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PART
I
ITEM
1. BUSINESS.
Overview
Inspired
Entertainment, Inc. (the “Company”, “Inspired”, “we” or “us”) is a global gaming technology
company, supplying content, platform and other products and services to online and land-based regulated lottery, betting and gaming operators
worldwide through a broad range of distribution channels, predominantly on a business-to-business basis. We provide end-to-end digital
gaming solutions (i) on our own proprietary and secure network, which accommodates a wide range of devices, including land-based gaming
machine terminals, mobile devices and online computer applications and (ii) through third party networks. Our content and other products
can be found through the consumer-facing portals of our interactive customers and, through our land-based customers, in licensed betting
offices, adult gaming centers, pubs, bingo halls, airports, motorway service areas and leisure parks.
Our customer base includes regulated operators of lotteries, licensed sports
bookmakers, gaming and bingo halls, casinos and regulated online operators, adult gaming centers, pubs, holiday parks, and motorway service
areas. Some of our key customers include William Hill, SNAI, Sisal, Lottomatica, Betfred, Paddy Power, Betfair, Genting, bet365, Sky Bet,
Fortuna, the Greek Organisation of Football Prognostics S.A. (OPAP.), Entain, the Pennsylvania Lottery, Bourne Leisure, Greentube, Stonegate,
Mitchells & Butler, Marstons, Greene King, JD Wetherspoon, Parkdean Resort, Centre Parcs Resorts and Novomatic. Geographically, 73%
of our revenues (excluding VAT-related revenue) for the year ended December 31, 2022 were generated from our UK operations, with the remainder
generated from Greece and the rest of the world. Our products are designed to operate within applicable gaming and lottery regulations
and our customers are regulated gaming or lottery operators or are otherwise licensed to operate our products.
We
conduct business across different jurisdictions of which Great Britain, Italy and Greece have historically contributed the most significant
recurring revenues. Recently we have begun to conduct a meaningful amount of business in North America as well. We are licensed or certified
(as applicable) by the Gambling Commission in the United Kingdom, and by the Hellenic Gaming Commission in Greece, and registered with
L’Agenzia delle dogane e dei Monopoli (“ADM”) in Italy. We are licensed by regulators in other jurisdictions such as
the Malta Gaming Authority, Licensing Authority of Gibraltar, the Alderney Gambling Control Commission, the Belgian Commission, Autorité
Des Marchés Financiers (Quebec), the Romanian National Gambling Office, Oficiul National pentru Jocuri de Noroc and we hold licenses
with the US States of Connecticut, Illinois, Michigan,, New Jersey, Oregon, Pennsylvania, West Virginia and the Canadian provinces of
Alberta, Nova Scotia, Ontario and Saskatchewan.
We
are headquartered in the United States, with principal operating facilities located in the United Kingdom, India and Italy. As of December
31, 2022, we had approximately 1,600 employees, approximately 1,500 of which were full-time. We generated total revenue of
$285.4 million and Adjusted EBITDA of $99.6 million for the year ended December 31, 2022.
The
Company is publicly listed on the NASDAQ and had an equity market capitalization of approximately $328.27 million as of December 31,
2022 (based upon a closing stock price of $12.67 on December 30, 2022).
Certain
product and company names referred to herein are trademarks™ or registered® trademarks of their respective holders.
Our
Products
We
operate in four business segments: Gaming, Virtual Sports, Interactive and Leisure, as further described below.
Gaming
Segment
Our
Gaming segment supplies gaming terminals as well as gaming software and games for the terminals provided to betting offices, casinos,
gaming halls and high street adult gaming centers. It utilizes our Server Based Gaming (“SBG”) technology to supply products
to our customers’ global land-based gaming venues. SBG products offer an extensive portfolio of games through digital terminals.
Our games are currently deployed through more than 35,000 digital terminals. Because our SBG products are fully digital, they interact
with a central server and are provided on a “distributed” basis, which allows us to access a wide geographic footprint through
internet and proprietary networks.
Our
SBG game portfolio includes a broad selection of popular omni-channel slots titles including the CenturionTM game family and
Super Hot Fruits® (featuring the Sizzling Hot SpinsTM game family). These games offer customers a wide range of
volatilities, return-to-player and other special features, which we collectively refer to as “game math.” We also offer a
range of more traditional casino games through our SBG network, such as roulette, blackjack and numbers games.
We
distribute games to devices through different game management systems (“GMS”), each tailored to a specific operator or sector.
Our CORETM GMS is designed for distributed street-gaming sectors and uses Inspired cabinets in combination with gaming content
from Inspired, as well as a wide portfolio of content from independent game developers. CORE-CONNECT is our American Gaming Association
G2S standard-based VLT GMS, currently deployed in the Greek VLT sector and North America. Our SBG products comply with all requirements
in the UK (B2/B3), Italy (6B), Greece (G2S) and Illinois (G2S).
Our
SBG terminals in the United Kingdom account for a material portion of all SBG terminal placements, and we offer over 100 games for play
across this portfolio. We are also a material supplier to customers in Greece and Italy. Over the past two years, we have grown our business
in North America where we have sold products in Illinois and to the Western Canada Lottery Corporation. We offer SBG terminals such as
the Flex4k curved screen, Vantage ®, EclipseTM, ValorTM, PrismaticTM and Sabre HydraTM,
each offering a different size terminal, graphics, technology and price proposition.
As
of December 31, 2022, we had a total installed base of 35,003 units, which were operated primarily under participation-based contracts.
We generate revenue by participating, typically as a function of gross revenue from each machine, in a percentage of volumes generated
by these machines. Because we participate in our customers’ revenues under such contracts, we are aligned with our customers in
benefitting from the introduction of our new content, which can drive growth of the win per unit per day of our installed base. Additionally,
we earn revenue through the sale of units, as well as receiving a fixed daily fee for some of our installed units. During 2022, we sold
2,927 units, 53% of these in the UK and 47% internationally. With our participation-driven business model, approximately 96% of service
revenue for our Gaming segment was recurring in nature in 2022 (excluding $2.0 million of performance bonus revenue and $1.0 million
of VAT-related revenue) and derived under long-term contracts. We have successfully renewed contracts with our three largest customers
in the UK LBO market.
For
the year ended December 31, 2022, our Gaming segment generated revenue and Adjusted EBITDA of $111.7 million and $41.6 million, respectively
(excluding VAT related income), as compared to the year ended December 31, 2021, during which we generated $81.4 million and $26.1 million
in revenue and Adjusted EBITDA, respectively (excluding VAT related income).
Virtual
Sports Segment
Our
Virtual Sports business designs, develops, markets and distributes ultra-high-definition games that create an always-on sports wagering
experience in betting shops, other locations and online. Our Virtual Sports product comprises a complex software and networking package
that provides fixed odds wagering on an ultra-high definition computer rendering of a simulated sporting event, such as soccer, football
or basketball. Players can bet on the simulated sporting event, overcoming the relative infrequency of live sporting events. We have
developed this product using an award-winning TV and film graphics team with advanced motion capture techniques.
We
believe we are one of the most innovative suppliers of Virtual Sports gaming products in the world. We offer a wide range of sports and
numbers games to approximately 32,000 retail venues as well as through various online websites. Our products are installed in over 20
gaming jurisdictions worldwide, including the UK, Italy, Greece, Turkey, Morocco, and the U.S.
Our
Virtual Sports game portfolio includes titles such as V-Play SoccerTM, V-Play Women’s SoccerTM, V-Play
Football TM, V-Play Basketball TM, V-Play Baseball TM, and V-Play NFLA TM, as well as
greyhounds, other horse racing products, tennis, motor racing, cycling, cricket, speedway, golf and darts. We have also licensed the
use of images of certain sports brands in our games, including with the NFL Alumni. In 2021, we entered into an exclusive licensing
agreement with the Major League Baseball Players Alumni Association to create and license a new V-Play Home Run Shoot-out Legends TM
virtual baseball product.
Our
customers are many of the largest operators in lottery, gaming and betting worldwide. We are contracted to supply Virtual Sports to mobile
and online operators in the United Kingdom; the U.S. states of Nevada, Pennsylvania, D.C. and New Jersey; Gibraltar and other regulated
EU sectors, including Italy, Greece and Poland; and other jurisdictions such as Ontario, Turkey and Morocco. Virtual Sports can be adapted
to function in sports betting, lottery, or gaming environments and is therefore available to a wide range of customers in both public
and private implementations.
The
Virtual Sports events are capable of being offered to millions of customers, through retail, online and mobile platforms, many of them
available 24 hours per day, 7 days per week, and often concurrently within the same location or interactive platform. We have multiple
hosting solutions capable of fulfilling the product delivery needs of our customers including our proprietary Virtual Plug and Play end
to end online and mobile turnkey solutions. In addition, a cloud-based solution is available to customers who require an XML sportsbook
integration that is fully hosted and operated by Inspired.
Our
Virtual Sports products are typically offered to operators on a participation basis, whereby we receive a portion of the gaming revenues
generated, plus an upfront software license fee. With our participation-driven business model, our Virtual Sports segment produces approximately
99% of total revenue on a recurring basis under long-term contracts for which our standard term is three years in duration.
For
the year ended December 31, 2022, our Virtual Sports segment generated revenue and Adjusted EBITDA of $55.1 million and $46.3 million,
respectively, as compared to the year ended December 31 2021, during which we generated $36.0 million and $28.4 million in revenue and
Adjusted EBITDA, respectively. Virtual Sports revenue generated through online and mobile channels has increased from $26.1 million in
2021 to $43.4 million in 2022.
Interactive
Segment
Our
Interactive business uses unique interactive-only content as well as offerings from our Gaming and Virtual Sports segments to create
games that are hosted on remote gaming servers to allow online gaming operators to use our games and content online and on mobile devices
worldwide. Our interactive content includes a wide range of premium random number generated casino content from feature-rich bonus games
to European-style casino free spins and table games incorporating well-known first and third-party brands including Space Invaders®,
20p RouletteTM, Jagr’s Super SlotTM, Super Hot Fruits® and Reel King MegawaysTM. Inspired
releases several new titles per month and new games can be seamlessly deployed to the full estate of operators and aggregators through
its proprietary Virgo RGS™. Games are available on over 300 websites across much of regulated Europe including the UK, Gibraltar,
Malta, Spain, Sweden, Italy, Germany, the Netherlands, Romania, Greece and Belgium as well as in New Jersey, Michigan, Pennsylvania,
Connecticut, Ontario and Quebec. We expect to next go live in West Virginia and Alberta during 2023.
Inspired’s
Virgo RGS™ is integrated with a number of best known casino brands, including William Hill, Entain, bet365, Flutter, 888, Kindred,
Gamesys, BetFred, Rank, Leo Vegas, OPAP and Stoiximan. We are also now live with thirteen North American operators: Bet MGM, Draft Kings,
Caesars, Resorts/Mohegan, Rush Street Interactive, Wynn, Unibet, Ballys, Tipico, Ocean, 888 and Golden Nugget and with Loto Quebec in
Canada.
Our
Interactive products are typically offered to operators on a participation basis, whereby we receive a percentage of total amount of
stakes wagered or a percentage of net gaming revenue. For the year ended December 31, 2022, our Interactive segment generated revenue
and Adjusted EBITDA of $23.1 million and $12.3 million, respectively. With our participation-driven business model, approximately 100%
of revenue for our Interactive segment is recurring in nature and derived under long-term contracts for which our standard term is three
years in duration. We have successfully renewed all of our key Interactive contracts expiring over the last three years. We believe the
COVID-19 global pandemic accelerated the market adoption of interactive gaming by end-users, and that our EBITDA margins in this segment
will expand as our revenue grows due to the low variable costs we expect to incur on incremental revenue, versus our existing base of
revenue.
Leisure
Segment
We
are a supplier of gaming terminals and amusement machines to the Leisure and Hospitality sectors and one of the largest operators of
“pay to play” gaming terminals and amusement machines in the UK. As of December 31, 2022, we supplied and operated over 11,000
gaming terminals and 4,500 pool tables, prize vending and jukeboxes located in pubs, bingo halls, and adult gaming centers. We also service
approximately 2,800 gaming terminals under maintenance only contracts. The increasing majority of gaming terminals we operate are server
based, allowing us to distribute content supplied by our “in house” design studios as well as some of the most popular content
titles from our strategic partners.
In
addition, we also supply and operate approximately 9,500 amusement machines and 2,200 gaming terminals in family entertainment centers
and adult gaming centers located in holiday parks, bowling centers and other entertainment venues. These include virtual reality simulators
and arcade games, redemption and skill with prize games, basketball, air hockey and cue sports. Commercial arrangements are typically
structured as either revenue participations or rental agreements.
Our
customers in this segment include the vast majority of recognizable brands that participate in the geographies and sectors in which we
operate. These customers include large pub operators JD Wetherspoons, Stonegate Pub Company, Greene King, Mitchells and Butler, Whitbread
Marstons and Admiral Taverns. In the Bingo sector, we supply gaming terminals and services to Buzz Bingo and Mecca. We supply gaming
terminals and services to transport hub operators, Moto and Welcome Break and major airports, including Heathrow. We also operate our
own adult gaming centers under the QuicksilverTM brand in Extra Motorway Services. We have joint venture agreements with holiday
park operators including Parkdean Resorts, Bourne Leisure and Butlins, where we supply machines and trained staff to manage and operate
family entertainment centers.
Overall,
our Leisure segment had, as of December 31, 2022, an installed base of over 16,000 gaming terminals, which were operated primarily
under participation-based contracts. We generate revenue by participating, typically as a function of gross revenue from each
machine, in a percentage of volumes generated by these machines. Because we participate in our customers’ revenues under such
contracts, we are aligned with our customers in benefitting from the introduction of our new content, which can drive growth in the
win per unit per day of our installed base. Additionally, we earn revenue through the sale of units, as well as a fixed daily fee
for certain of our installed units. With our participation-driven business model, approximately 96% of revenue for our Leisure
segment is recurring in nature and derived under long-term contracts. Notably, we have successfully renewed contracts with pub
operators Greene King, Marstons PLC, Mitchells & Butlers, Admiral Taverns, Stonegate and Whitbread. We have also secured new
contracts with Bourne Leisure and Butlins.
For
the year ended December 31, 2022, our Leisure segment generated revenue and Adjusted EBITDA of $95.5 million and $24.4 million, respectively.
Our
Strengths
We
believe key factors that give us an advantage in the gaming technology space include:
Established
presence across multiple Product Verticals
We
have a substantial installed base across each of our product verticals, including over 31,800 digital terminals in the Gaming segment
located across key jurisdictions in the United Kingdom, Greece, Italy and South America, with approximately 13,700 terminals installed
in UK Licensed Betting Offices and approximately 8,700 installed in Greek video lottery terminals (“VLTs”). In our Leisure
segment, we supply and operate an installed base of approximately 16,000 gaming terminals (including approximately 2,200 gaming terminals
under maintenance only contracts) and 7,000 pool tables, prize vending and jukeboxes to pubs, bingo halls and adult gaming centers. In
addition, we also supply and operate approximately 9,300 amusement machines and 2,200 gaming terminals in family entertainment centers
located in holiday parks, bowling centers and other entertainment venues. We have award winning content and products in our Virtual Sports
segment, which offers a wide range of sports and numbers games through approximately 32,000 retail venues as well as through various
online channels. Our Virtual Sports gaming products are installed in approximately 35 gaming jurisdictions worldwide, including the United
Kingdom, Italy, Greece, Morocco and the United States, our customers being many of the largest operators of lottery, gaming, and betting
operations worldwide. Additionally, our Interactive segment provides a wide range of premium iGaming content to large operators primarily
located in the United Kingdom, Italy, Greece and North America, as well as several other countries across Europe through over 170 websites.
