effective income tax rate has fluctuated primarily as a result of the income mix between jurisdictions. 

The income tax expense for the three months ended March 31, 2020 and 2019 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to pre-tax losses for which no tax benefit can be recorded, and foreign earnings being taxed at rates different than the US statutory rate.

Macquarie Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK”), is an affiliate of MIHI LLC, the beneficial owner of approximately 16.75% of our common stock. Macquarie UK is one of the lending parties with respect to our senior secured term loans and revolving credit facility under our senior facilities agreement dated September 27, 2019 (the “SFA”). The portion of the total loans of $297.2 million under these facilities held by Macquarie UK at March 31, 2020 was $26.8 million and the interest expense payable to Macquarie UK for the three months ended March 31, 2020 and 2019 amounted to $0.5 million and $0.0 million, respectively. In addition, $0.9 million of a total $10.6 million of accrued interest payable was due to Macquarie UK at March 31, 2020. On April 6, 2020, the Company entered into an Extended Grace Period Letter Agreement (the “Amendment”) to the SFA (see note 17). MIHI LLC, jointly with Hydra Industries Sponsor LLC, is a party to a stockholders agreement with the Company and other stockholders, dated December 23, 2016, pursuant to which, subject to certain conditions, MIHI LLC and Hydra Industries Sponsor LLC are permitted to designate two directors to be nominated for election as directors of the Company at any annual or special meeting of stockholders at which directors are to be elected, until such time as MIHI LLC and Hydra Industries Sponsor LLC in the aggregate hold less than 5% of the outstanding shares of the Company. 

The Company had a 40% non-controlling equity interest in Innov8 Gaming Limited (“Innov8”) at March 31, 2020. In April 2020, the Company disposed of its interest and the value of its investment has been impaired by $0.7 million to $Nil at March 31, 2020 as a result of the transaction. Amounts owed by Innov8 at March 31, 2020 and December 31, 2019 amounted to $2.1 million and $0.9 million, respectively, and revenue earned from Innov8 for the three months ended March 31, 2020 and 2019 amounted to $0.6 million and $0.0 million, respectively. Amounts payable to Innov8 at March 31, 2020 and December 31, 2019 amounted to $0.2 million and $0.0 million, respectively, and purchases from Innov8 for the three months ended March 31, 2020 and 2019 amounted to $0.2 million and $0.0 million, respectively.

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

The components of lease income were as follows:

Legal Matters

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

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

The total amount of employer contributions paid during the three months ended March 31, 2020 amounted to $0.0 million.

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

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

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

The following tables present revenue, cost of sales, excluding depreciation and amortization, selling, general and administrative expenses, depreciation and amortization, stock-based compensation expense and acquisition related transaction expenses, operating profit/(loss), total assets and total capital expenditures for the periods ended March 31, 2020 and 2019, respectively, by business segment. Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these costs are not allocable and to do so would not be practical. Corporate function costs consist primarily of selling, general and administrative expenses, depreciation and amortization, capital expenditures, cash, prepaid expenses and property and equipment and software development costs relating to corporate/shared functions.

Segment Information

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

Geographic Information

Geographic information for revenue is set forth below:

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

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

During the three months ended March 31, 2020, there were no customers that represented at least 10% of the Company’s revenues. During the three months ended March 31, 2019, three customers represented at least 10% of revenues, accounting for 23%, 14% and 11% of the Company’s revenues. All these customers were served by both the Server Based Gaming and Virtual Sports segments. 

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

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

In April 2020, the Company disposed of its 40% non-controlling equity interest in Innov8 Gaming Limited. The value of its investment has been impaired by $0.7 million to $Nil at March 31, 2020 as a result of the transaction.

