Inspired Entertainment Inc

Previous wording

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 referenced in the section titled “Risk Factors” included elsewhere in this report.

Current wording

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 referenced in the section titled “Risk Factors” included in our annual report on Form 10-K for our fiscal year ended December 31, 2023, filed with the SEC on April 15, 2024.

Previous wording

We generate revenue in four principal ways: (i) on a participation basis, (ii) on a fixed rental fee basis, (iii) through product sales, (iv) by services provided and (v) through software license fees. Participation revenue generally includes a right to receive a share of our customers’ gaming revenue, typically as a share of net win but sometimes as a share of the handle or “coin in” which represents the total amount wagered.

Current wording

We generate revenue in four principal ways: i) on a participation basis, ii) on a fixed rental fee basis, iii) through product sales and iv) through software license fees. Participation revenue generally includes a right to receive a share of our customers’ gaming revenue, typically as a share of net win but sometimes as a share of the handle or “coin in” which represents the total amount wagered.

Previous wording

For the three months ended March 31, 2024 we derived approximately 75% of our revenue from the UK (including customers headquartered in the UK but whose revenue is generated globally), 10% from Greece, and the remaining 15% across the rest of the world. In the three-months ended March 31, 2023 we derived approximately 76% of our revenue from the UK (including customers headquartered in the UK but whose revenue is generated globally), 9% from Greece, and the remaining 15% across the rest of the world.

Current wording

For the three and six months ended June 30, 2024, we derived approximately 75% (in both periods) of our revenue from the UK (including customers headquartered in the UK but whose revenue is generated globally), respectively, 6% and 8% from Greece, respectively, and the remaining 19% and 17% across the rest of the world. During the three and six months ended June 30, 2023, we derived approximately 78% and 77% from the UK, 7% and 8% from Greece and 15% (in both periods) for the rest of world.

Previous wording

As of March 31, 2024, our non-current assets (excluding goodwill) were attributable as follows: 70% to the UK, 12% to Greece and 18% across the rest of the world. As of March 31, 2023 our non-current assets (excluding goodwill) were attributable as follows: 80% to the UK, 5% to Greece and 15% across the rest of the world.

Current wording

As of June 30, 2024, our non-current assets (excluding goodwill) were attributable as follows: 70% to the UK, 10% to Greece and 20% across the rest of the world. As of June 30, 2023, our non-current assets (excluding goodwill) were attributable as follows: 77% to the UK, 4% to Greece and 19% across the rest of the world.

Previous wording

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 geographic region in which the largest portion of our business is operated is the UK and the British pound sterling (“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.

Current wording

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 geographic region in which the largest portion of our business is operated 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.

Previous wording

During the three months ended March 31, 2024 we derived approximately 25% of our revenue from sales to customers outside the UK. In the thee months ended March 31, 2023 we derived approximately 24% of our revenue from sales to customers outside the UK.

Current wording

During the three and six months ended June 30, 2024, we derived approximately 25% (in both periods) of our revenue from sales to customers outside the UK (see caveat above), compared to 22% and 23% during the three and six months ended June 30, 2023, respectively.

Previous wording

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.

Current wording

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 year 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.

Previous wording

Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). During the three months ended March 31, 2024 and March 31, 2023, the average GBP:USD rates for the periods 1.27 and 1.21, respectively.

Current wording

Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). During the three month periods ended June 30, 2024 and June 30, 2023, the average GBP:USD rates were 1.26 and 1.25, respectively, and for the six-month period were 1.27 and 1.24, respectively.

Previous wording

For the three months ended March 31, 2024, revenue on a functional currency (at constant rate) basis decreased by $4.4 million, or 7%.

Current wording

For the three and six months ended June 30, 2024, revenue on a functional currency (at constant rate) basis decreased by $4.6 million and $9.0 million, respectively, or 6% (in both periods)

Previous wording

For the three-month period, Gaming revenue declined by $4.1 million and Gaming service revenue declined by $2.4 million predominantly due to a decrease in the UK and Greek markets. Gaming Product revenue decreased by $1.7 million predominately due to UK and mainland Europe product sales. Virtual Sports declined by $3.0 million predominately due to reduced Online revenues. Interactive grew by $1.8 million, driven primarily by revenue growth in the UK, mainland Europe and Latin America. Leisure grew by $0.8 million, driven primarily by the increase in the revenue generated per machine in the Pubsand increased revenues in Holiday Parks.