Highly
Diversified Business Underpinned by Longstanding Customer Relationships
We
operate in several business segments and geographic locations that provide us a diversified revenue and cash flow stream that has proven
to be resilient under various economic environments. While our Gaming segment has represented the largest proportion of our revenue in
each of the last three years, our Virtual Sports and Interactive segments represent substantial growth opportunities as demonstrated
by recent trends, including during the COVID-19 global pandemic, which are expected to continue to diversify our business. Additionally,
we continue to expand in high growth markets, such as North America, which are expected to drive further geographic diversification across
business segments. We have over 600 customers, including major lottery, sports betting and gaming operators (both interactive and location-based)
within regulated sectors worldwide. Many of our customer relationships in the UK and European sectors are long-standing and in excess
of 10 years. We expect that our diverse customer base will afford us opportunities to sell incremental products to certain of these customers
in the future.
Substantial
Recurring Revenue Supported by Long-Term Participation-Based Contracts
We
believe our robust recurring revenue business model will drive our performance and free cash flow generation. For the year ended
December 31, 2022, our recurring revenue, which included revenue generated from participation-based contracts and licensing
arrangements, represented 86% of total revenue (87% excluding VAT-related revenue and $2.0 million of performance bonus), as compared to approximately 86% of total
revenue (87% excluding VAT-related revenue) for the year ended December 31, 2021. Our content and products, which are provided
primarily pursuant to long-term contracts, are essential to generating revenue for our customers and satisfying the demand of our
end users. Our long-term contracts typically have an initial duration of three to five years depending on the business segment and
the customer and, over the last three years, we have successfully renewed the significant majority of expiring contracts with key customers in our Gaming,
Virtual Sports and Interactive segments, and have successfully renewed all expiring contracts with key customers in our Leisure
segment since the Company’s acquisition of the Gaming Technology Group of Novomatic UK Ltd., a division of Novomatic Group, an
international supplier of gaming equipment and solutions in October 2019 (the “NTG Acquisition”).
Proprietary
Technology and Track-Record of Strong Content Development
We
are dedicated to being at the forefront of our industry in terms of technology and innovation. We combine complementary expertise in
technology and operations, positioning us as a provider of superior technical solutions. As of December 31, 2022, we held approximately
15 patents and approximately 200 trademarks worldwide. We focus our product development efforts on emerging technology trends, utilizing
a combination of customer research, design experience and engineering excellence. We are committed to developing innovative products
for our customers and are focused on improving player entertainment and customer profitability.
We
believe convergence trends in the gaming industry emphasize the importance of proprietary content, including licensed content. Such content
is needed to successfully promote a compelling game offering across multiple platforms and to develop distinctive products for operator-clients.
Our proprietary content drives engagement across gaming platforms. Our full suite of high-quality gaming products, services and multichannel
distribution capabilities, extensive traditional content library, sizeable installed gaming machine base and deep relationships with
operator-customers help make us an attractive partner for potential licensors of branded content.
Our
Interactive business has expanded rapidly, with revenue growing at an approximate compound annual growth rate of 103% on a functional
currency at constant rate basis between 2019 and 2022. We believe this growth has been driven, in part, by our content library of over
100 slot games . Many of our recent game launches, including Gold Cash Free SpinsTM, Big Fishing FortuneTM, and
the Reel King ® family of games, have been omni-channel, offering a premium player experience across multiple platforms – though,
unlike our older games, they originated online and, once proved successful, were migrated to retail platforms.
Inspired’s
award-winning Virtual Sports products offer a wide range of betting markets and what we consider to be superior graphics. Our Virtual
Sports revenue has been growing fast and has achieved high Adjusted EBITDA margins, while providing an attractive recurring-revenue base.
Positioned
To Benefit From Key Market Trends
With
our proprietary digital gaming platform and content comprising an end-to-end product offering and our multi-channel capabilities and
robust relationships across the client spectrum, we believe we are well-positioned to benefit from emerging gaming sector trends, including
growth stimulated by liberalization of government gaming regulations, the emergence of multi-channel offerings and the increasing importance
of proprietary content.
Our
multi-channel offerings are well-positioned to benefit from the increased prevalence of smart phones and tablets and the legalization
of online gaming in certain parts of the United States, Canada and other jurisdictions. Such jurisdictions have provided new growth opportunities
for gaming and lottery operators through the introduction of new channels and portals for delivering games to customers. This supplements
the existing broad-based online gambling market across Europe. Our multi-channel solutions and customer relationship management capabilities
position us to take advantage of new opportunities to extend our gaming solutions across different channels for our customers to reach
new players, expand the player demographic base and access players wherever they are whenever they want to play. Our technology extends
play for existing players and has the capability to reach new player segments. This and other technology help position us for future
online real-money gaming opportunities by offering play-for-fun online gaming options in jurisdictions where online real-money gaming
may be legalized in the future.
Government
initiatives, such as the legalization of casino operations in new jurisdictions, increases in the number of casinos allowed to operate
in a given jurisdiction and the legalization of new products, have helped stimulate growth in the gaming market. In the United States,
legislative change has led to an increase in the legalization of sports betting. As of December 31, 2022, 21 U.S. states and the District
of Columbia have legalized sports betting.
Experienced
Management Team
Our
seasoned management team is led by our Executive Chairman, Lorne Weil, who is known as a gaming industry innovator and whose past leadership
includes growing a diversified global gaming technology company both organically and through extensive acquisitions and joint ventures
further bolstering the business. Other members of the Company’s Office of the Executive Chairman (the “OEC”) are our
President and Chief Executive Officer, Brooks H. Pierce; our Executive Vice President and Chief Financial Officer, Stewart F.B. Baker;
and our Executive Vice President and General Counsel, Carys Damon. The OEC executes the day-to-day management of the Company. Our management
team has broad and deep experience in the gaming industry, working with lotteries, casino operators, betting platforms, and online operators.
The members of the OEC have, on average, decades of experience in the gaming industry, including relationships with customers around
the world, helping them build and sustain revenue growth. In addition, the members of the OEC have centered their careers on identifying,
acquiring and integrating, through the implementation of value creation initiatives, complementary businesses.
Our
Strategy
We
seek to deliver innovative and differentiated products that provide value to our customers and exciting experiences to their players
in multiple jurisdictions throughout the world while achieving long-term growth in revenues, profit and cash flow. We place great emphasis
on developing creative solutions, in terms of game content and play that deliver and sustain superior performance through operators across
interactive and location-based channels. Our technology often allows us to update our games and operating software remotely, keeping
pace with evolving requirements in game play, security, technology and regulations. We seek to achieve these goals as we:
Extend
our positions in each of the sectors in which we operate by developing new content and products which can often be utilized across multiple
distribution channels.
We
continually invest in new content and product development in each of the business segments in which we operate. We believe these investments
can benefit our existing and prospective customers by making new content and products available to them and bringing exciting entertainment
experiences to their players. Our approach, which seeks to distribute our content across a wide range of channels, protocols and regulatory
standards, allows us to distribute our content across multiple sectors in which we operate on a cost-efficient basis. We have continued
to focus on channels where we believe there is considerable growth available – especially in our digital businesses. We believe
our technological approach allows us to quickly adapt to changes in player preferences.
Continue
to invest in content and technology in order to grow our existing customers’ revenues and penetrate new customers in our existing
markets.
Over
the last three years, a substantial portion of our annual revenue has been recurring and based on long-term contracts with customers,
where our revenues typically grow in line with the growth of our customers’ gaming revenues from our content and products. We seek
to work closely with our customers to assist in the optimization of their operations so they can achieve growth in their revenues generated
by our content and products, which we believe is to our benefit. Accordingly, we continually invest in new content and technology offerings
that we believe will enable our customers to keep their offerings fresh and allow them to offer their players new forms of entertainment.
As our content demonstrates successful commercial results, we seek to place it with additional customers who recognize its performance.
We believe content development is a key aspect of our strategy and we intend to continue this strategic priority for each of the businesses
in which we operate.
Add
new customers by expanding into underpenetrated markets.
We
believe our historical growth has been driven by our entry into new geographies, and supplemented by increasing our share in existing
markets. We expect to continue to focus on North American markets in the Gaming, Virtual Sports and Interactive segments for such expansion.
We believe North America is a major gaming market in which we currently have limited participation, but where our products are well positioned,
or can be positioned, for future success. For example, in 2021 and 2022, we placed 399 and 1,006 VLT terminals, respectively, in North
America. We also believe there are likely to be growth opportunities in Latin America which will be available to us in the future.
Pursue
targeted mergers and acquisitions to expand our product portfolio and distribution footprint.
In
addition to growing our business organically, we have pursued, and continue to pursue, merger and acquisition opportunities that we believe
will help strengthen and scale our operations and take further advantage of our competitive position. Our management team shares a combination
of operating, investing, financial and transactional experience that we believe will serve the Company well as it seeks to identify opportunities
for value-adding acquisitions and negotiate and close on beneficial acquisition transactions. In December 2021, we completed the acquisition
of Sportech Lotteries, LLC (currently Inspired Entertainment Lotteries LLC), which is our first lottery-focused acquisition, further
diversifying our business model on a product, customer, and geographic level.
Industry
Overview
We
operate within the global gaming and lottery industry. Global gaming and lottery growth has been resilient in the face of economic cycles
over the last decade. According to the H2 Database, the global gaming and lottery industry has grown at a 2% compounded annual growth
rate from 2012 to 2022, which has been driven by increased consumer spend and the introduction of new regulated sectors but declined
dramatically in 2020 due to land-based venues being closed due to COVID-19 mandated shutdowns and restrictions.
During
this period, the digital online and mobile gaming and lottery sectors have grown at a faster pace than the industry as a whole. According
to the H2 Database, these industry sectors have grown at a 15% compounded annual growth rate from 2012 to 2022, driven by rapid growth
in the deployment of digital games and technologies, including many of our products, into land-based venues in the primary sectors in
which we operate, where regulators have supported the transition to digital, online and retail channels. According to the H2 Database,
the total global gaming and lottery industry is projected to grow an average of 6% per year from 2022 to 2027 driven by the projected
growth in mobile and online gaming.
We
believe the global gaming and lottery industry will return to a growth trajectory, with more robust growth in the digital gaming and
lottery sectors, as further described below. We believe the industry is content driven and, much like music, videogames and motion pictures,
will continue to be transformed by the propagation of digitally-networked technologies.
As
a gaming and lottery business-to-business supplier focused on digital products and technologies, we believe we are well-positioned to
benefit from these trends.
Influencers
of Digital Adoption
We
believe the digital segment of the global gaming and lottery industry will continue to grow, including as a result of the following factors:
Governments:
Opening of new gaming territories. Many national and state governments operating in developed economies in Europe and the United
States are suffering from structural funding deficits. The regulation and liberalization of gaming and lottery is frequently relied upon
to raise new sources of revenue for these governments. In most cases, we believe such liberalization does not favor buildouts of large
new destination resort casinos, but rather focuses on smaller distributed gaming (“EDGE”) venues with lottery, gaming and
sports betting, combined with online or mobile gaming.
Digital
Multi-Channel Offerings: Replacement of legacy analog machines with larger volume of smart digital devices, both interactive and location
based. In many established sectors, as existing gaming sectors mature, governments and regulatory authorities have implemented
regulations to upgrade the established terminal base to digital operation.
Smartphones
and Mobile Devices: Rapid adoption of gaming and lottery applications on growing volume. In certain sectors, mobile play on sports
betting and gaming now exceeds such play on personal computers. According to the H2 Database, mobile gaming revenues in such sectors
exhibited a 27.0% compound annual growth rate between 2010 and 2021. Mobile gaming and lottery is now expanding in other sectors, and
mobile play has recently been approved in other sectors for gaming or lottery.
In
addition to the foregoing, we believe there are significant benefits for our customers in adopting digitally networked gaming and lottery
technologies. We believe our digitally-enabled products allow operators to remotely manage their operations with minimal disruption to
their businesses. The system centralization enabled by digital operations offers flexibility to rotate or change games, tailor game availability
to time-of-day, target specific player demographics and take advantage of seasonal and themed marketing opportunities. New games often
can be phased in without the interim revenue declines often associated with replacing games on traditional slot machines. In addition,
digital operations permit more games per terminal, enabling operators to test new games and new suppliers, seek to appeal to a broader
base of players with minimal cost or risk, commission games from third-party suppliers on an open game interface and reduce procurement
risk. Moreover, digital operations can significantly reduce the need for on-site repairs, improve terminal up-time and should extend
terminal life cycles as well as the time period over which capital costs can be depreciated.
Regulatory
Framework
We
conduct business in a number of different jurisdictions, of which Great Britain, Italy and Greece have historically contributed the most
significant recurring revenues. The gaming regulator responsible for our activities in Great Britain is the Gambling Commission of Great
Britain (the “UK Gambling Commission” or the “Gambling Commission”). In Italy, the operation of gaming machines
and remote gaming is regulated by L’Agenzia delle dogane e dei Monopoli (“ADM”). In Greece, the operation of gaming
machines and remote gaming is regulated by the Hellenic Gaming Commission. In addition, we are licensed or certified (as applicable)
in a number of other jurisdictions by regulators such as the Malta Gaming Authority, Licensing Authority of Gibraltar, the Alderney Gambling
Control Commission, the Belgian Commission, Autorité Des Marchés Financiers (Quebec) and state regulators in various jurisdictions
in North America.
Great
Britain
In
the British sector, we supply and distribute Category B3 gaming machines (with maximum betting stakes for players of £2) and ETG
machines to third parties who are licensed to operate such machines in bricks-and-mortar premises. In addition, we operate a number of
Adult Entertainment Centers. We also supply virtual racing software to local retail venues and to online operators who are licensed to
target the British sector. We also supply our Interactive product to remote operators who are licensed to target the British sector.
The provision of our products and services in relation to the British sector is authorized by a series of licenses issued by the UK Gambling
Commission, namely remote and non-remote Gaming Machine Technical (Full) operating licenses, a remote casino operating license, a remote
and non-remote gambling software license and a remote general betting standard (virtual events) license gaming machine general adult
gaming center license and a gaming machine general family entertainment center license.
British
Betting and Gaming Laws and Regulations. The Gambling Act 2005 (the “GA05”) is the principal legislation in Great
Britain governing gambling (other than in relation to the National Lottery, which is governed by separate legislation). The GA05 applies
to both land-based gambling (referred to as “non-remote” gambling) and online and mobile gambling (referred to as “remote”
gambling).
The
GA05 provides that it is an offense to make a gaming machine available for use without an appropriate operating license. There are a
number of different categories of licensable gaming machines (the GA05 provides for category A to D machines, although no category A
machines are currently in operation); each category is subject to different levels of maximum stakes and prize limits. In addition, there
are limits on the numbers and types of gaming machines that can be operated from licensed premises: for example, a licensed betting office
is permitted to house up to four category B3 to D machines, while a large casino may house up to 150 category B to D machines (subject
to satisfying certain ratios of machines to gaming tables).
Gaming
machine suppliers are required to hold an operating license in order to manufacture, supply, install, adapt, maintain or repair a gaming
machine or part of a gaming machine. Gaming machine suppliers must also comply with the Gaming Machine Technical Standards published
by the Gambling Commission in relation to each category of machine, and such machines must meet the appropriate testing requirements.
