Inspired Entertainment Inc

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

Company Description and Nature of Operations

We are a global gaming technology company, supplying content, platform, gaming terminals and other products and services to online and land-based regulated lottery, betting and gaming operators worldwide through a broad range of distribution channels, predominantly on a business-to-business basis. We provide end-to-end digital gaming solutions (i) on our own proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices and online computer applications and (ii) through third party networks. Our content and other products can be found through the consumer-facing portals of our interactive customers and, through our land-based customers, in licensed betting offices, adult gaming centers, pubs, bingo halls, airports, motorway service areas and leisure parks.

Management Liquidity Plans

As of June 30, 2024, the Company’s cash on hand was $23.5 million, and the Company had working capital in addition to cash of $24.3 million. The Company recorded a net loss of $3.7 million and net income of $4.2 million for the six months ended June 30, 2024 and 2023, respectively. Net income/losses included non-cash stock-based compensation of $3.9 million and $6.0 million for the six months ended June 30, 2024 and 2023, respectively. Historically, the Company has generally had positive cash flows from operating activities and has relied on a combination of cash flows provided by operations and the incurrence of debt and/or the refinancing of existing debt to fund its obligations. Cash flows used in operations amounted to $2.1 million and cash flows provided by operations amounted to $32.5 million for the six months ended June 30, 2024 and 2023, respectively.

Management currently believes that 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 August 2025.

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, 2023 and 2022. The financial information as of December 31, 2023 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 15, 2024. The financial information for the three and six months ended June 30, 2023 is derived from the unaudited consolidated financial statements presented in the Company’s Quarterly Report on Form 10-Q/A for the three and six months ended June 30, 2023 filed with the SEC on February 27, 2024. The interim results for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for any future interim periods.

2. Allowance for Credit Losses

Changes in the allowance for credit losses are as follows:

3. Inventory

Inventory consists of the following:

Component parts include parts for gaming terminals. Our finished goods inventory primarily consists of gaming terminals which are ready for sale.

4. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

5. Contract Related Disclosures

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 $1.2 million and $2.4 million for the six months ended June 30, 2024 and 2023, respectively.

For the periods ended June 30, 2024 and 2023 respectively, there were no significant amounts of revenue recognized as a result of changes in contract transaction price related to performance obligations that were satisfied in the respective prior periods.

Transaction Price Allocated to Remaining Performance Obligations

At June 30, 2024, the transaction price allocated to unsatisfied performance obligations for contracts expected to be greater than one year, or performance obligations for which we do not have a right to consideration from the customer in the amount that corresponds to the value to the customer for our performance completed to date, variable consideration which is not accounted for in accordance with the sales-based or usage-based royalties guidance, or contracts which are not wholly unperformed, was approximately $95.2 million. Of this amount, we expect to recognize as revenue approximately 23% through December 31, 2024, approximately 55% through December 31, 2026, and the remaining 22% through December 31, 2029.

6. Long Term and Other Debt

Under our debt facilities in place as of June 30, 2024, we were not subject to covenant testing on our senior secured notes (the “Senior Secured Notes”). We are, however, subject to covenant testing at the level of Inspired Entertainment Inc., the ultimate holding company, on our Revolving Credit Facility Agreement (the “RCF Agreement”) which required the Company to maintain a maximum consolidated senior secured net leverage ratio of 6.0x on March 31, 2022, stepping down to 5.75x on March 31, 2023 and 5.50x from March 31, 2024 and thereafter (the “RCF Financial Covenant”). The RCF Financial Covenant is calculated as the ratio of consolidated senior secured net debt to consolidated pro forma EBITDA (defined as net loss excluding depreciation and amortization, interest expense, interest income and income tax expense) for the 12-month period preceding the relevant quarterly testing date and is tested quarterly on a rolling basis, subject to the Initial Facility (as defined in the RCF Agreement) being drawn on the relevant test date. The RCF Financial Covenant does not include a minimum interest coverage ratio or other financial covenants. Covenant testing at June 30, 2024 showed covenant compliance with a net leverage of 3.1x.

The Indenture governing the Senior Secured Notes contains covenants and certain reporting requirements including the requirement to provide the lender, within 60 days after the close of the quarter, unaudited quarterly financial statements with footnote disclosures.

There were no covenant violations in the periods ended June 30, 2024 or June 30, 2023.

7. Stock-Based Compensation

A summary of the Company’s Restricted Stock Unit (“RSU”) activity during the six months ended June 30, 2024 is as follows:

The Company issued a total of 352,287 shares during the six months ended June 30, 2024, in connection with the Company’s equity-based plans, which included an aggregate of 333,161 shares issued in connection with the net settlement of RSUs that vested during the prior year (primarily on December 29, 2023).

8. Accumulated Other Comprehensive Loss (Income)

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

In connection with the issuance of the Senior Secured Notes, and the entry into the “RCF Agreement on May 19, 2021, the Company terminated all of its interest rate swaps. Accordingly, hedge accounting is no longer applicable. The amounts previously recorded in Accumulated Other Comprehensive Income were amortized into Interest expense over the terms of the hedged forecasted interest payments. Losses reclassified from Accumulated Other Comprehensive Income into Interest expense in the Consolidated Statements of Operations and Income for the six months ended June 30, 2024 and June 30, 2023 amounted to $0.0 million and $0.3 million, respectively.

9. Net Income (Loss) per Share

Basic income/loss per share (“EPS”) is computed by dividing net income/loss attributable 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 and RSUs, unless the inclusion would be anti-dilutive.