On April 6, 2020, the Company entered into an Extended Grace Period Letter Agreement (the “Amendment”) to the SFA. The parties entered into the Amendment in order to, among other things, (i) increase the grace period (the “Extended Grace Period”) applicable to payment defaults for non-payment of interest with respect to certain interest payments that became due on April 1, 2020 from three business days to 75 calendar days and (ii) permit certain transfers of the commitments under the SFA to certain entities nominated by the lenders from time to time, subject to certain exceptions. The Amendment also imposed additional obligations on Inspired and its subsidiaries during the Extended Grace Period including, among other things, (i) additional reporting obligations to the lenders under the SFA, including a weekly budget containing a 13-week cash flow forecast, (ii) a minimum liquidity covenant and (iii) restrictions on disposals, incurrence of financial indebtedness or granting of security. The Amendment also contemplates that the parties to the SFA will negotiate in good faith and use all reasonable efforts to further amend and restate the SFA.

Prior to the entry into the Amendment, on April 1, 2020, the Company did not make interest payments in the amounts of £5.7 million, and €3.1 million, (the “Overdue Amounts”) when due under the SFA (the “Trigger Event”). The Trigger Event constituted a Default under and as defined in the SFA, which may, if the Company fails to remedy such Default during the Extended Grace Period, including, without limitation, by failing to enter into the amendment and restatement referred to above, result in an Event of Default, as a result of which all the obligations under the SFA may be accelerated by lenders whose aggregate commitments are equal to or exceed 66.67% of the total commitments under the SFA. 

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

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

Forward-Looking Statements

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

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

Overview

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

Our key strategic priorities are to:

On October 1, 2019, the Company completed the acquisition of the Gaming Technology Group (“NTG”) of Novomatic UK Ltd., a division of Novomatic Group, a leading international supplier of gaming equipment and solutions, and heretofore denoted as “Acquired Businesses.”

Business Segments

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

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

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

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

Revenue

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

Geographic Range

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

For the three months ended March 31, 2020, we earned approximately 73.5% of our revenue in the UK, 9.1% in Greece, 4.2% in Italy and the remaining 13.2% across the rest of the world. During the three months ended March 31, 2019, we earned approximately 66.0%, 14.3%, 12.5% and 7.2% of our revenue in those regions, respectively.

Foreign Exchange

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

During the three months ended March 31, 2020, we derived approximately 27% of our revenue from sales to customers outside the UK, compared to 34% during the three months ended March 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

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

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

Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). In the three-month periods ended March 31, 2020 and March 31, 2019, the average GBP:USD rates were 1.28 and 1.30, respectively.

Our results for the quarter ended March 31, 2020 have been impacted by the temporary closure of most non-essential businesses around the world due to the outbreak COVID-19. The ongoing COVID-19 pandemic is expected to have far reaching impact on global commerce, with governments discouraging non-essential movement and/or ordering social distancing and sheltering-in-place in an effort to help control the transmission of COVID-19, which in some cases include the mandatory closure of spaces where the public congregates. With respect to the jurisdictions in which the Company operates, the UK, Italy, Greece, and US (Illinois) each mandated the above shutdown measures in response to COVID-19 on March 20, 2020, March 10, 2020, March 14, 2020, and March 21, 2020, respectively. The financial results discussed herein reflect the impact of these shutdowns through March 31, 2020.

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

Three Months ended March 31, 2020 compared to Three Months ended March 31, 2019

Revenue

Total reported revenue for the three months ended March 31, 2020 increased by $18.6 million, or 55.4%, to $52.3 million on a reported basis. Adverse currency movements accounted for a $0.8 million impact. On a functional currency at constant rate basis, revenue increased by $19.5 million, or 57.8%, with service revenue increasing by $13.0 million and hardware revenue increasing by $6.5 million. The change in total revenue was comprised of a decrease of $7.0 million in SBG revenue, a decrease of $1.0 million in Virtual Sports revenue, offset by an increase in revenue of $27.4 million from the newly-established Acquired Businesses segment. This was offset by $0.8 million in intercompany eliminations.

SBG revenue, which is included in total reported revenue, above, decreased by $6.7 million on a functional currency at constant rate basis, or 28.5%, comprised of a reduction in service revenue of $7.3 million, offset by a $0.6 million increase in hardware sales.