In
relation to remote gambling, the GA05 (as amended by the Gambling (Licensing and Advertising) Act 2014 provides that it is an offense
to “provide facilities” for remote gambling either (a) using “remote gambling equipment” situated in Great Britain,
or (b) which are used by players situated in Great Britain, in each case without a remote gambling operating license. It is also an offense
to manufacture, supply, install or adapt gambling software in Great Britain without an appropriate gambling software license.
A
remote gambling operating license holder providing facilities for remote gambling to British players is required to use gambling software
manufactured and supplied by the holder of a gambling software license (and failure to do so is an offence). Where gambling software
is used or supplied for use in relation to the British sector, it must satisfy the Remote Gambling and Software Technical Standards published
by the Gambling Commission.
The
holder of a British gambling operating license is subject to a variety of ongoing regulatory requirements, including, but not limited
to, the following:
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Shareholder disclosure:
An entity holding a gambling license must notify the Gambling Commission of the identity of any shareholder holding 3% or more of
the equity or voting rights in the entity (whether held or controlled either directly or indirectly). |
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Change of corporate control:
Whenever a new person becomes a “controller” (as defined in section 422 of the Financial Services and Markets Act 2000)
of a company limited by shares that holds a gambling operating license, the licensed entity must apply to the Gambling Commission
for permission to continue to rely on its operating license in light of the new controller. A new controller includes any person
who holds or controls (directly or indirectly, including ultimate beneficial owners who hold their interest through a chain of ownership)
10% or more of the equity or voting rights in the licensed entity (or who is otherwise able to exercise “significant influence”
over it). The Gambling Commission must be supplied with specified information regarding the new controller (which, in the case of
an individual, includes detailed personal disclosure) and this information will be reviewed by the Gambling Commission to assess
the suitability of the new controller to be associated with a licensed entity. If the Gambling Commission concludes that it would
not have issued the operating license to the licensed entity had the new controller been a controller when the application for the
operating license was made, the Gambling Commission is required to revoke the operating license. It is possible to apply for approval
in advance from the Gambling Commission prior to becoming a new controller of a licensed entity. |
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Compliance with the License
Conditions and Codes of Practice (LCCP): The LCCP is a suite of license conditions and code provisions which attach to operating
licenses issued by the Gambling Commission. The provision of gambling facilities in breach of a license condition is an offense under
the GA05. Certain specified “Social Responsibility” code provisions are accorded the same weight as license conditions
in this regard (whereas breach of an “ordinary” code provision is not an offense in itself, but may be evidence of unsuitability
to continue to hold a gambling license). The LCCP imposes numerous operational requirements on licensees, including compliance with
the Gambling Commission’s Remote Gambling and Software Technical Standards, segregation of customer funds, the implementation
of a variety of social responsibility tools (such as self-exclusion), anti-money laundering measures, age verification of customers
and a host of consumer protection measures. The Gambling Commission regularly reviews and revises the LCCP. |
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Regulatory returns and
reporting of key events: The LCCP requires licensees to submit quarterly returns to the Gambling Commission detailing prescribed
operational data. Licensees are also required to notify the Gambling Commission as soon as practicable and in any event within 5
working days of becoming aware of the occurrence of certain specified “key events” which, in summary, are events which
could have a significant impact on the nature or structure of the licensee’s business. Licensees are also required to notify
suspicion of offenses and suspicious gambling activity. |
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Personal licenses: Key
management personnel are required to maintain personal licenses authorizing them to discharge certain responsibilities on behalf
of the operator. These personal licenses are subject to renewal every five years. Personal licenses are subject to compliance with
certain license conditions. |
Italy
We
operate two different gaming businesses in Italy. We provide platform and games for video lottery terminals (“VLTs”), we
also supply platforms for bets on Virtual Sports events to betting shops and online platforms. Our businesses are operated through the
Italian branches of certain of our UK subsidiaries. These branches hold police licenses and are enrolled in the ADM Register of Gestori,
as further described below. We supply our platform and games and Virtual Sports products only to operators licensed under Italian gaming
laws and regulations.
Our
VLT and Virtual Sports platforms must be connected over the internet to servers operated by the ADM. Information regarding gaming sessions
and the amounts wagered and won is provided in real time through the ADM servers, in order to enable the ADM to monitor the operation
of machines and games and to verify the amount of taxes due.
Italian
Betting and Gaming Laws and Regulations. Operators of betting premises offering VLTs (including the entities managing the networks
connecting such VLTs to ADM servers), and operators of betting premises or online platforms offering Virtual Sports products, must hold
an Italian gaming license. No gaming license is required in order to supply VLTs or Virtual Sports products to such operators. Such VLT
platforms, machines and games, and Virtual Sports platforms and games, must be certified and approved by either SOGEI, an entity controlled
by the Italian Ministry of Finance and authorized to conduct such certifications or testing labs accredited with ADM. Such certifications
and approvals must be obtained by such operators, rather than the suppliers of such VLT platforms, machines and games, and Virtual Sports
platforms and games.
Suppliers
of gaming machines, including VLTs, must hold a police license (as prescribed by article 86, paragraph 3, of the Italian United Text
of Public Security Law (TULPS) provided by the Royal Decree 18 June 1931, No. 773) and be enrolled in a registry prescribed by article
1, paragraph 82 of Law No. 220/2010 and managed by ADM (known as the “ADM Register of Gestori”). If a supplier of gaming
machines is not enrolled in the ADM Register of Gestori, any agreement it enters into regarding the supply of gaming machines is null
and void. In addition, if the enrollment is not renewed, existing agreements regarding the supply of gaming machines become null and
void. Enrollment in the ADM Register of Gestori is subject to, among other things, a review of the suitability of the applicant business
entity and its directors. In the event of a change of control of the entity enrolled in the ADM Register of Gestori (but not of such
entity’s direct or indirect parent entities), the details of such change must be notified to the ADM and suitability must be reconfirmed.
Suppliers
of Virtual Sports products are not required to hold a police license, be enrolled in the Register of Gestori or otherwise be licensed
or registered.
Greece
In
Greece, we supply VLTs, including the terminal machines themselves, the related online platforms and the games available on the machines,
to brick-and-mortar gaming locations operated by OPAP, the country’s sole licensed operator of gaming machines. We supply such
VLTs under a certification provided by the Hellenic Gaming Commission (the “HGC”). We also supply Virtual Sports products
within retail venues operated by OPAP and via self-service betting terminals within OPAP venues and supply interactive games and Virtual
Sports to online operators in Greece including Stoiximan, OPAP and Novibet.
Greek
Betting and Gaming Laws and Regulations: According to Article 44 par. 2 of Law 4002/2011, as well as according to HGC’s
Decision No 225/2/25.10.2016 as well as Ministerial Decision 79314/23.07.2020 (GG B’ 3263/5 August 2020) as amended with Decision
13530 /02.02.2022 (GG B’ 356 03.02.2022) and again with Decision 187634/27.12.2022 (GG B’ 6716/2712.2022) and 79305/05.08.2020
(GG B’ 3262/5 August 2020), all suppliers of gaming machines in Greece must be certified by the HGC in order to legally supply,
sell, lease, offer or distribute any VLT or virtual game or any other game of chance (i.e. games including wagers or bets and the result
of which games depends, even partly, on the influence of luck). Moreover, for Manufacturers which are defined under the aforesaid Decision
79305 as “the person or entity which manufactures (indicatively, studies, designs, assembles, produces, programs) and in any way makes
available to an Operator and/or Importer any Technical Means and Hardware, and has received a Suitability License by the HGC to this
end, as well as the person that holds a license for a Studio”, Decision 79305, provides in Article 9 for a Suitability License provided
a Manufacturers (type A.1 licence) and in Article 10 to Importers/Distributors (type E1 and E2)Accordingly, manufacturers need to obtain
a Suitability License Type A1, while importers/distributors need to obtain a Suitability License Type E1 or E2.
As regards online gaming, Articles 45 -52 of Law 4002/2011 (GG A’ 180/22.8.2011), which was recently amended by Law 4635/2019 (GG
A’ 167/30.10.2019), introduces several new provisions such as the two exclusive types of online licenses for online gaming operators:
a) Online Betting License; and b) a license for Other Online Games (it covers online casino games and online poker games and variants
thereof). Furthermore, Article 14 of the HGC’s Decision No 79835/05.08.2020 (GG B’ 3265/5.8.2020) states that all Manufacturers
have to submit an application to the HGC, accompanied by the required compliance certificates, for the following elements: i. the Gaming
Platform (Betting Platform); ii. the Random Number Generator (RNG) per type/group of Games that the Manufacturer offer to each License
Holder; and iii. each individual game or multigame. Lastly, Suitability Licenses for suppliers are also divided into two types: a) Manufacturers
Suitability License and b) Importers/Distributors Suitability License (according to articles 9 and 10 of Decision No 79305/05.08.2020).
Accordingly, manufacturers need to obtain a Suitability License Type A1 or A2 (depending on whether the manufacturer provides management
services to the operator or not), while importers/distributors need to obtain a Suitability License Type E1 or E2.
Gaming
Regulation and Changes in Ownership
In
all of the jurisdictions in which we are subject to gaming regulations, regulators require us to keep them informed as to our ownership
structure and composition and, to varying extents and in various circumstances, require us to disclose certain information regarding
the persons who directly or indirectly hold our shares. Depending on the regulator, we may need to provide such information not only
when we first seek licenses or certifications, but also when material changes (measured at different levels) occur in the ownership of
our shares. As a result, material changes in our shareholdings may be subject to special procedures in order to ensure the continuation
of our gaming licenses and certifications.
Content
Development
We
continually invest in new product development in each of our Gaming, Virtual Sports, Interactive and Leisure business
segments. Inspired has a full stack game development structure, combining its proprietary technology frameworks together with some
of the industry’s best math, art, creative and production personnel spread across 3 game studios (Inspired, Astra and Bell
Fruit). We release over 100 games each year onto our own priority gaming system, Interactive RGS and to our G2S clients around the
world in markets such as North America, UK, Greece, Spain, Belgium, Italy, Sweden and more. Whilst many of our game launches are
omni-channel, we have a focus on building the right game for the right market and take pride in tweaking and modifying the math and
themes for the target player. In Virtual Sports we combine graphical assets and software that controls those assets to schedule
events and generate results via a random number generator, as well as supplying on demand versions of our content. In 2020, we
launched the Virtual Plug and Play (VPP) product range. Using our award winning Virtuals assets, with our Interactive RGS and the
addition of a Virtuals Bet Management System, VPP gives our operators a Virtuals Sportsbook in a box, with ease of integrations and
operation. We account for our development costs as software development costs and these are typically amortized over a two-year
period.
Suppliers
Our
principal supply arrangements concern the supply of our terminal components, content provision and outsourced labor. We work closely
with our key suppliers to ensure a high level of quality of goods and services is obtained and have worked with many of these suppliers
for many years. We have achieved significant cost savings through centralization of purchases.
Customers
Our
customer base includes regulated operators of lotteries, licensed sports bookmakers, gaming and bingo halls, casinos, pubs, adult gaming
centers, holiday parks and regulated online operators. We typically implement design and content variations to customize their terminals
and player experiences. Our license agreements with customers for the provision of machines, content and Virtual Sports products include
provisions to protect our intellectual property rights in our games and other content.
Customer
Contracts – Gaming
Our
contracts in the Gaming segment involve supplying gaming terminals and licensing gaming software and games for the terminals. We supply
the terminals on an exclusive or non-exclusive basis for all terminals of a customer or for specific locations. Under these contracts,
we have general obligations to deliver, install, upgrade and service the terminals and software. The contracts may be terminated early
in various circumstances such as if we fail to meet performance targets in servicing the machines.
Under
some contracts, we receive an upfront fee for the provision of the terminals but more typically generate revenue as a percentage of income
generated on terminals. With our participation-driven business model, approximately 94% of service revenue (excluding VAT related income)
for our Gaming segment is recurring in nature and derived under long-term contracts that are typically between three and five years (although
may be shorter for contract extensions). Over the last three years, we have renewed a significant majority of contracts that were expiring.
Customer
Contracts – Virtual Sports
Our
contracts in the Virtual Sports segment typically involve the supply of licenses to operators to make available, either via online or
retail channels, virtual sporting events such as darts, cricket, or basketball, and to enable end-users to place bets on these events.
These are typically one-time non-exclusive licenses specific to the virtual sporting event. We may agree to customize and brand the virtual
sporting events for the operator or to provide language variations of the event. The contracts may be terminated early in various circumstances,
including, for example, if the operator fails to pay an invoice within 60 days of receipt.
Our
Virtual Sports products are typically offered to operators on a participation basis, whereby we receive a portion of the gaming revenues
generated, plus an upfront software license fee. With our participation-driven business model, our Virtual Sports segment produces approximately
99% of total revenue on a recurring basis under long-term contracts that average four years when entered into and we have historically
had a 100% renewal rate over the last three years for contracts that expired.
Customer
Contracts – Interactive
Our
contracts in the Interactive segment vary but generally involve the provision of a limited, non-exclusive, non-transferable, revocable
license to operators to display certain slot and casino content on which online bets are placed or to make our games available for play
by end-users of an operator’s online gaming business operations. The contracts may be terminated early in various circumstances,
including material breach or inability to operate due to a change in regulatory status.
Our
Interactive products are typically offered to operators on a participation basis, whereby we receive a percentage of total amount of
stakes wagered or a percentage of net gaming revenue. With our participation-driven business model, approximately 100% of revenue for
our Interactive segment is recurring in nature and derived under long-term contracts that averaged three years from when we entered into
these contracts. Over the last three years, we have renewed approximately 100% of these contracts for those customers that have continued
to trade.
Customer
Contracts – Leisure
Our
contracts in the Leisure segment vary but generally involve (i) agreement whereby the operator or proprietor of certain leisure resorts
contributes premises and we provide, on an exclusive basis, gaming and amusement terminals as well as gaming software and games for the
machines provided, (ii) contracts to supply gaming terminals as well as gaming software and games for the terminals provided to leisure
operators on a non-exclusive basis, and (iii) rental agreements, which we enter into with certain motorway services providers, whereby
we rent unit space in motorway service areas and populate this space with our gaming terminals.
Depending
on the contract type, we have general obligations to deliver, install, upgrade and service the terminals and software provided, to acquire
licensing for the various prizes and toys, which may be used in the terminals, to keep the premises open for minimum operating hours
and not to use the premises for certain business. These contracts may be terminated early in various circumstances, including for material
breach or insolvency events.
Under
our leisure contracts, we typically generate revenue on a participation-basis by participating, typically as a function of gross revenue
from each terminal, in a percentage of volumes generated by these terminals. With our participation-driven or fixed weekly fee business
model, approximately 100% of service revenue for our Leisure segment is recurring in nature and derived under long-term contracts that
are usually between three and five years. Since the NTG Acquisition, within the Leisure segment we have successfully renewed or extended
the significant majority of major contracts that have expired.
Operations
and Employees
Our
operations include game production, platform and hardware design, production, testing, and distribution; the maintenance, management,
and extension of our centralized network for product distribution and product monitoring; the delivery and, in certain circumstances,
maintenance of SBG terminals; gaming machine engineering, assembly, repair and storage; parts supply; change and release management;
remote operational services; problem management; business development; market account management; and general administration and management,
including Finance, Legal, People (Human Resources), Investor Relations, Marketing and Communications, Quality, Compliance and Information
Security.