The computation of diluted EPS excludes the common stock equivalents of the following potentially dilutive securities because they were either contingently issuable shares or because their inclusion would be anti-dilutive:

The following tables reconcile the numerators and denominators of the basic and diluted EPS computations. There were no reconciling items for the six months ended June 30, 2024:

The calculation of Basic EPS includes the effects of 1,915,323 and 1,932,560 shares for the three and six months ended June 30, 2024 and 2023, respectively, with respect to RSU awards that have vested but have not yet been issued.

**10. Other Finance Income **

Other finance income consisted of the following:

11. Income Taxes

The effective income tax rate for the three months ended June 30, 2024 and 2023 was 26.8% and 15.7%, respectively, resulting in a $0.8 million and $1.0 million income tax expense, respectively. The effective income tax rate for the six months ended June 30, 2024 and 2023 was 27.7% and 16.6%, respectively, resulting in a $1.4 million income tax benefit and a $0.8 million income tax expense, respectively.

The effective tax rate reported in any given year will continue to be influenced by a variety of factors including the level of pre-tax income or loss, the income mix between jurisdictions, and any discrete items that may occur.

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 twelve 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.

12. Related Parties

Macquarie Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK”), (an arranger and lending party under our RCF Agreement) is an affiliate of MIHI LLC, which beneficially owned approximately 11.4% of our common stock as of June 30, 2024. Macquarie UK held $2.1 million of the total $19.0 million of RCF drawn at June 30, 2024, and $2.1 million of the total $19.1 million of RCF drawn at December 31, 2023, respectively. Interest expense payable to Macquarie UK for the RCF for the three months ended June 30, 2024 and 2023 amounted to $0.0 million and $0.0 million, respectively, and for the six months ended June 30, 2024 and 2023 (including non-utilization fees) amounted to $0.1 million and $0.0 million, respectively. Macquarie UK did not hold any of the Company’s senior notes at June 30, 2024 or December 31, 2023. MIHI LLC is also a party to a stockholders agreement with the Company and other stockholders, dated December 23, 2016, pursuant to which, subject to certain conditions, MIHI LLC, jointly with Hydra Industries Sponsor LLC, are permitted to designate two directors to be nominated for election as directors of the Company at any annual or special meeting of stockholders at which directors are to be elected, until such time as MIHI LLC and Hydra Industries Sponsor LLC in the aggregate hold less than 5% of the outstanding shares of the Company.

Richard Weil, the brother of A. Lorne Weil, our Executive Chairman, provides consulting services to the Company relating to our lottery operations in the Dominican Republic under a consultancy agreement dated December 31, 2021, as amended. The aggregate amount incurred by the Company in consulting fees was $37,500 and $30,000 for the three months ended June 30, 2024 and 2023, respectively, and $75,000 and $60,000 for the six months ended June 30, 2024 and 2023, respectively

13. Leases

Certain of our arrangements include leases for equipment installed at customer locations. As the lessor, we combine lease and non-lease components for all classes of underlying assets in arrangements that involve operating leases. The single combined component is accounted for under ASC 606,Revenue from Contracts with Customers based on the consideration that the non-lease components are the predominant items in the arrangements. If a component cannot be combined, the consideration is allocated between the lease component and the non-lease component based on relative standalone selling price. The lease component is accounted for under ASC 842,Leasesand the non-lease component is accounted for under ASC 606.

Lease income from operating leases is not material for any of the periods presented. Lease income from sales type leases is as follows:

14. Commitments and Contingencies

Employment Agreements

We are party to employment agreements with our executive officers and other employees of the Company and our subsidiaries which contain, among other terms, provisions relating to severance and notice requirements.

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.

15. Pension Plan

We operate a defined contribution plan in the US, and both defined benefit and defined contribution pension schemes in the UK. The defined contribution scheme assets are held separately from those of the Company in independently administered funds.

Defined Benefit Pension Scheme

The defined benefit scheme 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. The latest actuarial valuation of the scheme (as at March 31, 2021), which was finalized in June 2022, determined that the statutory funding objective was not met, i.e., there were insufficient assets to cover the scheme’s technical provisions and there was a funding shortfall.

In June 2022, a recovery plan was put in place to eliminate the funding shortfall. The plan expects the shortfall to be eliminated by October 31, 2026.

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

16. Segment Reporting and Geographic Information

The Company operates its business along four operating segments, which are segregated on the basis of revenue stream: Gaming, Virtual Sports, Interactive and Leisure. 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, stock-based compensation expense and depreciation and amortization, operating income (loss) and total capital expenditures for the periods ended June 30, 2024 and June 30, 2023, 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 and capital expenditures relating to corporate/shared functions.

Segment Information

Three Months Ended June 30, 2024

Three Months Ended June 30, 2023

Six Months Ended June 30, 2024

Six Months Ended June 30, 2023

Geographic Information

Geographic information for revenue is set forth below:

UK revenue includes revenue from customers headquartered in the UK, but whose revenue is generated globally.

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.

17. Customer Concentration

During the three months ended June 30, 2024, no customers represented at least 10% of the Company’s revenue. During the three months ended June 30, 2023, one customer represented at least 10% of the Company’s revenue, accounting for 13% of the Company’s revenue. This customer was served by the Virtual Sports and Interactive segments.

During the six months ended June 30, 2024, one customer represented at least 10% of the Company’s revenue, accounting for 10% of the Company’s revenue. This customer was served by the Virtual Sports and Interactive segments. During the six months ended June 30, 2023, one customer represented at least 10% of the Company’s revenue, accounting for 14% of the Company’s revenue. This customer was served by the Virtual Sports and Interactive segments.

At June 30, 2024, no customers represented at least 10% of the Company’s accounts receivable. At December 31, 2023, one customer represented at least 10% of the Company’s accounts receivable, accounting for approximately 24% of the Company’s accounts receivable.

18. Subsequent Events

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued. Based upon this review, the Company did not identify subsequent events that would have required adjustment or disclosure in the consolidated financial statements.