SBG service revenue decreased by $7.5 million on a reported basis, of which $0.2 million was attributable to adverse currency movements. On a functional currency at constant rate basis, SBG service revenue decreased by $7.3 million, or 35.0%, to $13.5 million. This was primarily due to a decrease in revenue in the UK LBO market of $4.4 million as a result of the Triennial Implementation, increased Italy taxes of $0.4 million, the introduction in Italy on January 1, 2020 of the requirement for players to use an identifying card to access and play games, which had an adverse impact of $0.5 million and the impact of retail venue closures as a result of COVID-19 which caused a reduction of $2.1 million. The impact of the decrease related to COVID-19 by market was UK ($1.1 million), Greece ($0.6 million) and Italy ($0.3 million) during the quarter. These negative impacts were partly offset by growth in the Greek market of $0.8 million as a result of the continued rollout of contracted VLTs.

SBG hardware revenue increased by $0.5 million to $3.3 million on a reported basis. On a functional currency at constant rate basis, revenue increased $0.6 million, with adverse currency movements accounted for decreased revenue of $0.1 million.

Virtual Sports reported revenue decreased by $1.0 million, of which $0.2 million was due to exchange rate impact. On a like-for-like basis, Virtual Sports revenue decreased by $0.8 million, or 8.4%, to $9.0 million, of which $0.7 million was due to a one-time payment for a revenue adjustment in 2019, and $1.0 million decline in retail recurring revenue was primarily attributable to shutdowns associated with COVID-19 during March 2020. These declines were partially offset by growth in Scheduled Online Virtuals of $0.5 million and Interactive of $0.4 million.

Acquired Businesses revenue accounted for $21.4 million in service revenue and $6.0 million in hardware revenue. $9.7 million was generated from UK Pub gaming machines and other rental products, including 8,483 Category C gaming machines. An additional $1.9 million in revenue was generated through the UK leisure parks business, with $5.8 million generated from machine rentals to UK motorway services and adult gaming centers.

Cost of sales, excluding depreciation and amortization

Cost of sales, excluding depreciation and amortization, which includes machine cost of sales, consumables, content royalties and connectivity costs, increased by $6.6 million, or 93.6%, on a reported basis, to $13.6 million. This increase included the impact of $0.3 million from favorable currency movements. On a functional currency at constant rate basis, cost of sales increased by $6.9 million, or 97.9%.

Of this increase, $7.9 million was attributable to the acquisition of the Acquired Businesses, comprised of $2.7 million in service costs and $5.2 million in hardware costs. This was offset by a $0.8 million decrease in SBG service costs due to reduced consumable usage in line with reduced machine estate and COVID-19 impact.

Selling, general and administrative expenses

SG&A expenses increased by $14.4 million, or 97.5%, on a reported basis, to $29.1 million. This included $0.4 million of favorable currency movements. On a functional currency at constant rate basis, SG&A increased by $14.8 million, or 100.1%. The reported increase was driven by incremental SG&A expenses of $16.9 million from the Acquired Businesses. This was partially offset by a $2.0 million decrease in selling, general and administrative expenses in SBG and Virtual Sports.

Stock-based compensation

During the three months ended March 31, 2020, the Company recorded an expense of $1.0 million with respect to outstanding awards. Of this expense, $0.1 million related to costs from awards made under the 2016 Long Term Incentive Plan and $0.9 million from awards made under the 2018 Plan. The entirety of this cost related to recurring costs. During the three months ended March 31, 2019, the charge for stock-based compensation was $2.1 million. Of this expense, $1.5 million related to costs from awards made under the 2016 Long Term Incentive Plan and $0.6 million from awards made under the 2018 Plan with some of the 2018 Plan awards impacted by movements in the stock price between the award granting date and May 14, 2019, the date the scheme was formally approved by stockholders. Following approval, the cost was no longer impacted by stock price movements being charged by the same method as all other award plans.

Acquisition and integration related transaction expenses

Acquisition related transaction expenses increased by $2.3 million to $3.2 million, on a reported basis. The entirety of the 2020 and 2019 period expenses were related to work in respect of potential acquisitions with the 2019 expenses relating to the acquisition and third party integration fees linked exclusively to the acquisition and integration of Novomatic UK’s Gaming Technology Group and the 2020 expenses relating to the group reorganization and integration costs following the acquisition.