As
of December 31, 2022, we had approximately 1,600 employees, approximately 1,500 of which were full-time. Of those employees, over 600
were dedicated to delivering our digital gaming platforms, content and manufacturing. Approximately 85 of our employees were assigned
to the ongoing operation of our network, through which we supply and maintain our products. Approximately 600 of our employees were involved
in UK field operations. Our management, sales and administration teams accounted for approximately 200 employees.
Intellectual
Property
Our
intellectual property consists principally of the propriety software we develop to operate our network and in the design and distribution
of our games. We depend upon agreements relating to trade secrets and proprietary know-how to protect our rights in this intellectual
property. We require all our employees, contractors and other collaborators to enter into agreements that prohibit the disclosure of
our confidential information to other parties. In addition, it is our policy to require our employees, contractors and other collaborators
who have access to proprietary and trade secret material to enter into agreements that require them to assign any and all intellectual
property rights to us that arise as a result of their work on our behalf. We also require our employees to review and acknowledge our
intellectual property policies regarding how we handle intellectual property. These agreements, acknowledgements and policies may not
provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or
disclosure in violation of these agreements, and may not be sufficient to secure for us the value in such developments that they are
designed to secure.
We
also hold certain patents, trademarks, design rights and other intellectual property rights in respect of our products, systems, web
domains, and other intellectual property. We also rely on certain products and technologies that we license from third parties. Proprietary
licenses typically limit our use of intellectual property to specific uses and for specific time periods.
The
terms of our intellectual property registrations vary based on the type of registration and the date and jurisdiction of filing or grant.
European and U.K trademark registration lasts for 10 years but can be renewed indefinitely. European and U.K design registration lasts
for five years but it can be renewed four times (giving a maximum total of 25 years of protection). European and U.K patents can only
be renewed for up to 20 years. U.S. design patents expire 15 years from the date of grant, and the term of utility patents generally
expires 20 years from the date of filing of the first non-provisional patent application in a family of patents. The actual protection
afforded by a patent depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the applicable
country.
Competition
We
operate in a highly competitive industry, and in highly competitive business segments. We face competition from a number of worldwide
businesses, many of which have substantially greater financial resources and operating scale than we do. Such competition could adversely
affect our ability to win new contracts and sales and renew existing contracts. We operate in a period of intense price-based competition
in some key sectors, which could affect the profitability of the contracts and sales we do win. In certain sectors, our businesses also
face competition from suppliers, operators or licensees who offer products for internet gaming in illegal or unregulated sectors, but
are still able or permitted to supply products and compete with us in regulated sectors. These competitors often have substantially greater
financial resources and operating scale than we do. Some larger competitors hold long term contracts which control access points for
some of our products and this may mean we must contract with those competitors rather than directly with the customer to provide our
products. Our principal competitors include, among others, certain businesses that have vertically integrated gaming machine and retail
betting operations and businesses that operate in both regulated and unregulated sectors and thereby effectively subsidize their regulated
operations with unregulated operations.
Corporate
Information
We
maintain a website at www.inseinc.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act are available free of charge through
the Investors link on our website as soon as reasonably practical after they are electronically filed with or furnished to the SEC. Also
available on our website are our Code of Ethics, as well as the charters of the audit, compensation and nominating and corporate governance
committees of the Board of Directors. Information on our website is not incorporated into this report.
ITEM
1A. RISK FACTORS.
Our
business is subject to a high degree of risk. You should carefully read and assess our discussion of the risk factors facing our business,
below. Any of these risks could materially and adversely affect our business, operating results, financial condition and prospects, and
cause the value of our common stock to decline, which could cause investors in our common stock to lose all or part of their investments.
Summary
of Risk Factors
Our
business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely
affect our business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below
and include, but are not limited to, risks related to the following:
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We rely on a relatively
small number of customers for a significant portion of our sales, and the loss of, or material reduction in, sales to any of our
top customers could have an adverse effect on our business, results of operations, financial condition and prospects. |
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We are dependent on our
relationships with key suppliers to obtain equipment and other supplies for our business on acceptable terms. |
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The UK Government’s
impending review of the Gambling Act, together with other rules that may be considered in the UK in response to recent consultations,
could have a material negative impact on our business. |
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Data privacy and security
laws and regulations in the jurisdictions in which we do business could increase the cost of our operations and subject us to possible
sanctions and other penalties. |
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Our results of operations
fluctuate due to seasonality and other factors and, therefore, our periodic operating results are not guarantees of future performance. |
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Our industry is subject
to strict government regulations that could limit our existing operations and have a negative impact on our ability to grow. |
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Our industry is subject
to regulations that set parameters for levels of gaming or wagering duty, tax, stake, prize and return to player. |
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We may be adversely affected
by disruptions to our transaction gaming and lottery systems, as well as disruptions to our internal enterprise and information technology
systems. |
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Our directors and key personnel
are subject to the approval of certain regulatory authorities, which, if withheld, would require us to sever our relationship with
non-approved individuals, which could adversely impact our operations. |
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Licensing and gaming authorities
have significant control over our operations and ownership and could cause us to redeem certain stockholders on potentially disadvantageous
terms. |
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Certain of our executive
officers and directors are affiliated with entities engaged in business activities similar to those conducted by us (or may enter
into similar business activities in the future) and, accordingly, may have conflicts of interest in determining whether a particular
business opportunity should be presented to us or to another entity. |
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We have operations in a
variety of countries, which subjects us to additional risks. |
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We may have future capital
needs and may not be able to obtain additional financing on acceptable terms. |
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Because tax laws and regulations are subject to interpretation and uncertainty,
tax payments may ultimately differ from amounts currently recorded by the Company. |
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We may be unable to develop
sufficient new products and product lines and integrate them into our existing business, which may adversely affect our ability to
compete; our expansion into new sectors may present competitive and regulatory challenges that differ from current ones. |
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We may be required to recognize
impairment charges related to goodwill, identified intangible assets and property and equipment or to take write-downs or write-offs,
restructuring or other charges that could have a significant negative effect on our financial condition, results of operations and
stock price, which could have an adverse effect on your investment. |
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Volatility or disruption
in the financial markets could materially adversely affect our business and the trading price of our common stock. |
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Global economic conditions
could have an adverse effect on our business, operating results and financial condition. |
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We face risks and uncertainty
arising from the United Kingdom’s withdrawal from the European Union. |
Risks
Relating to Our Business and Industry
Disruption
of our supply chain or distribution capabilities have an adverse effect on our business, financial condition, and results of operations.
Our
ability to manufacture and ship machines is critical to our success. We are subject to damage or disruption to supplies of parts or our
manufacturing or distribution capabilities (in particular, to the extent that our parts are sourced globally) due to weather, including
any potential effects of climate change, natural disaster, fire, terrorism, adverse changes in political conditions or political unrest,
pandemic, strikes, labor shortages, freight transportation availability, disruption in logistics, import restrictions, or other factors
that impair our ability to manufacture or sell our machines. Failure to take adequate steps to mitigate the likelihood or potential impact
of such events, or to effectively manage such events if they occur, adversely affect our business, financial condition, and results of
operations, as well as require additional resources to restore our supply chain.
Our
results of operations could be adversely affected by labor shortages, turnover, and labor cost increases.
Inflationary
pressures, shortages in the labor market, and increased competition within and outside our industry for talented employees have increased
our labor costs, which could negatively impact our profitability. Labor shortages or lack of skilled labor have led to increases in costs
to meet demand as we roll out incremental programs to attract and retain talent. Labor shortages may also negatively impact us from servicing
all demand that exists for our products or operating our service operations and manufacturing facilities efficiently. Further, we distribute
our machines and receive parts through the freight transportation market, and reduced trucking capacity due to shortages of drivers has
led to increased costs and reduced service levels due to lack of freight transportation availability.
We
operate in a highly competitive industry and our success depends upon our ability to effectively compete with numerous worldwide businesses.
We
face competition from a number of businesses, including worldwide businesses, many of which have substantially greater financial resources
and operating scale than we do. Such competition could adversely affect our ability to win new contracts and sales and renew existing
contracts. We operate in a period of intense price-based competition in some key sectors, which could affect the profitability of the
contracts and sales we do win.
In
certain sectors, our businesses also face competition from suppliers, operators or licensees who offer products for internet gaming in
illegal or unregulated sectors, but are still able or permitted to supply products and compete with us in regulated sectors. These competitors
often have substantially greater financial resources and operating scale than we do.
If
we cannot successfully compete in our industry and business segments, our business, results, financial condition and prospects could
suffer.
We
are heavily dependent on our ability to renew our long-term contracts with our customers and we could lose substantial revenue if we
are unable to renew certain of these contracts.
Generally,
customer contracts in our Gaming, Virtual Sports and Interactive business segments are for initial terms of three to five years, but
longer in certain territories, with renewals at the customer’s option. Generally, our customer contracts within the Leisure business
segment are for terms of four to six years (although in certain cases they are longer), but certain customers have options for early
termination under certain circumstances or to reduce machines volumes in certain circumstances, and we may face pressure to renew or
upgrade terminals during the lives of these contracts, which could adversely affect revenues or our return on capital and leave us with
surplus terminals. At any given time, we have multiple substantial customer contracts that have years to run and others that may be nearing
expiration or renewal, which we may lose if we cannot compete effectively to retain their business.
There
can be no assurance that current contracts will be extended or that we will be awarded contract extensions or new contracts as a result
of competitive bidding processes or otherwise. The termination, expiration or failure to renew one or more of our contracts could cause
us to lose substantial revenue.
Changes
in applicable gambling regulations or taxation regimes may affect the revenues or profits generated by the contracts we enter into with
our customers. Many of the contracts we have with our customers are on revenue-sharing (net of gaming taxes) terms, and therefore changes
which adversely affect our customers may also adversely affect us. In addition, any such changes may cause our customers to seek to renegotiate
their contracts, may alter the terms on which such customers are prepared to renew their contracts and may affect their ability or willingness
to renew their contracts.
We
rely on a relatively small number of customers for a significant portion of our sales, and the loss of, or material reduction in, sales
to any of our top customers could have an adverse effect on our business, results of operations, financial condition and prospects.
Certain
key customers, including certain UK, Italian and Greek gaming terminal customers and certain Virtual Sports customers, make a significant
contribution to our revenues and profitability. Our top ten customers generated approximately 56% of total revenues and one customer
generated more than 10% of total revenues in the year ended December 31, 2022. We expect that these customers will continue to represent
a significant portion of our sales in the future. However, the loss of any of our top customers, whether through contract expiry and
non-renewal, breach of contract or other adverse factors could materially adversely affect our revenues or return on capital and leave
us with surplus terminals. Moreover, if any of these customers experience reduced revenue, such reduction could adversely affect any
revenue-sharing arrangements we have with those customers, reduce our own revenues and adversely affect our financial results.
We
are dependent on our relationships with key suppliers to obtain equipment and other supplies for our business on acceptable terms.
We
have achieved significant cost savings through our centralization of equipment and non-equipment purchases. However, as a result, we
are exposed to the credit and other risks of a group of key suppliers. While we make every effort to evaluate our counterparties prior
to entering into long-term and other significant procurement contracts, we cannot predict the impact on our suppliers of the current
economic environment and other developments in their respective businesses. Insolvency, financial difficulties, supply chain delays or
other factors may result in our suppliers not being able to fulfill the terms of their agreements with us. Further, such factors may
render suppliers unwilling to extend contracts that provide favorable terms to us, or may force them to seek to renegotiate existing
contracts with us. In addition, our business has signed a number of significant contracts whose performance depends upon third party
suppliers delivering equipment on schedule for us to meet its contract commitments. Failure of the suppliers to meet their delivery commitments
could result in us being in breach of and subsequently losing those contracts. Although we believe we have alternative sources of supply
for the equipment and other supplies used in our business, concentration in the number of our suppliers could lead to delays in the delivery
of products or components, and possible resultant breaches of contracts that we have entered into with our customers; increases in the
prices we must pay for products or components; problems with product quality or components coming to the end of their life; and other
concerns.
Our
ability to bid on new contracts may be dependent upon our ability to fund any required up-front capital expenditures through our cash
from operations, the incurrence of indebtedness or the raising of additional equity capital.
Our
Gaming and Leisure terminal contracts in the UK, Italy and Greece often require significant up-front capital expenditures for terminal
assembly, software customization and implementation, systems and equipment installation and telecommunications configuration. Historically,
we have funded these up-front costs through cash flows generated from operations and external borrowings. Our ability to continue to
procure new contracts, including in new jurisdictions, will depend upon, among other things, our liquidity levels at the time or our
ability to obtain additional debt or equity funding at commercially acceptable terms to finance the initial up-front costs. If we do
not have adequate liquidity or are unable to obtain other funding for these up-front costs on favorable terms or at all, we may not be
able to bid on certain contracts, which could restrict our ability to grow and have an adverse effect on our ability to retain existing
contracts and therefore on future profitability. Certain contracts within the Leisure business segment also require injections of capital
expenditure during the term for new or replacement hardware.
The
UK Government’s impending review of the Gambling Act, together with other rules that may be considered in the UK in response to
recent consultations, could have a material negative impact on our business.
In
December 2020, DCMS announced that it is reviewing the Gambling Act, the consultation period for which closed on March 31, 2021 with
the objective of (i) examining whether changes are needed to the system of gambling regulation in Great Britain to reflect changes to
the gambling landscape since 2005, particularly due to technological advances (ii) ensuring there is an appropriate balance between consumer
freedoms and choice on the one hand, and prevention of harm to vulnerable groups and wider communities on the other and (iii) making
sure customers are suitably protected whenever and wherever they are gambling, and that there is an equitable approach to the regulation
of the online and the land based industries. There have a been a number of similar consultations launched, including a DCMS consultation
in relation to fees which closed on March 25, 2021 and a Gambling Commission consultation in relation to Remote Customer Interaction
which closed on February 9, 2021. The potential outcomes of such reviews are not currently known but new legislation or regulations could
adversely affect our business. A recent example of legislative change implemented by the UK Government which adversely affected our business
was the reduction of maximum permitted bets from £100 to £2 on B2 Gaming Machines which became effective as of April 1, 2019.
As a result of this change, a number of land-based operators commenced a rationalization of their retail operations, which among other
measures led to the closure of certain land-based operator shops.
Our
business depends on our ability to prevent or mitigate the effects of a cybersecurity attack.
Our
information technology may be subject to cyber-attacks, security breaches or computer hacking, including a widespread ransomware attack
encrypting corporate IT equipment, a directed motivated attack against us or a data breach or cyber incident happening to a third-party
network and affecting us. Regardless of our efforts, there may still be a breach and the costs to eliminate, mitigate or address the
aforementioned threats and vulnerabilities before or after a cyber incident could be significant. Any such breaches or attacks could
result in interruptions, delays or cessation of service, and loss of existing or potential suppliers or customers. In addition, breaches
of our security measures and the unauthorized dissemination of sensitive personal, proprietary or confidential information about the
Company, our business partners or other third parties could expose us to significant potential liability and reputational harm. We could
also be negatively impacted by existing and proposed laws and regulations, and government policies and practices related to cybersecurity,
data privacy, data localization and data protection. The risk of cyber attacks may also increase owing to the current war in Ukraine.
Our
business depends upon the protection of our intellectual property and proprietary information.