Current wording

For the three-month period ended June 30, 2024, Gaming revenue declined by $4.3 million. Gaming product sales declined $2.1 million due to a decrease in the UK market, partially offset by growth in North America, Gaming service revenue declined $2.2 million, due to a decrease in the UK and mainland European markets. Virtual Sports declined by $3.5 million due to reduced Online revenue. Interactive grew by $2.7 million, driven by revenue growth in the UK, North America and mainland Europe: and Leisure grew by $0.7 million predominately driven by the increased revenues in Holiday Parks due to the addition of a new site as well as growth in existing sites.

Previous wording

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2024 increased by $4.1 million, or 16% compared to the three-month period March 31,2024.

Current wording

Selling, general and administrative (“SG&A”) expenses for the three and six months ended June 30, 2024 increased by $5.4 million and $9.6 million, or 23% and 19%, respectively.

Previous wording

The increase was driven primarily by the cost of restatement work of $5.0 million (excluded from Adjusted EBITDA) as well as an increase in non-staff costs of $2.1 million, of which the largest proportion was driven by audit and accountancy costs of $0.7 million that were not incurred in the prior period. This was partially offset by $3.0 million for restructuring costs incurred in the prior year period that were not repeated in this period (removed from Adjusted EBITDA).

Current wording

The increase in the six-month period ended June 30, 2024, was driven primarily by the $7.8 million costs of the restatement of our prior financial statements (removed from Adjusted EBITDA), an increase in non-staff costs of $2.9 million, of which the largest proportion was driven by increased facility, travel, external labor, IT, storage and distribution costs as well as an increase in staff cost of $0.5 million driven by support staff costs and an increase in national living wage and salary increases. This was partially offset by a reduction in the cost of group restructure of $2.1 million (removed from Adjusted EBITDA).

Previous wording

During the three months ended March 31, 2024, the Company recorded expenses of $2.3 million compared to expenses of $2.9 million for the three months ended March 31, 2023. All expenses were related to outstanding awards. The three months ended March 31, 2023 included an expense of $0.7 million relating to the group restructure.

Current wording

During the three and six-month periods ended June 30, 2024, the Company recorded stock based compensation expenses of $1.6 million and $3.9 million, respectively, compared to stock based compensation expenses of $3.1 million and $6.0 million for the three and six months ended June 30, 2023. All expenses related to outstanding awards but the three and six months ended June 30, 2023, included $0.4 million related to award units that were fully vested on the date of grant and therefore were expensed immediately. The six months ended June 30, 2023 also included $0.7 million related to the group restructure.

Previous wording

Depreciation and amortization decreased for the three-month period by $0.1 million. This was driven by Gaming reduction of $0.4 million and Leisure reduction of $0.3 million due to assets being fully written down, partly offset by an increase of $0.6 million in Interactives.

Current wording

Depreciation and amortization for the six-month period ended June 30, 2024, increased by $0.5 million. This increase was driven by increases in Virtual Sports of $1.7 million and Interactive of $0.7 million, partially offset by a reduction in Gaming of $1.6 million and Leisure of $0.3 million due to assets being fully depreciated.

Previous wording

For the three-months ended March 31, 2024 net loss was $5.7 million, compared to a net loss of $1.4 million in the prior year period. The $3.8 million decline year-over-year was primarily due to the decline in net operating income of $5.7 million, partially offset by an increase in income tax benefit of $1.9 million.

Current wording

For the three-month period ended June 30, 2024 the $3.8 million decline compared to the prior year period, was primarily due to the increase in SG&A expenses of $5.4 million. This was partially offset by a reduction in stock-based compensation of $1.3 million.

Previous wording

The Company recorded a valuation allowance against all of our deferred tax assets as of both March 31, 2024 and 2023. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.

Current wording

The Company recorded a valuation allowance against all of our deferred tax assets as of both June 30, 2024 and 2023. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next six months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.

Previous wording

Segment Results (for the three months ended March 31, 2024, compared to the three months ended March 31, 2023)

Current wording

Segment Results (for the three and six months ended June 30, 2024, compared to the three and six months ended June 30, 2023)

Previous wording

We generate revenue from our Gaming segment through the delivery of our gaming terminals preloaded with proprietary gaming software, server-based content, as well as services such as terminal repairs, maintenance, software upgrades and upgrades on a when and if available basis and content development. We receive rental fees for machines, typically in conjunction with long-term contracts, 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.

Current wording

We generate revenue from our Gaming segment through delivery of our gaming terminals preloaded with proprietary gaming software, server-based content, as well as services such as terminal repairs, maintenance, software upgrades and upgrades on a when and if available basis and content development. We receive rental fees for machines, typically in conjunction with long-term contracts, 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.

Previous wording

“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.