Depreciation and amortization

Depreciation and amortization increased by $2.9 million, or 29.6%, on a reported basis, to $12.6 million. This included the impact of favorable currency movements of $0.2 million.

On a functional currency at constant rate basis, depreciation and amortization increased by $3.1 million, or 32.1%. This increase was driven by incremental depreciation and amortization of $4.8 million from the Acquired Businesses. This was partially offset by a $1.4 million decrease of depreciation and amortization in SBG and Virtual Sports, due primarily to UK and Italy machine estates reaching full depreciation status.

Net operating loss

During the period on a reported basis, net operating loss increased by $6.4 million from a loss of $0.7 million to a loss of $7.2 million. On a functional currency at constant rate basis, net operating loss increased by $6.7 million, mainly due to the increase in cost of sales and SG&A expenses as well as a $0.3 million adverse currency movement, offset by higher revenues attributable to the Acquired Businesses. The net impact of the Triennial Implementation in the UK for the period (included in the above) was $1.8 million.

Interest expense

During the period on a reported basis, net operating loss increased by $6.4 million from a loss of $0.7 million to a loss of $7.2 million. On a functional currency at constant rate basis, net operating loss increased by $6.7 million, mainly due to the increase in cost of sales and SG&A expenses as well as a $0.3 million adverse currency movement, offset by higher revenues attributable to the Acquired Businesses. The net impact of the Triennial Implementation in the UK for the period (included in the above) was $1.8 million.

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 three months ended March 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. There were no such liabilities in the three months ended March 31, 2020.

Change in fair value of derivative liability

Following the termination of the cross-currency swaps on October 1, 2019, there was no change in the fair values of derivative liabilities in the three months ended March 31, 2020. For the three months ended March 31, 2019, the change in fair value of derivative liability was a $1.2 million credit.

Other finance income

Other finance income for the three months ended March 31, 2020 was a charge of $3.7 million compared to a $1.1 million credit in the three months ended March 31, 2019. This was primarily due to an adverse foreign exchange impact of $6.8 million in retranslating the debt balance which was partly offset by a $1.9 million loss in the three months ended March 31, 2019 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 March 31, 2020 was 1.3% and our effective tax rate for the period ended March 31, 2019 was (1.8)%.

Net loss

On a reported basis, net loss increased by $12.4 million, from a loss of $5.0 million to a loss of $17.4 million in the three months ended March 31, 2020. On a functional currency at constant rate basis, net loss increased by $12.9 million, mainly due to the impact of the Triennial Implementation and the shutdowns associated with COVID-19, as well as increases in operating expenses attributable to the Acquired Businesses, in addition to increases in interest expense and other finance costs, offset by a reduction in earnout liability.

Three Months ended March 31, 2020 compared to Three Months ended March 31, 2019 – Server Based Gaming Segment

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

SBG Segment, Key Performance Indicators

In the table above:

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

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

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

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

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

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

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

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

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

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

SBG Segment, key events that affected results for the Three Months ended March 31, 2020

During the period Customer Gross Win per unit per day in the total UK market (including non-LBO markets) decreased by 31.7%. This was due to the Triennial Implementation outcome in the UK as well as attributable to COVID-19 impact with retail venues closing from March 21, 2020 through the end of the period. The revenue impact of the triennial regulatory change was in line with our expectations.

During the period, an additional 94 self-service betting terminals were sold and deployed in the UK LBO market. These are part of a confirmed 170 unit order due to be completed when the UK retail market reopens. In addition to hardware sale margin, these terminals also generate a recurring service fee.

During the period, new market sales continued in North America, which we entered in December 2019. Hardware sales of a further 161 “Valor” terminal were sold to multiple customers in Illinois.

In Italy, Customer Net Win per unit per day decreased by 61.7%, due to an increase in the average revenue tax of 1.0% from 8.3% in 2019 to 9.3% in 2020, the impact of card reader implementation on January 1, 2020 and the closure of retail venues commencing March 9, 2020 as a result of COVID-19.