We
believe that our success depends, in part, on protecting our intellectual property in the UK and in other countries. Our intellectual
property includes certain trademarks relating to our systems, as well as certain patents and proprietary or confidential information
that is not subject to patent or similar protection. Our intellectual property protects the integrity of our games, systems, products
and services, which is a core value of the industries in which we operate. Protecting our intellectual property can be expensive and
time-consuming, may not always be successful depending on local laws or other circumstances, and we also may choose not to pursue registrations
in certain countries. Competitors may independently develop similar or superior products, software, systems or business models. In cases
where our intellectual property is not protected by an enforceable patent, or other intellectual property protection, such independent
development may result in a significant diminution in the value of our intellectual property.
There
can be no assurance that we will be able to protect our intellectual property. We enter into confidentiality or license agreements with
our employees, vendors, consultants and, to the extent legally permissible, our customers, and generally control access to, and the distribution
of, our game designs, systems and other software documentation and other proprietary information, as well as the designs, systems and
other software documentation and other information we license from others. Despite our effort to protect these proprietary rights, parties
may try to copy our gaming products, business models or systems, use certain of our confidential information to develop competing products,
or independently develop or otherwise obtain and use our gaming products or technology, any of which could have an adverse effect on
our business. Policing unauthorized use of our technology is difficult and expensive, particularly because of the global nature of our
operations. The laws of some countries may not adequately protect our intellectual property.
There
can be no assurance that our business activities, games, products and systems will not infringe upon, misappropriate of otherwise violate
the proprietary rights of others, or that other parties will not assert infringement or misappropriation claims against us. Any such
claim and any resulting litigation, should it occur, could subject us to significant liability for costs and damages and could result
in invalidation of our proprietary rights, distract management, and/or require us to enter into costly and burdensome royalty and licensing
agreements. Such royalty and licensing agreements, if required, may not be available on terms acceptable to us, or may not be available
at all. In the future, we may also need to file lawsuits to defend the validity of our intellectual property rights and trade secrets,
or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or unsuccessful, could
result in substantial costs and diversion of resources.
We
also rely on certain products and technologies that we license from third parties. Proprietary licenses typically limit our use of intellectual
property to specific uses and for specific time periods. There can be no assurance that these third-party licenses, or the support for
such licenses, will continue to be available to us on commercially reasonable terms. In the event that we cannot renew and/or expand
existing licenses, we may be required to discontinue or limit our use of the products that include, incorporate, or rely on licensed
intellectual property.
Data
privacy and security laws and regulations in the jurisdictions in which we do business could increase the cost of our operations and
subject us to possible sanctions and other penalties.
Our
business is subject to a number of federal, state, local and foreign laws and regulations governing data privacy and security, including
with respect to the collection, storage, use, transmission and protection of personal information. In particular, we are subject to the
EU General Data Protection Regulation (the “EU GDPR”) where we are established in the EEA or where we are not established
in the EEA but process personal data of individuals in the EEA in relation to the offering of goods or services to, or the monitoring
the behavior of, individuals in the EEA.
Following
the end of the Brexit Transition Period on December 31, 2020, the EU GDPR has been implemented in the UK as the “UK GDPR”.
The requirements of the UK GDPR are (for the time being) virtually identical to those of the EU GDPR.
The
EU GDPR and the UK GDPR (collectively the “GDPR”) set out a number of requirements that must be complied with when handling
personal data including (amongst others): (i) accountability and transparency requirements, and enhanced requirements for obtaining valid
consent; (ii) obligations to consider data protection as any new products or services are developed and to limit the amount of personal
data processed; (iii) obligations to comply with data protection rights of data subjects; and (iv) reporting of personal data breaches
to the supervisory authority without undue delay (and no later than 72 hours where feasible).
The
GDPR also prohibits the international transfer of personal data from the EEA/UK to countries outside of the EEA/UK unless made to a country
deemed to have adequate data privacy laws by the European Commission or UK Government or a data transfer mechanism has been put in place.
In July 2020, the Court of Justice of the European Union (“CJEU”) in its Schrems II ruling invalidated the EU-US Privacy
Shield framework, a self-certification mechanism that facilitated the lawful transfer of personal data from the EEA/UK to the United
States, with immediate effect. The CJEU upheld the validity of standard contractual clauses (“SCCs”) as a legal mechanism
to transfer personal data but companies relying on SCCs will need to carry out a transfer privacy impact assessment, which among other
things, assesses laws governing access to personal data in the recipient country and considers whether supplementary measures that provide
privacy protections additional to those provided under SCCs will need to be implemented to ensure an essentially equivalent level of
data protection to that afforded in the EU. This may have implications for our cross-border data flows and may result in compliance costs.
In
addition, Brexit has implications for transfers of personal data between the UK and the EU and vice versa. Transfers of personal data
from the UK to the EU are unrestricted and do not require additional safeguards as the UK has approved the adequacy of the EU and all
12 nations deemed adequate by the EU. As regards transfers of personal data from the EEA to the UK, under the terms of the Trade and
Cooperation Agreement agreed between the EU and UK on December 24, 2020, such data flows remain unrestricted as the European Commission
granted the UK an “adequacy decision” meaning transfers of personal data from the EEA to the UK may continue unrestricted
and would not require any additional safeguards.
Compliance
with the GDPR will incur compliance and operational costs. In addition, a data supervisory authority may find our data processing practices
and compliance steps to be inconsistent with the GDPR’s application in their respective jurisdiction. Data supervisory authorities
also have the power to issue fines for non-compliance of the GDPR of up to 4% of an organization’s annual worldwide turnover or
€20m (£17.5 million under the UK GDPR), whichever is higher. Data subjects also have a right to compensation as a result of
an organization’s breach of the GDPR that has affected them, for financial or non-financial losses (e.g., distress).
Our
results of operations fluctuate due to seasonality and other factors and, therefore, our periodic operating results are not guarantees
of future performance.
Our
revenues are subject to a number of variations. Equipment sales and software license revenues usually reflect a limited number of large
transactions, which may not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period
to period as a result of the timing of equipment sales and software licensing. In addition, revenues may vary depending on the timing
of contract awards and renewals, changes in customer budgets and general economic conditions. A proportion of our revenues are subject
to regular seasonal variations of the sort often related to seasonal consumer behavior, income from the Leisure business segment is generally
strongest in the spring and summer, predominantly in Leisure parks, and in Italy and Greece we experience reductions in revenue in the
summer.
Our
industry is subject to strict government regulations that could limit our existing operations and have a negative impact on our ability
to grow.
In
certain jurisdictions, forms of wagering, betting and lottery may be expressly authorized and governed by law and in other jurisdictions
forms of wagering, betting and lottery may be expressly prohibited by law. If expressly authorized, such activities are typically subject
to extensive and evolving governmental regulation. Gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore,
we are subject to a wide range of complex gaming laws, rules and regulations in the jurisdictions in which we are licensed or may seek
to be licensed. Most jurisdictions require that we are licensed or authorized, that our key personnel and certain of our security holders
are found to be suitable or are licensed, and that our products are reviewed, tested and certified or approved before placement. If a
license, approval, certification or finding of suitability is required by a regulatory or national authority and we fail to seek or do
not receive the necessary approval, license, certification or finding of suitability, or if it is revoked, then we may be prohibited
from distributing our products for use in the respective jurisdiction. Additionally, such prohibition could trigger reviews of our Company
by regulatory bodies in other jurisdictions and adversely affect our ability to obtain or retain the required licenses and approvals
in those jurisdictions.
The
regulatory environment in any particular jurisdiction may change in the future, and any such change could have an adverse effect on our
results of operations or business in general. Moreover, there can be no assurance that the operation of Server Based Gaming terminals,
Video Lottery Terminals or other Terminals, Virtual Sports betting, betting online, lottery or other forms of wagering systems will be
approved, certified or found suitable by additional jurisdictions or that those jurisdictions in which these activities are currently
permitted will continue to permit such activities in their existing forms (stricter regulations, including regulation relating to age
verification, could come into force which could have adverse impacts on the Company) or at all. While we believe that we have the means
to continue to develop procedures and policies designed to comply with and monitor the requirements of evolving laws, there can be no
assurance that law enforcement agencies, governmental agencies or gaming regulatory authorities, whether in existing or new jurisdictions,
will not seek to restrict our business or otherwise institute enforcement proceedings or other legal claims against the Company. Moreover,
in addition to the risk of such enforcement actions or claims, we are also at risk from loss of business reputation in the event of any
potential legal or regulatory investigation whether or not we are ultimately accused of or found to have committed any violations.
We
supply our products to operators of gaming venues, platforms and websites who typically must themselves be licensed by gaming regulators.
If any one of these operators fails to maintain its gaming licenses, or violates gaming laws or regulations, our business may suffer,
due to our loss of a viable customer and, in instances where we have a revenue-sharing arrangement with the operator, due to our loss
of our shares of the revenue generated by that operator’s business.
We
supply certain of our products to operators who operate gaming websites. Some of those operators may take bets from customers in sectors
where no gaming laws or regulations exist and where the provision of online gaming is effectively unregulated. Although the Company seeks
to ensure that its customers only take bets in sectors where online gaming is legal, if any of those operators is subjected to investigatory
or enforcement action for acting otherwise, this could result in the operator suffering interventions ranging from special conditions
being applied to its licenses, license suspension or license loss, or the operator otherwise withdrawing from or curtailing its activities
in its sector. Any such developments could adversely affect such operator’s revenues and in turn adversely affect our earnings
from such operator. The Company may itself be subject to investigatory or enforcement action (if and to the extent that local laws or
the laws of other jurisdictions in which the Company operates impose liability on suppliers for the activities of the customers that
they supply or for receiving funds that are deemed to be illegal because of such activities). We seek to protect ourselves against any
such liability for the activities of the operators that we supply, including by contractually requiring those operators not to operate
in certain territories and only supplying operators who we have reviewed to determine whether they uphold the requisite standards of
regulatory and legal compliance. Nonetheless, there is a risk that we may fail to undertake sufficient due diligence, fail to receive
accurate information on which to conduct due diligence, or become subject to investigatory or enforcement action should we or any of
our customers be accused of breaching any regulations or laws. Any such action may adversely affect our standing with gaming regulators
and our ability to obtain and retain required licenses and other approvals in other jurisdictions.
We
may be required to obtain and maintain licenses and certifications from various state and local jurisdictions in order to operate certain
aspects of our business and we and our key personnel and certain security holders may be subject to extensive background investigations
and suitability standards. We may also become subject to regulation in any other jurisdiction where our customers are permitted to operate
in the future. Licenses and ongoing regulatory compliance can be costly. There can be no assurance that we will be able to obtain new
licenses or renew any of our existing licenses, and the loss, denial or non-renewal of any of our licenses could have an adverse effect
on our business. Generally, regulatory authorities have broad discretion when granting, renewing or revoking approvals and licenses.
Our failure, or the failure of any of our key personnel, systems or machines, in obtaining or retaining a required license or approval
in one jurisdiction could have a negative impact on our ability (or the ability of any of our key personnel, systems or gaming machines)
to obtain or retain required licenses and approvals in other jurisdictions. The failure to obtain or retain a required license or approval
in any jurisdiction would decrease the geographic area where we may operate and generate revenues, decrease our share in the gaming marketplace
and put us at a disadvantage compared with our competitors. In addition, the levy of substantial fines or forfeiture of assets could
significantly harm our business, financial condition and results of operations.
Some
jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning
a specified percentage of equity securities of licensed or regulated businesses. The failure of beneficial owners of our common stock
to submit to such background checks and provide required disclosure could jeopardize our business. In light of these regulations and
the potential impact on our business, our second amended and restated certificate of incorporation provides for the prohibition of stock
ownership by persons or entities who fail to comply with informational or other regulatory requirements under applicable gaming law,
who are found unsuitable to hold our stock by gaming authorities or whose stock ownership adversely affects our ability to obtain, maintain,
renew or qualify for a license, contract, franchise or other regulatory approval from a gaming authority. The licensing procedures and
background investigations of the authorities that regulate our businesses and the proposed amendment may inhibit potential investors
from becoming significant stockholders or inhibit existing stockholders from retaining or increasing their ownership.
Our
businesses are subject to a number of federal, state, local and foreign laws and regulations governing data privacy and security, including
with respect to the collection, storage, use, transmission and protection of personal information and other consumer data. In particular,
the EU has adopted strict data privacy regulations. Following recent developments such as the European Court of Justice’s 2015
ruling that the transfer of personal data from the EU to the U.S. under the EU/U.S. Safe Harbor was an invalid mechanism of personal
data transfer, the adoption of the EU-U.S. Privacy Shield as a replacement for the Safe Harbor (which has since been declared invalid
by Schrems II), and coming into effect of the EU’s General Data Protection Regulation, data privacy and security compliance in
the EU are increasingly complex and challenging. The scope of data privacy and security regulations continues to evolve, and we believe
that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions. Compliance
with data privacy and security restrictions could increase the cost of our operations and failure to comply with such restrictions could
subject us to criminal and civil sanctions as well as other penalties.
We
are subject to the provisions of the UK Bribery Act 2010, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws. The
UK Bribery Act generally prohibits giving a financial or other advantage to another person with the intention of inducing that person
to improperly perform a relevant function or activity. The U.S. Foreign Corrupt Practices Act generally prohibits U.S. persons and companies
and their agents from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of
obtaining or retaining business. Certain of these anti-corruption laws also contain provisions that require accurate record keeping and
further require companies to devise and maintain an adequate system of internal accounting controls. Because a significant percentage
of our revenue derives from foreign sources, and our business activities involve continuing relationships with governmental regulators,
there exists a risk that certain provisions of these anti-corruption laws may be breached. We are also subject to anti-money laundering
and anti-terrorist financing laws and regulations, and to economic and trade sanctions programs administered by the Office of Foreign
Assets Control (OFAC) in the United States relating to our ability to engage in transactions with entities that are domiciled in countries
or territories subject to comprehensive OFAC trade sanctions (currently, Cuba, Iran, North Korea, Syria, and Crimea), or that are included
on OFAC’s list of Specially Designated Nationals and Blocked Persons. Although we have policies and controls in place that are
designed to ensure compliance with these laws, if those controls are ineffective or an employee or intermediary fails to comply with
the applicable regulations, we may be subject to criminal and civil sanctions as well as other penalties. Any such violation could disrupt
our business and adversely affect our reputation, results of operations, cash flows and financial condition.
We
review and develop our internal compliance programs in an effort to ensure that we comply with legal requirements imposed in connection
with our business activities. The compliance program is run on a day-to-day basis by our in-house legal department with compliance and
technical advice provided by our compliance manager and outside professionals. There can be no assurance that such steps will prevent
the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of administrative,
civil and even criminal sanctions, monetary fines or suspension or revocation of one or more of our licenses.
Our
industry is subject to regulations that set parameters for levels of gaming or wagering duty, tax, stake, prize and return to player.
In
most jurisdictions in which we operate or expect to seek to operate, the level of duty or taxation, the stake, prize and return to player
of wagering, betting and lottery games and the speed at which players can participate in gaming are defined in government regulations
which are subject to change. Those regulations may also affect the premises in which gaming activities may take place (i.e., by limiting
the number of gaming machines which may be housed in a licensed gaming location, or by restricting the locations in which licensed gaming
premises may be situated). Once authorized, such parameters are subject to extensive and evolving governmental regulation. Moreover,
such gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore, we are subject to a wide range of complex gaming
parameters in the jurisdictions in which we are licensed. If a key parameter is changed, such as the level of taxation or duty or the
maximum stake or prize or return to player of a game, then it may be to the detriment of our business, financial condition, results and
prospects or we may be unable to distribute our products profitably.