Current wording

“Total Gaming - Average Installed Base” is the average number of deployed Gaming terminals during the period consisting of both 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.

Previous wording

Set forth below is a breakdown of our Gaming recurring revenue. Gaming recurring revenue principally consists of Gaming participation revenue and fixed rental revenue.

Current wording

Set forth below is a breakdown of our Gaming recurring revenue. Gaming recurring revenue principally consist of Gaming participation revenue and fixed rental revenue.

Previous wording

“Gaming Project Recurring Revenue” relates specifically to a single customer for machine estate upgrades and distribution.

Current wording

“Gaming Project Recurring Revenue” relates specifically to a single customer for machine upgrades and distribution.

Previous wording

“Gaming Long term license amortization” – see the definition provided above.

Current wording

“Gaming Long term license amortization” – see the set forth provided above.

Previous wording

The decrease in Gaming Service revenue was mainly driven by the UK market, inclusive of shop closures in UK LBO and the expiry of historical amortized license revenues in Greece.

Current wording

For the three-month period ended June 30, 2024, the decrease in Gaming Service revenue was driven by decreases of $1.0 million in the UK market inclusive of shop closures in UK LBO and $0.4 million in the Greek market primarily due to the reduction in Gross Win per day and expiry of historical amortized license revenues.

Previous wording

During the three-month period, revenue decreased by $2.9 million, or 20%. This was driven by $2.6 million in Online Virtuals, primarily driven by a major customer optimizing their customer base, as well as decreases in Retail Virtuals of $0.3 million.

Current wording

During the three and six-month periods ended June 30, 2024, revenue decreased by $3.5 million and $6.3 million, or 23% and 21%, respectively. These decreases were driven by $3.6 million and $6.4 million decreases in Online Virtuals, respectively, primarily driven by driven by a major customer optimizing their customer base.

Previous wording

We generate revenue from our Interactive segment through thevarious games content made available via third party aggregation platforms with Inspired’s remote gaming server or directly on the Company’s remote gaming server platform, and services such as customer support, platform maintenance, updates and upgrades. Typically, we receive fees on a participation basis. Our participation contracts are usually 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.

Current wording

We generate revenue from our Interactive segment through the various games and content made available via third party aggregation platforms with Inspired’s remote gaming server or directly on the Customers remote gaming server platform, and services such as customer support, platform maintenance, updates and upgrades. Typically, we receive fees on a participation basis. Our participation contracts are usually 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.

Previous wording

During the three-month period ended March 31, 2024, revenue increased by $1.8 million, or 31% as compared to the three-month period ended March 31, 2023, primarily driven by revenue growth in the UK, Europe and Latin America due to the consistent launch of new content across the estate and increased promotional activity.

Current wording

During three and six-month periods ended June 30, 2024, revenue increased by $2.7 million and $4.5 million, or 40% and 36%, respectively, primarily driven by revenue growth in the UK, North America and mainland Europe due to new customer launches, the consistent launch of new content across the estate and increased promotional activity through exclusive deals with tier-one customers.

Previous wording

Operating income for the three-month period ended March 31, 2024 increased by $0.4 million. This increase was driven by the increase in revenue, partially offset by a $0.6 million increase in SG&A expenses driven by increased staff and IT costs, and a $0.6 million increase in depreciation and amortization expenses.

Current wording

Operating income for the three and six-month periods ended June 30, 2024, increased by $2.5 million and $2.9 million, respectively. For the three-month period ended June 30, 2024, this increase was driven by the increase in gross margin, partially offset by increases in depreciation and amortization of $0.2 million and $0.7 million, respectively. For the six-month period, this increase was driven by the increase in gross margin, offset by a $0.5 million increase in SG&A driven by increased staff and IT costs and a $0.7 million increase in depreciation and amortization.

Previous wording

“End of period installed base Gaming” and “Average installed base Gaming” represent the number of gaming machines installed (excluding Holiday 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.

Current wording

“End of period installed base Gaming” and “Average installed base Gaming” represent the number of gaming machines installed (excluding Holiday Park machines) that are Category B and Category C only (UK Gambling Act 2005 places machines into categories dependent on maximum stake and prize available), from which there is participation or rental revenue at the end of the period or as an average over the period.

Previous wording

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 the timing of transactions.

Current wording

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.

Previous wording

Reconciliations from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Income (Loss), to Adjusted EBITDA are shown below.

Current wording

Reconciliations from net loss, as shown in our Consolidates Statements of Operations and Comprehensive Income (Loss), to Adjusted EBITDA are shown below:

Previous wording

Reconciliation to Adjusted EBITDA by segment for the Three Months ended March 31, 2024

Current wording

Reconciliation to Adjusted EBITDA by segment for the Three and Six Months ended June 30, 2024

Previous wording

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.