Greece Customer Gross Win per unit per day (in EUR) decreased by 18.5%, due solely to the closure of retail venues commencing March 14, 2020 due to COVID-19. Prior to the venue closures, Gross Win per unit per day was in line with first quarter 2019 despite the increase in average volume of over 1,300 VLTs.

Customer Gross Win per unit per day (in our functional currency, GBP) decreased by £40 or 37.9% across the entire estate, driven mainly by the reduction in maximum permitted bets on B2 gaming machines in the UK in accordance with the Triennial Implementation, and the impact of the COVID-19 shutdown in March 2020. These impacts along with reduced tax in the UK LBO market post triennial, partly offset by a 1.0% average increase in the Italy tax rate resulted in a Net Win per unit per day decrease on total SBG of £25 or 33.8%. Our blended participation rate reduced by 0.1% to 6.0%

SBG Segment, Three Months ended March 31, 2020 compared to Three Months ended March 31, 2019

Server Based Gaming

SBG Segment Revenue

In the period revenue decreased by $7.0 million, to $16.7 million, on a reported basis. A small part of this decrease was due to adverse currency movements of $0.2 million. On a functional currency at constant rate basis, SBG revenue decreased by $6.7 million, or 28.5%.

Service revenue decreased by $7.5 million on a reported basis, and adverse currency movements accounted for $0.2 million of the decrease. On a functional currency at constant rate basis, SBG service revenue decreased by $7.3 million, or 35.0%, to $13.4 million. This was primarily due to a decrease in revenue in the UK LBO market of $4.4 million as a result of the Triennial Implementation, increased Italy taxes of $0.4 million, the adverse impact of the introduction in Italy of player cards of $0.5 million, and the impact of retail venue closures as a result of COVID-19 of $2.1 million. The impact of the decrease related to COVID-19 by market is $1.1 million in the UK, $0.6 million in Greece and $0.3 million in Italy. These negative impacts were partly offset by growth in Greek market of $0.8 million as a result of the continued rollout of contracted VLTs.

UK LBO Customer Gross Win per unit per day decreased by approximately 32.3%, in which this reduction was divided into the impact of Triennial Implementation of approximately 23.0% and the COVID-19 shutdown commencing March 21, 2020 driving the remaining 9.3% adverse impact. The revenue impact of the Triennial Implementation was in line with our expectations.

Hardware revenue increased by $0.5 million to $3.3 million on a reported basis. On a functional currency at constant rate basis, the revenue increase was $0.6 million with adverse currency movements accounting for decreased revenue of $0.1 million. The increase in hardware revenue was driven by continued “Valor cabinet” new market sales in North America of $2.3 million following our breakthrough in the fourth quarter of 2019 and $0.4 million of “Flex cabinet” sales to a major UK Bingo market customer.

SBG Segment Operating Income

Cost of sales (excluding depreciation and amortization) decreased by $0.7 million to $5.4 million, on a reported basis. This variance was impacted by minimal favorable currency movements of $0.1 million. On a functional currency at constant rate basis, cost of sales decreased by $0.6 million.

Service cost of sales decreased by $0.8 million, on a reported basis. On a functional currency basis, service cost of sales decreased by $0.8 million as a result of lower consumables spend in the UK LBO market of $0.4 million.

Hardware cost of sales increased by $0.1 million to $1.8 million on a reported basis.

SBG SG&A expense declined by $1.5 million, reflecting ongoing restructuring, as well as synergies associated with the acquisition of the Acquired Businesses. Of this reduction, $1.0 million is attributable to reduced staff costs.

Depreciation declined by $1.5 million on a reported basis, or 19.1%. On a functional currency basis, depreciation declined by $1.3 million, reflecting $0.1 million in favorable currency impact. The decrease in depreciation expense was due to the machines in the UK estate becoming fully depreciated, offset by additional depreciation from new machines in the Greek estate.

Operating income declined by $3.1 million, declining from a $3.0 million reported operating profit to a $0.1 million operating loss year over year, as the decline in revenue was only partially offset by the declines in cost of sales, SG&A, and depreciation.

SBG Segment, Recurring Revenue

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

In the table above:

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

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

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

SBG Segment, Service Revenue by Region