Our
business is subject to evolving technology.
The
sectors for our products are affected by changing technology, new regulations and evolving industry standards. Our ability to anticipate
or respond to such changes and to develop and introduce new and enhanced products and services on a timely basis will be a significant
factor in our ability to expand, remain competitive, attract new customers and retain existing contracts. For example, some of our contracts
with customers require that the technology being licensed by the customer remain compliant with applicable regulations. Because regulatory
changes cannot always be foreseen, such contractual requirements can from time-to-time result in us having to incur unforeseen costs
to adapt our technology to changes in regulation.
Generally,
there can be no assurance that we will achieve the necessary technological advances, have the financial resources, introduce new products
or services on a timely basis or otherwise have the ability to compete effectively on a technological basis in the sectors we serve.
Our
business competes on the basis of the stability, security and integrity of our software, networks, systems, games and products.
We
believe that our success depends, in significant part, on providing secure products and systems to our vendors and customers with high
levels of uptime, quality and availability. Attempts to penetrate security measures may come from various combinations of customers,
retailers, vendors, players, employees and others. Our ability to monitor and ensure quality of our products is continually reviewed
and enhanced. There can be no assurance that our business might not be affected by a security breach, virus, Denial of Service attack,
or technical error, failure or lapse which could have an adverse impact on our business.
Additionally,
we maintain a large number of games and terminals and jackpot systems, which rely on algorithms and software designed to pay out winnings
to players at certain ratios. Our systems, testing and processes to monitor and ensure the payout of games are continually reviewed and
enhanced, and are additionally reviewed and tested by third-party expert test houses. There can be no assurance that our business might
not be affected by a malicious or unintentional breach or technical error, failure or lapse which could have an adverse impact on payout
ratios which would consequently have an adverse effect on our business in the form of lost revenues or penalty payments to players or
customers. Gaming regulators may take enforcement action against us (including the imposition of significant fines) where the payout
ratios fall below the ratios advertised to customers, or our software, networks, systems, games and/or products otherwise suffer from
technical error, failure or lapse.
We
may be adversely affected by disruptions to our transaction gaming and lottery systems, as well as disruptions to our internal enterprise
and information technology systems.
Our
operations are dependent upon our transactional gaming, lottery and information technology systems. We rely upon such systems to manage
customer systems on a timely basis, to coordinate our sales and installation activities across all of our locations and to manage invoicing.
A substantial disruption in our transactional gaming, lottery and information technology systems for any prolonged time period (arising
from, for example, system capacity limits from unexpected increases in our volume of business, outages, computer viruses, unauthorized
access or delays in its service) could result in delays in serving our customers, which could adversely affect our reputation and customer
relationships and could result in monetary penalties pursuant to the terms of customer contracts. Our systems might be damaged or interrupted
by natural or man-made events or by computer viruses, physical or electronic break-ins, or similar disruptions affecting the Internet
and our disaster recovery plan may be ineffective at mitigating the effects of these risks. Such delays, problems or costs could have
an adverse effect on our financial condition, results of operations and cash flows.
Because
tax laws and regulations are subject to interpretation and uncertainty, tax payments may ultimately differ from amounts currently recorded
by the Company.
We are subject to income taxes as well as non-income based taxes, in both
the United States and numerous foreign jurisdictions. The determination of the Company’s worldwide provision for income taxes and other
tax liabilities requires judgment and is based on diverse legislative and regulatory structures that exist in the various jurisdictions
where the company operates. The ultimate tax outcome may differ from the amounts recorded in the Company’s financial statements and may
adversely affect the Company’s financial results for the period when such determination is made. Tax authorities may disagree with certain
positions we have taken and assess additional taxes via tax audit. We work with local tax experts to support our tax provisions in line
with our tax strategy. However, there can be no assurance that we will not be subject to challenge and the future outcome of any potential
audits could adversely affect our results of operations, financial condition and cash flows.
Gaming
opponents persist in their efforts to curtail legalized gaming, which, if successful, could limit our existing operations.
Legalized
gaming is subject to opposition from gaming opponents, including in the UK, Italy and other sectors where we are active. There can be
no assurance that this opposition will not succeed in either preventing the legalization of gaming in jurisdictions where these activities
are presently prohibited or prohibiting or limiting the expansion or continuance of gaming where it is currently permitted, in either
case to the detriment of our business, financial condition, results and prospects.
Our
directors and key personnel are subject to the approval of certain regulatory authorities, which, if withheld, would require us to sever
our relationship with non-approved individuals, which could adversely impact our operations.
Our
members, managers, directors, officers and key employees must be approved by certain government and state regulatory authorities. If
such regulatory authorities were to find a person occupying any such position unsuitable, we would be required to sever our relationship
with that person. We may thereby lose key personnel which would have a negative effect on our operations. Certain public and private
issuances of securities and certain other transactions by us also require the approval of certain state regulatory authorities. Further,
our gaming regulators can require us to disassociate ourselves from suppliers or business partners found unsuitable by the regulators.
The regulatory environment in any particular jurisdiction may change in the future and any such change could have an adverse effect on
our results of operations. In addition, we are subject to various gaming taxes, which are subject to increase at any time.
Licensing
and gaming authorities have significant control over our operations and ownership, and could cause us to redeem certain stockholders
on potentially disadvantageous terms.
Regulatory
authorities have broad powers to request detailed financial and other information, to limit, condition, suspend or revoke a registration,
gaming license or related approval and to approve changes in our operations. Some jurisdictions also require extensive personal and financial
disclosure and background checks from persons and entities beneficially owning a specified percentage of equity securities of licensed
or regulated businesses. For example, in the UK, an entity holding a gambling license must notify the Gambling Commission of the identity
of any stockholder holding, directly or indirectly, 3% or more of its equity or voting rights, and must apply for permission to continue
to rely on its operating license whenever a new person acquires, directly or indirectly, 10% or more of its equity or voting rights.
The failure of beneficial owners of our common stock to submit to such background checks and provide required disclosure could jeopardize
our business. Our second amended and restated certificate of incorporation provides that, to the extent required by the gaming authority
making the determination of unsuitability or to the extent the board of directors determines, in its sole discretion, that a person is
likely to jeopardize the Company’s or any affiliate’s application for, receipt of, approval for, right to the use of, or
entitlement to, any gaming license, shares of our capital stock that are owned or controlled by an unsuitable person or its affiliates
are subject to mandatory redemption by us. The redemption price may be paid in cash, by promissory note, or both, as required, and pursuant
to the terms established by, the applicable gaming authority and, if not, as we elect. Such a redemption could occur on terms or at a
time that a stockholder believes to be disadvantageous.
Changes
in laws or regulations, or a failure to comply with, or liabilities under, any laws and regulations, may adversely affect our business,
investments and results of operations.
We
are subject to laws and regulations enacted by national, regional, state and local governments, including non-U.S. governments. Compliance
with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and
their interpretation and application may also change from time to time and those changes could have an adverse effect on our business,
investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied,
or liabilities thereunder, could have an adverse effect on our business and results of operations.
Certain
of our executive officers and directors may become affiliated with entities engaged in business activities similar to those conducted
by us (or may enter into similar business activities in the future) and, accordingly, may have conflicts of interest in determining whether
a particular business opportunity should be presented to us or to another entity.
Certain
of our executive officers and directors may become affiliated with entities that are engaged in businesses similar to the ones we operate
(or may enter into similar business activities in the future). As a result, any of them may become aware of business opportunities which
may be appropriate for presentation to us and to other entities to which they owe certain fiduciary or contractual duties. Accordingly,
they may have conflicts of interest in determining to which entity a particular business opportunity should be presented — to us
or to another entity. These conflicts may not be resolved in our favor and a potential business opportunity may be presented to another
entity prior to its presentation to us. Our second amended and restated certificate of incorporation provides that we renounce our interest
in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in
his or her capacity as a director or officer of our Company and such opportunity is one that we are legally and contractually permitted
to undertake and would otherwise be reasonable for us to pursue.
We
are a holding company and conduct all of our operations through our subsidiaries.
We
are a holding company and derive all of our operating income from our subsidiaries. Other than any cash we retain, all of our assets
are held by our direct and indirect subsidiaries. We rely on the earnings and cash flows of our subsidiaries, which are paid to us by
our subsidiaries, if and only to the extent available, in the form of dividends and other payments or distributions, to meet our debt
service obligations. The ability of our subsidiaries to pay dividends or make other payments or distributions to us will depend upon
their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which
may limit the amount of funds available for the payment of dividends and other distributions to us), the terms of existing and future
indebtedness and other agreements of our subsidiaries and the covenants of any future outstanding indebtedness we or our subsidiaries
incur.
Our
inability to complete future acquisitions of gaming and related businesses we acquire in the future could limit our future growth, if
any.
We
continue to pursue expansion and acquisition opportunities in gaming and related businesses. There can be no assurance that acquisition
opportunities will be available on acceptable terms or at all or that we will be able to obtain necessary financing or regulatory approvals
to complete potential acquisitions. Our ability to succeed in implementing our strategy will depend upon the ability of our management
to identify, complete and successfully integrate commercially viable acquisitions. Acquisition transactions may disrupt our ongoing business
and distract management from other responsibilities. Any future acquisition transactions involving the use of company stock would dilute
our existing stockholders and earnings per share.
Our
business may be affected by changes in general and local economic and political conditions.
The
demand for our services is sensitive to general and local economic conditions over which we have no control, including changes in the
levels of consumer disposable income and geographic exposure to macro-economic trends and taxation. In addition, the economic stability
of certain Eurozone countries where we conduct or intend to conduct business may become affected by sovereign debt crises or other general
and local economic and political conditions. Adverse changes in economic conditions may affect our business generally or may be more
prevalent or concentrated in particular sectors in which we operate. Any deterioration in economic conditions or the continuation of
uncertain economic conditions could have an adverse effect on our business, financial condition, results of operations and prospects.
Other economic risks which may adversely affect our performance include high interest rates, inflation and volatile foreign exchange
markets, and effects arising from Great Britain’s exit from the European Union (“Brexit”).
The
performance of our business may also be subject to political risks in certain jurisdictions where we operate, including change of government,
political unrest, war or terrorism.
Our
revenues can vary substantially from period to period and you should not rely upon our periodic operating results as indications of future
performance.
Our
revenues are subject to variations. Wagering equipment sales and software license revenues usually reflect a limited number of large
transactions, which may not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period
to period as a result of the timing of major equipment sales and software license revenue. In addition, revenues may vary depending on
the timing of contract awards and renewals, changes in customer budgets and general economic conditions. Revenues may also vary based
on adverse sequences of payouts of prizes, unusual jackpot wins, and other variations in game margin.
Our
business could also be affected by natural or man-made disasters such as floods, storms or terrorist attacks. We have taken steps to
have disaster recovery plans in place but there can be no assurance that such an event would not have a significant adverse impact on
our business.
We
have operations in a variety of countries, which subjects us to additional risks.
We
are a global business and derived substantially all of our revenue outside the United States during the year ended December 31, 2022.
In the year ended December 31, 2022, we earned approximately 73% of our revenue from our operations in the UK, 8% of our revenue from
our operations in Greece, and 19% of our revenue from our operations in the rest of the world. Our business in foreign markets subjects
us to risks customarily associated with such operations, including:
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foreign withholding taxes
on, or bank regulatory restrictions on expatriating, our subsidiaries’ earnings that could reduce cash flow available to meet
our required debt service and other obligations; |
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the complexity of foreign
laws, regulations and markets; |
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the impact of foreign labor
laws and disputes; |
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potential risks relating
to our ability to manage our foreign operations, monitor our customers’ activities or our partners’ activities which
may subject us to risks involving such other entities’ financial condition or to inconsistent interests or goals; |
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recent gaming tax increases
in Italy; |
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other economic, tax and
regulatory policies of foreign governments; and |
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the ability to attract
and retain key personnel in foreign jurisdictions. |
Our
consolidated financial results are significantly affected by foreign currency exchange rate fluctuations. Foreign currency exchange rate
exposures arise from current transactions and anticipated transactions denominated in currencies other than U.S. Dollars, and from the
translation of foreign currency balance sheet accounts into GBP-denominated or USD-denominated balance sheet accounts. Exposure to currency
exchange rate fluctuations exists and will continue because a significant portion of our revenues are denominated in currencies other
than the USD, particularly GBP and the Euro. Exchange rate fluctuations have in the past adversely affected operating results and cash
flows and may continue to adversely affect our results of operations and cash flows and the value of assets.
As
a result of the geographic concentration of our operations in the UK, Italy and Greece, our operating results and cash flow depend significantly
on economic conditions and the other factors listed above in these sector areas. There can be no assurance that we will be able to operate
on a continuing successful basis in these sectors or in any combination of different geographical sectors.
Our
business could be negatively affected by ownership changes and consolidation in the gaming industry.
Because
a substantial part of our revenue is recurring in nature, our medium to long term results of operations, cash flows and financial condition
could be negatively affected if any of our customers were sold to or merged with other customers, or if consolidation in the gaming industry
were otherwise effected. Consolidation among gaming operators could result in our customers using more products and services of our competitors
or reducing their spending on our products, or could otherwise cause downward pricing pressures, any of which outcomes could negatively
affect our business.
We
may not be able to capitalize on the expansion of interactive gaming or other trends and changes in the gaming and lottery industries,
including due to laws and regulations governing these industries, and other factors.
We
participate in new and evolving aspects of the interactive gaming and lottery industries. Part of our strategy is to take advantage of
the liberalization of regulations covering these industries on a global basis. These industries involve significant risks and uncertainties,
including legal, business and financial risks. The fast-changing environment in these industries can make it difficult to plan strategically
and can provide opportunities for competitors to grow their businesses at our expense. Consequently, our future results of operations,
cash flows and financial condition are difficult to predict and may not grow at the rates we expect.
Laws
relating to interactive gaming are evolving. To varying degrees, governments have taken steps to change the regulation of interactive
wagering through the implementation of new or revised licensing and taxation regimes, including the possible imposition of sanctions
on unlicensed providers. We cannot predict the timing, scope or terms of the implementation or revision of any such state, federal or
foreign laws or regulations, or the extent to which any such laws and regulations may facilitate or hinder our strategy.
In
jurisdictions that authorize interactive gaming, we cannot assure that we will be successful in offering our technology, content and
services to interactive gaming operators, because we expect to face intense competition from our traditional competitors in the gaming
and lottery industries as well as a number of other domestic and foreign competitors (and, in some cases, the operators themselves),
many of which have substantially greater financial resources or experience in this area than we do.
Know-your-customer
and geo-location programs and technologies supplied by third parties are an important aspect of certain interactive gaming products and
services, because they can confirm certain information with respect to players and prospective players, such as age, identity and location.
Payment processing programs and technologies, typically provided by third parties, are also a necessary feature of interactive wagering
products and services. These programs and technologies are costly, and our use of them may have an adverse impact on our results of operations,
cash flows and financial condition. Additionally, we cannot assure that products or services containing these programs and technologies
will be available to us on commercially reasonable terms, if at all, or that they will perform accurately or otherwise in accordance
with required specifications.
Our
business is capital intensive and our ability to retain customers may be influenced by our ability to deploy additional capital.
Customers
of our server based gaming products may request us to incur capital expenditures to provide gaming terminals to support their land-based
operations. While we seek to obtain what we believe to be satisfactory rates of return on such investments, these capital expenditures
can be meaningful and may be concentrated within short periods of time. To the extent that we have insufficient access to capital or
liquidity at the time that a customer, or prospective customer, makes such a request, we may be at a competitive disadvantage in retaining
or attracting such customer. Such a circumstance could have an adverse effect on our business, financial condition, results of operations
or prospects.