Current wording

Note: Certain corporate function costs have not been allocated to the Company’s reportable operating segments because to do so would not be practical; these are shown in the Corporate category.

Previous wording

Reconciliation to Adjusted EBITDA by segment for the Three Months ended March 31, 2023

Current wording

Reconciliation to Adjusted EBITDA by segment for the Three and Six Months ended June 30, 2023

Previous wording

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.

Current wording

Note: Certain corporate function costs have not been allocated to the Company’s reportable operating segments because to do so would not be practical; these are shown in the Corporate category.

Previous wording

For the three months ended March 31, 2024, net cash inflow provided by operating activities was $3.6 million, compared to an $11.6 million inflow for the three months ended March 31, 2023, representing a $8.0 million decrease in cash generation from operating activities. This decrease was driven primarily through a higher net loss in the three months ended March 31, 2024 and the three months ended March 31, 2023 benefitted from favorable receipts due to the timing of sales.

Current wording

For the six months ended June 30, 2024, net cash provided by operating activities was a $2.1 million outflow, compared to a $32.5 million inflow for the six months ended June 30, 2023, representing a $34.6 million decrease in cash generation from operating activities. This decrease was driven primarily through the previous year benefiting from favorable receipts due to the timing of invoicing for Vantage terminal rollout for several key customers.

Previous wording

Change in fair value of derivative liabilities and stock-based compensation expense decreased by $0.8 million to $2.3 million due to a $0.6 million reduction in the stock-based compensation expense and a $0.2 million reduction in the recycling of the terminated currency swaps which ended on September 30, 2023.

Current wording

Change in fair value of derivative liabilities and stock-based compensation expense decreased by $2.4 million to $3.9 million due to a $2.1 million reduction in the stock-based compensation expense and a $0.3 million reduction in the recycling of the terminated currency swaps which ended on September 30, 2023.

Previous wording

Depreciation and amortization increased by $0.8 million, to $11.0 million, with increases of $0.8 million and $0.3 million for amortization of intangible and of right of use assets offset by a $0.4 million decrease in machine depreciation.

Current wording

Depreciation and amortization increased by $1.1 million, to $22.5 million, with increases of $1.1 million for intangible assets and $0.9 million for contract costs partly offset by a $0.5 million reduction in machine depreciation and a $0.4 million reduction in software development amortization.

Previous wording

During the three months ended March 31, 2024, net cash utilized by financing activities was $0.2 million relating to finance lease spend compared to $0.5 million during the three months ended March 31, 2023.

Current wording

During the six months ended June 30, 2024, net cash used by financing activities was $0.5 million relating to finance lease spend. During the six months ended June 30, 2023, net cash utilized by financing activities was $0.8 million, with $0.7 million of finance lease spend and $0.1 million on share repurchases.

Previous wording

To fund our obligations, we have historically relied on a combination of cash flows provided by operations and the incurrence of additional debt or the refinancing of existing debt. As of March 31, 2024, we had liquidity consisting of $35.3 million in cash and a further $6.3 million of undrawn revolver facility. This compares to $27.8 million of cash as of March 31, 2023, with a further $24.7 million of revolver facilities undrawn. We had a working capital outflow of $1.8 million for the three months ended March 31, 2024, compared to a $2.0 million inflow for the three months ended March 31, 2023.

Current wording

To fund our obligations, we have historically relied on a combination of cash flows provided by operations and the incurrence of additional debt or the refinancing of existing debt. As of June 30, 2024, we had liquidity consisting of $23.5 million in cash and cash equivalents and a further $6.3 million of undrawn revolver facility. This compares to $42.1 million of cash and cash equivalents as of June 30, 2023, with a further $25.4 million of revolver facilities undrawn. We had a working capital outflow of $19.8 million for the six months ended June 30, 2024, compared to a $4.8 million inflow for the six months ended June 30, 2023.

Previous wording

Some of our business operations require cash to be held within the machines. As of March 31, 2024, $6.1 million of our $35.3 million of cash were held as operational floats within the machines. At March 31, 2023, $5.5 million of our $27.8 million of cash were held as operational floats within the machines.

Current wording

Some of our business operations require cash to be held within the machines. As of June 30, 2024, $6.4 million of our $23.5 million of cash and cash equivalents were held as operational floats within the machines. At June 30, 2023, $5.8 million of our $42.1 million of cash and cash equivalents were held as operational floats within the machines