We
may be subject to claims arising from the operations of our various businesses for periods prior to the dates we acquired them.
We
may be subject to claims or liabilities arising from the ownership or operation businesses we have acquired for the periods prior to
our acquisition of them, including environmental, employee-related and other liabilities and claims not covered by insurance.
Our
success depends upon our key personnel.
Our
business results depend largely upon the continued contributions of various members of our management team, as well as certain key technical
specialists, game designers, operational experts and other developers and operators of key intellectual property and processes. If we
lose the services of one or more members of our management team or key employees, our business, financial condition and results of operations,
as well as the market price of our securities, could be adversely affected.
The
long-term performance of our business relies on our ability to attract, develop and retain talented personnel and our labor force while
controlling our labor costs.
To
be successful, we must attract, develop and retain highly qualified and talented personnel who have the experience, knowledge and expertise
to successfully implement our key business strategies. We also must attract, develop and retain our labor force while maintaining labor
costs. We compete for employees, including sales people, regional management, executive officers and others, with a broad range of employers
in many different industries, including large multinational firms, and we invest significant resources in recruiting, developing, motivating
and retaining them. The failure to attract and retain key employees, or to develop effective succession planning to assure smooth transitions
of those employees and the knowledge, customer relationships and expertise they possess, could negatively affect our competitive position
and our operating results. Further, if we are unable to cost-effectively recruit, train and retain sufficient skilled personnel, we may
not be able to adequately satisfy increased demand for our products and services, which could adversely affect our operating results.
Restrictions
in our existing borrowings, including covenants set forth in our existing debt facilities, or any other indebtedness we may incur in
the future, could adversely affect our business, financial condition, or results of operations, and our ability to make distributions
to stockholders and the value of our common stock.
Our
existing borrowings, and any other indebtedness we may enter into, may limit our ability to, among other things:
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incur or guarantee additional
debt; |
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make distributions or dividends
on or redeem or repurchase shares of common stock; |
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make certain investments
and acquisitions; |
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make capital expenditures; |
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incur certain liens or
permit them to exist; |
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enter into certain types
of transactions with affiliates; |
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acquire, merge or consolidate
with another company; and |
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transfer, sell or otherwise
dispose of all or substantially all of our assets. |
The
provisions of our existing borrowings may affect our ability to obtain future financing and pursue attractive business opportunities
and our flexibility in planning for, and reacting to, changes in business conditions.
As
of December 31, 2022, our senior debt consisted of an aggregate of £235.0 million ($282.9 million) of Senior Secured Notes (carrying
an interest rate of 7.875% per annum, and maturing on June 1, 2026), and we had £20.0 million ($24.1 million) of credit facility
borrowings available under the RCF Agreement (see Note 13).
The
Indenture governing the Senior Secured Notes contains incurrence covenants that limit the ability of the Company and the Company’s
restricted subsidiaries to, among other things, (i) incur or guarantee additional debt and issue certain preferred stock of restricted
subsidiaries; (ii) create or incur certain liens; (iii) make restricted payments, including dividends or distributions to the Company’s
stockholders or repurchase the Company’s stock; (iv) prepay or redeem subordinated debt; (v) make certain investments, including
participating joint ventures; (vi) create encumbrances or restrictions on the payment of dividends or other distributions by restricted
subsidiaries; (vii) sell assets, or consolidate or merge with or into other companies; (viii) sell or transfer all or substantially all
of the Company’s assets or those of the Company’s subsidiaries on a consolidated basis; (ix) engage in certain transactions
with affiliates; and (x) create unrestricted subsidiaries. Certain of these covenants will be suspended if and for so long as the Senior
Secured Notes have investment grade ratings from any two of Moody’s Investors Service, Inc., Standard & Poor’s Investors
Ratings Services and Fitch Ratings, Inc. These covenants are subject to exceptions and qualifications as set forth in the Indenture.
The
RCF Agreement governing credit facility borrowings contains various covenants (which include restrictions regarding the incurrence of
liens, the incurrence of indebtedness by the Company’s subsidiaries and fundamental changes, subject in each case to certain exceptions),
representations, warranties, limitations and events of default (which include non-payment, breach of obligations under the financing
documents, cross-default, insolvency and litigation) customary for similar facilities for similarly rated borrowers and subject to customary
carve-outs and grace periods. Following the occurrence of an event of default which has not been waived or remedied, the Lenders who
represent more than 66.67% of total commitments under the RCF may, subject to the terms of an intercreditor agreement (which governs
the relationship between the Lenders and the holders of the Senior Secured Notes), instruct the agent to (i) accelerate the RCF Loans,
(ii) instruct the security agent to enforce the transaction security and/or (iii) exercise any other remedies available to the Lenders.
The
RCF Agreement requires that the Company maintain a maximum consolidated senior secured net leverage ratio of 6.25x on the test date for
the relevant period ending June 30, 2022, stepping down to 6.0x on March 31, 2022, 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 Agreement does
not include a minimum interest coverage ratio or other financial covenants.
We
may have future capital needs and may not be able to obtain additional financing on acceptable terms.
Economic
and credit market conditions, the performance of the gaming industry and our financial performance, as well as other factors, may constrain
our financing abilities. Our ability to secure additional financing, if available, and to satisfy our financial obligations under indebtedness
outstanding from time to time will depend upon our future operating performance, the availability of credit, economic conditions and
financial, business and other factors, many of which are beyond our control.
We
may require additional financing to fund our operations and growth. The failure to secure additional financing could have an adverse
effect on our continued development or growth. None of our officers, directors or stockholders is required to provide any financing to
us.
We
may be unable to identify and develop sufficient new products and product lines and integrate them into our existing business, which
may adversely affect our ability to compete; our expansion into new sectors may present competitive and regulatory challenges that
differ from current ones.
Our
business depends in part on our ability to identify and develop future products and product lines that complement existing products and
product lines and that respond to our customers’ and players’ needs. We may not be able to compete effectively unless our
product selection keeps up with trends in the sectors in which it competes or trends in new products. If our new products and product
lines do not meet our customers’ and players’ expectations, or if they are not brought to market in a timely and effective
manner, our revenue (especially our revenue under revenue participation-based contracts) and financial performance will be negatively
affected. In addition to market factors, our ability to develop new products and their ability to achieve commercial success will depend
on a number of factors, including our ability to:
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effectively market our
games to our customers and to existing and new players; |
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adapt to changing customer
needs and player preferences; |
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adapt to new technologies; |
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adapt game features and
contents for an increasingly diverse set of devices and specifications; |
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minimize launch delays
and cost overruns on the development of new products and features; |
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expand and enhance games
and content after their initial release; |
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attract, retain and motivate
talented and experienced game designers, product managers and engineers; |
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achieve and maintain player
engagement; |
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develop games that can
build upon or become franchise games; |
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maintain quality content
and game experience; |
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compete successfully against
a large and growing number of market participants; |
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integrate new products
and product lines into our existing business; and |
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minimize and quickly resolve
bugs or outages. |
In
addition, if new technologies are protected by the intellectual property rights of others, including our competitors, we may be prevented
from introducing new products and product lines based on these technologies or expanding into sectors created by these technologies.
Even if we are able to develop new products and product lines that achieve success, it is possible that these products and product lines
could divert players of our other games without growing our overall user base, which could harm our operating results. Furthermore, the
success of new products and product lines will depend upon market demand and there is a risk that new products and product lines will
not deliver expected results, which could adversely affect our future sales and results of operations. It is difficult to know whether
we will succeed in continuing to develop successful new products and product lines.
Our
expansion into new sectors may present competitive, distribution and regulatory challenges that differ from current ones. We may be less
familiar with new product categories and may face different or additional risks, as well as increased or unexpected costs, compared to
existing operations.
Changes
in customer and player preferences could adversely affect our results of operations.
Competition
in the gaming industry is intense and subject to rapid change, including changes from evolving customer and player preferences. Accordingly,
our success in the gaming industry is dependent on our ability to offer attractive products to our customers and players. In the markets
in which we operate, we compete with various other gaming vendors and our customers and players now have access to many other forms of
recreational and leisure activities. Our participation-based revenue will depend on the appeal of our gaming offerings to our customers
and players relative to our competitors. If we are not able to anticipate and react to changes in customer and player preferences, our
competitive and financial position may be adversely affected.
In
addition, our future success will also depend on the success of the gaming industry as a whole in attracting and retaining players. Gaming
may lose popularity as new leisure activities arise or as other leisure activities become more popular. Alternatively, changes in social
mores and demographics could result in reduced acceptance of gaming as a leisure activity. If the popularity of gaming declines for any
reason, our business, financial condition and results of operations may be adversely affected.
Our
financial success is dependent on our customers’ ability to attract and maintain players.
We
have a participation-driven business model, whereby a significant amount of our revenues are generated from the gaming revenue of our
customers, typically as a percentage of gross revenue. Accordingly, our results of operation and financial condition have been and are
expected to continue to be influenced by the ability of our customers to attract and maintain players. The ability of our customers to
attract and maintain players depends on a number of factors, including player gaming preferences, marketing of our products and player
perceptions of our customers. If we are unable to provide our customers with products that players find engaging or fail to perform our
obligations in maintaining the products we provide to our customers, players may reduce the amount they spend with our customers, which
in turn may have an adverse effect on our results of operations (see “—We may be unable to identify and develop sufficient
new products and product lines and integrate them into our existing business, which may adversely affect our ability to compete;
our expansion into new sectors may present competitive and regulatory challenges that differ from current ones.”). Under most
of our contracts, our customers are under no obligation to market our products and therefore we are dependent on our customers in promoting
our products to maintain and attract players. Failure by our customers to effectively market our products may result in decreased gaming
revenue for our customers from our products, which may have an adverse effect on our results of operations. Player perception of our
customers may also impact the willingness of players to engage with our customers, which in turn may have an adverse effect on our results
of operation.
Risks
Relating to Our Status as a Public Company and Ownership of Our Common Stock
We
may be required to recognize impairment charges related to goodwill, identified intangible assets and property and equipment or to take
write-downs or write-offs, restructuring or other charges that could have a significant negative effect on our financial condition, results
of operations and stock price, which could have an adverse effect on our common stock and your investment.
We
are required to test goodwill and any other intangible asset with an indefinite life for possible impairment on the same date each year
and on an interim basis if there are indicators of a possible impairment. We are also required to evaluate amortizable intangible assets
and property and equipment for impairment if there are indicators of a possible impairment. There is significant judgment required in
the analysis of a potential impairment of goodwill, identified intangible assets and property and equipment. If, as a result of a general
economic slowdown, deterioration in one or more of the sectors in which we operate or impairment in our financial performance and/or
future outlook, the estimated fair value of our long-lived assets decreases, we may determine that one or more of our long-lived assets
is impaired. An impairment charge would be determined based on the estimated fair value of the assets and any such impairment charge
could have an adverse effect on our financial condition and results of operations.
Even
though these charges may be non-cash items and would not have an immediate impact on our liquidity, the fact that we report charges of
this nature could contribute to negative market perceptions about the Company or our securities. In addition, charges of this nature
may cause us to be unable to obtain future financing on favorable terms or at all.
The
liquidity of the trading markets for our securities and other factors may adversely affect the price of our securities.
The
price of our securities may be affected by the light volume of the trading markets for our securities as well as a variety of other factors
including due to general economic conditions and forecasts, our general business condition and the release of our financial reports.
If our results do not meet the expectations of investors or securities analysts, the market price of our securities may decline. In addition,
fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Any of the factors listed
below could have an adverse effect on the price of our securities, and our securities may trade at prices significantly below the price
you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors
affecting the trading price of the Company’s securities may include:
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market conditions affecting
the gaming industry; |
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quarterly variations in
our results of operations; |
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changes in government regulations; |
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the announcement of acquisitions
by us or our competitors; |
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changes in general economic
and political conditions; |
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volatility in the financial
markets; |
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results of our operations
and the operations of others in our industry; |
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changes in interest rates; |
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threatened or actual litigation
and government investigations; |
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the addition or departure
of key personnel; |
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actions taken by our stockholders,
including the sale or disposition of their shares of our common stock; and |
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differences between our
actual financial and operating results and those expected by investors and analysts and changes in analysts’ recommendations
or projections. |
Broad
market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock
market in general, and NASDAQ in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities,
may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors
perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial condition or results
of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities
and our ability to obtain additional financing in the future.
Depending
on the number of shares you hold and other factors, you may not be able to sell your shares at the times you prefer at desirable market
prices.
We
do not currently intend to pay dividends on our common stock.
We
do not currently expect to pay cash dividends on our common stock and have not paid cash dividends on our common stock to date. Any future
dividend payments are within the absolute discretion of our board of directors and will depend upon, among other things, our results
of operations, working capital requirements, capital expenditure requirements, financial condition, level of indebtedness, contractual
restrictions with respect to payment of dividends, business opportunities, anticipated cash needs, provisions of applicable law and other
factors that our board of directors may deem relevant.
Our
business and stock price may suffer if securities or industry analysts do not publish or cease publishing research or reports about the
Company, our business, or our sector, or if they change their recommendations regarding our common stock adversely, the price and trading
volume of our common stock could decline.
The
trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about
us, our business, our sector, or our competitors. If securities or industry analysts do not continue to cover the Company, our stock
price and trading volume would likely be negatively affected. If any of the analysts who may cover the Company change their recommendation
regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock
would likely decline. If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports
on the Company, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
We
may issue a significant number of shares of our common stock or other securities from time to time.
We
may issue shares of our common stock or other securities from time to time as consideration for, or to finance, future acquisitions and
investments or for other capital needs. We cannot predict the size of future issuances of our shares or the effect, if any, that future
sales and issuances of shares would have on the market price of our common stock. If any such acquisition or investment is significant,
the number of shares of common stock or the number or aggregate principal amount, as the case may be, of other securities that we may
issue may in turn be substantial and may result in additional dilution to our stockholders. We may also grant registration rights covering
shares of our common stock or other securities that we may issue in connection with any such acquisitions and investments. On February
16, 2022, the Company filed a registration statement pursuant to which the Company may offer and sell from time to time, in one or more
series, any one of the following securities of our company, for total gross proceeds up to $300,000,000:
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common stock; |
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preferred stock; |
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secured or unsecured debt
securities consisting of notes, debentures or other evidences of indebtedness which may be senior debt securities, senior subordinated
debt securities or subordinated debt securities, each of which may be convertible into equity securities; |
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warrants to purchase our
securities; |
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rights to purchase any
of the foregoing securities; or |
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units comprised of, or
other combinations of, the foregoing securities. |
Anti-takeover
provisions contained in our second amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law,
could impair a takeover attempt.
Our
second amended and restated certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing
changes in control or changes in our management without the consent of our board of directors. These provisions include:
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no cumulative voting in
the election of directors, which limits the ability of minority stockholders to elect director candidates; |
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the exclusive right of
our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation,
death, or removal of a director with or without cause by stockholders, which prevents stockholders from being able to fill vacancies
on our board of directors; |
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the ability of our board
of directors to determine whether to issue shares of our preferred stock and to determine the price and other terms of those shares,
including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership
of a hostile acquirer; |
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limiting the liability
of, and providing indemnification to, our directors and officers; |
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designating the Court of
Chancery of the State of Delaware as the exclusive forum for adjudication of disputes; |
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controlling the procedures
for the conduct and scheduling of stockholder meetings; and |
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advance notice procedures
that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon
at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to
elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company. |
These
provisions, alone or together, could delay hostile takeovers and changes in control of the Company or changes in our board of directors
and management.
As
a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation
Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations
without approval of the holders of substantially all of our outstanding common stock. Any provision of our second amended and restated
certificate of incorporation or bylaws, or Delaware law that has the effect of delaying or deterring a change in control could limit
the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some
investors are willing to pay for our common stock.
Risks
Relating to Economic and Political Conditions
Volatility
or disruption in the financial markets could materially adversely affect our business and the trading price of our common stock.
Our
business relies on stable and efficient financial markets. Any disruption in the credit and capital markets could adversely impact our
ability to obtain financing on acceptable terms. Volatility in the financial markets could also result in difficulties for financial
institutions and other parties that we do business with, which could potentially affect the ability to access financing under existing
arrangements. We are exposed to the impact of any global or domestic economic disruption, including any potential impact of the decision
by the United Kingdom to exit the EU and the sovereign debt crises in certain Eurozone countries where we do business. Our ability to
continue to fund operating expenses, capital expenditures and other cash requirements over the long term may require access to additional
sources of funds, including equity and debt capital markets, and market volatility and general economic conditions may adversely affect
our ability to access capital markets. In addition, the inability of our vendors to access capital and liquidity with which to maintain
their inventory, production levels and product quality and to operate their businesses, or the insolvency of our vendors, could lead
to their failure to deliver merchandise. If we are unable to purchase products when needed, our sales could be materially adversely affected.
Accordingly, volatility or disruption in the financial markets could impair our ability to execute our growth strategy and could have
an adverse effect on the trading price of our common stock.
Currency
exchange rate fluctuations could result in lower revenues, higher costs and decreased margins and earnings.
We
conduct purchase and sale transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange
rates globally. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United
Kingdom’s June 23, 2016 referendum in which voters approved Brexit and subsequent entry into and ratification of a withdrawal agreement
as of January 29, 2021 followed by an agreement of the terms of a trade and cooperation agreement effective as of December 31, 2021.
It is possible that sovereign debt crises in certain Eurozone countries could lead to the abandonment of the Euro and the reintroduction
of national currencies in those countries. International revenues and expenses generally are derived from sales and operations in various
foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign
currencies and translated into USD for consolidated financial reporting, as weakening of foreign currencies relative to the USD will
adversely affect the USD value of the Company’s foreign currency-denominated sales and earnings. Currency exchange rate fluctuations
could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials
more expensive and more difficult to finance. Foreign currency fluctuations could have an adverse effect on our results of operations
and financial condition.
We
may hedge other foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations
on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of
a stronger USD or other trading currency, but they also reduce the positive impact of a weaker USD or other trading currency. Our future
financial results could be significantly affected by the value of the USD in relation to the foreign currencies in which we conduct business.
The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities, and
there can be no assurance that our hedging activities will be effective.
Global
economic conditions could have an adverse effect on our business, operating results and financial condition.
The
uncertain state of the global economy continues to affect businesses around the world, most acutely in emerging markets and developing
economies. If global economic and financial market conditions do not improve or deteriorate, the following factors could have an adverse
effect on our business, operating results and financial condition:
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Slower consumer spending
may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues,
higher discounts, increased inventories and lower gross margins; |
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In the future, we may be
unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so; |
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We conduct transactions
in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the USD. Continued
volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant
impact on our reported operating results and financial condition; |
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Continued volatility in
the availability and prices for commodities and raw materials we use in our products and in our supply chain could have an adverse
effect on our costs, gross margins and profitability; |
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If operators or distributors
of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase
our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment
terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt
expense; |
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If operators or distributors
of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively
affect the sale of our products to consumers; and |
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If contract manufacturers
of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets
to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery
of shipments of our products. |
International
hostilities, terrorist or cyber-terrorist activities, natural disasters, pandemics, and infrastructure disruptions could prevent us from
effectively serving our customers and thus adversely affect our results of operations.
Acts
of terrorist violence, cyber-terrorism, political unrest, armed regional and international hostilities and international responses
to these hostilities, natural disasters, including hurricanes or floods, global health risks or pandemics (such as COVID-19) or the
threat of or perceived potential for these events could have a negative impact on us. These events could adversely affect our
customers’ levels of business activity (or involve government mandated shutdowns of our venues) and precipitate sudden
significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our employees
and our physical facilities and operations around the world, whether the facilities are ours or those of our third-party service
providers or customers. By disrupting communications and travel and increasing the difficulty of obtaining and retaining highly
skilled and qualified personnel, these events could make it difficult or impossible for us to deliver products and services to our
customers. Extended disruptions of electricity, other public utilities or network services at our facilities, as well as system
failures at our facilities or otherwise, could also adversely affect our ability to serve our customers. We may be unable to protect
our employees, facilities and systems against all such occurrences. We generally do not have insurance for losses and interruptions
caused by terrorist attacks, conflicts and wars. If these disruptions prevent us from effectively serving our customers, our results
of operations could be adversely affected.
We
face risks and uncertainty arising from the United Kingdom’s withdrawal from the European Union.
Following
from the United Kingdom’s public referendum vote to exit from the European Union in June 2016, a withdrawal agreement was signed
by both the United Kingdom and European Union and formally ratified as of January 29, 2021. In accordance with the terms of the agreement,
the terms of a trade and cooperation agreement were agreed between officials from the European Union and United Kingdom on December 31,
2021. As with other businesses operating in the UK and Europe, the measures could potentially have corporate structural consequences,
adversely affect manufacturing and other costs, adversely change tax benefits or liabilities in these or other jurisdictions and could
disrupt some of the markets and jurisdictions in which we operate. In addition, Brexit could lead to legal uncertainty and potentially
divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. In addition,
the announcement of Brexit has caused significant volatility in global stock markets and currency exchange rate fluctuations, including
the strengthening of the USD against some foreign currencies, and the Brexit negotiations may continue to cause significant volatility.
The outcomes of these provisional and further trade deal negotiations also may create global economic uncertainty, which may cause customers
and potential customers to monitor their costs and reduce their budgets for products and services. Any of these effects of Brexit, among
others, could materially adversely affect the business, business opportunities, results of operations, financial condition and cash flows
of our Company.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES.
As
of December 31, 2022, the Company occupied approximately 240,000 square feet of leased space in the United Kingdom, 3,000 square feet
of leased space elsewhere in Europe, 3,200 square feet in New York and 17,000 square feet in Kochi, India. The primary locations were
as follows:
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Approximately 40,000 square
feet of office space on one floor in Burton-on-Trent, East Midlands, UK. |
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Approximately 2,250 square
feet of flexible office space in Manchester, UK. |
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Approximately 80,000 square
feet of administrative offices, workshop and warehousing in Bridgend, South Wales, UK. |
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Approximately 2,000 square
feet of offices on one floor in Rome, Italy. |
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Approximately 17,000 square
feet of office space on one floor in Kochi, India. |
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Approximately 3,200 square
feet of office space on one floor in New York. |
ITEM
3. LEGAL PROCEEDINGS.
From
time to time, the Company is involved in legal matters arising in the ordinary course of business. While the Company believes that such
matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company
is, or could be, involved in litigation, will not have an adverse effect on its business, financial condition or results of operations.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
1. |
Nature
of Operations, Management’s Plans and Summary of Significant Accounting Policies |
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 December 31, 2022, the Company’s cash on hand was $25.0 million, and the Company had working capital in addition to cash of
$28.9 million. The Company recorded net income of $22.3 million and net losses of $36.7 million and $32.4 million for the year ended December
31, 2022, 2021 and 2020, respectively. Net income/losses include excess capital expenditure, excluding the acquisition of subsidiary
assets, over depreciation and amortization, of $2.2 million for the year ended December 31, 2022, and excess depreciation and amortization
over capital expenditure, excluding the acquisition of subsidiary assets, of $21.4 million and $22.4 million for the year ended December
31, 2021 and 2020, respectively, non-cash stock-based compensation of $10.8 million, $13.0 million and $4.8 million for the year ended
December 31, 2022, 2021 and 2020, respectively, and non-cash changes in fair value of warrant liability of $0.0 million, $0.9 million
gain and $3.2 million losses for the year ended December 31, 2022, 2021, and 2020, respectively. Historically, the Company has generally
had positive cash flows from operating activities and has relied on a combination of cash flows provided by operations and the incurrence
of debt and/or the refinancing of existing debt to fund its obligations. Cash flows provided by operations amounted to $34.7 million,
$6.2 million and $52.9 million for the year ended December 31, 2022, 2021 and 2020 respectively, with the change year on year due to
land based operations being subject to lockdown restrictions for part of the year ended December 31, 2021. Working capital of $53.9 million
includes a non-cash settled item of $4.8 million of deferred income. Management currently believes that, absent any long-term coronavirus
(“COVID-19”) impact (see below), the Company’s cash balances on hand, cash flows expected to be generated from operations,
ability to control and defer capital projects and amounts available from the Company’s external borrowings will be sufficient to
fund the Company’s net cash requirements through March 2024.
There
have been no COVID-19 restrictions in the United Kingdom since July 2021 and social distancing measures throughout Greece and Italy are
no longer in force as of the second quarter of 2022.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Basis
of Presentation
The
accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
Principles
of Consolidation
All
monetary values set forth in these consolidated financial statements are in US Dollars (“USD”) unless otherwise stated herein.
The accompanying consolidated financial statements include the results of the Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Foreign
Currency Translation
For
most of our operations, the British pound (“GBP”) is our functional currency. Our reporting currency is the USD. We also
have operations where the local currency is the functional currency, including our operations in mainland Europe and North America. Assets
and liabilities of foreign operations are translated at period-end rates of exchange, equity is translated at historical rates of exchange
and results of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating
the foreign currency financial statements are recorded as a separate component of accumulated other comprehensive income in stockholders’
deficit. Gains or losses resulting from foreign currency transactions are included in Selling, general and administrative expenses, Interest
expense, net and Other finance (expense) income in the Consolidated Statement of Operations and Comprehensive Income (Loss).
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates
these estimates, including those related to the revenue recognition for contracts involving software and non-software elements, allowance
for doubtful accounts, inventory reserve for net realizable value, currency swaps, valuation of hedging activities, goodwill and intangible
assets, useful lives of long-lived assets, stock-based compensation, valuation allowances on deferred taxes, warrant liability, pension
liability, commitments and contingencies and litigation, among others. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances. We regularly evaluate these significant factors
and make adjustments when facts and circumstances dictate. Actual results may differ from these estimates.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Cash
We
deposit cash with financial institutions that management believes are of high credit quality. Substantially all of the
Company’s cash is held outside of the U.S. Included within the cash balance of $25.0 million is $2.5 million of cash floats
held on site at holiday parks.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount and do not bear interest. Our standard credit terms are net 30 to 60 days. The allowance
for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. Changes in circumstances
relating to the collectability of accounts receivable may result in the need to increase or decrease our allowance for doubtful accounts
in the future. We determine the allowance based on historical experience, current market trends, and our customers’ financial condition.
We continually review our allowance for doubtful accounts. Past due balances and other higher risk amounts are reviewed individually
for collectability. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential
for recovery is considered remote.
Under
certain contracts, the timing of our invoices does not coincide with revenue recognized under the contract. We have unbilled accounts
receivable which represent revenue recorded in excess of amounts invoiced under the contract and generally become billable at contractually
specified dates. These amounts consist primarily of revenue from our share of net winnings earned on a daily basis where the billing
period does not fall on the last day of the period. We had $18.2 million and $17.4 million of unbilled accounts receivable as of December
31, 2022 and December 31, 2021, respectively.
Inventories
Inventories
consist primarily of component parts and related parts used in gaming terminals. Inventories are stated at the lower of cost or net realizable
value, using the first-in-first-out method. We determine the lower of cost or net realizable value of our inventory based on estimates
of potentially excess and obsolete inventories after considering historical and forecasted demand and average selling prices. Demand
for gaming terminals and parts inventory is also subject to technological obsolescence. Cost includes all direct costs and an appropriate
proportion of fixed and variable overheads.
Property
and Equipment
Property
and equipment are recorded at cost, and when placed into service, depreciated and amortized to their residual values using the straight-line
method over the estimated useful lives of the related assets as follows:
Schedule
of Property and Equipment Estimated Useful Lives
Leasehold
property |
|
Shorter
of the useful life or the life of the lease |
Server
based gaming terminals |
|
2
– 7 years |
Plant
and machinery and fixtures and fittings |
|
3
– 10 years |
Computer
equipment |
|
3
– 5 years |
Our
policy is to periodically review the estimated useful lives of our fixed assets. We also assess the recoverability of long-lived assets
(or asset groups) whenever events or changes in circumstances indicate that the carrying amount of such an asset (or asset groups) may
not be recoverable.
Repairs
and maintenance costs are expensed as incurred. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation
are written off and any resulting gain or loss is credited or charged to income.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Software
Development Costs
We
classify software development costs as either internal use software or external use software. We account for costs incurred to develop
internal use software in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal Use Software. Consequently,
any costs incurred during preliminary project stages are expensed; direct costs incurred during the application development stages are
capitalized; and costs incurred during the post-implementation/operation stages are expensed. Once the software is placed in operation,
we amortize the capitalized internal use software cost over its estimated economic useful life, which range from two to five years.
We
purchase, license and incur costs to develop external use software to be used in the products we sell or provide to customers. Such costs
are capitalized under ASC 985-20, Costs of Software to Be Sold Leased or Marketed. Costs incurred in creating software are expensed when
incurred as Selling, General and Administrative Expenses until technological feasibility has been established, after which costs are
capitalized up to the date the software is available for general release to customers. We capitalize the payments made for software that
we purchase or license for use in our products that has previously met the technological feasibility criteria prior to our purchase or
license. Annual amortization of capitalized external use software development costs is recorded over the estimated economic life, which
is two to five years.
Research
and development costs are expensed as incurred, with the exception of research and development related primarily to software product
development costs, which is expensed until technological feasibility has been established. Total research and development costs
amounted to $16.1
million, $13.8
million and $15.0
million in the years ended December 31, 2022, 2021 and 2020, respectively. Research and development costs amounting to $1.5
million, $3.1
million and $3.9
million were expensed to Selling, general and administrative expenses during the year ended December 31, 2022, 2021 and 2020,
respectively. Research and development costs amounting to $14.6
million, $10.7
million and $11.1
million were capitalized during the year ended December 31, 2022, 2021 and 2020, respectively. Employee related costs associated
with related product development are included in Selling, general and administrative expenses in the Consolidated Statement of
Operations and Comprehensive Income (Loss).
Goodwill
and Other Acquired Intangible Assets
Our
principal acquired intangible assets relate to goodwill, trademarks and customer relationships. Goodwill represents the excess purchase
price over the fair value of the identifiable net assets acquired in a business combination. Trademarks and customer relationships were
originally recorded at their fair values in connection with business combinations, and increased in 2021 due to the acquisition of 100%
of the membership interests of Sportech Lotteries, LLC (see Note 2).
Goodwill
and other intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually.
Intangible assets with finite lives are amortized on a straight-line basis over three to thirteen years to their estimated residual values
and reviewed for impairment. Factors considered when assigning useful lives include legal, regulatory and contractual provisions, product
obsolescence, demand, competition and other economic factors.
Impairment
of Goodwill and Long-Lived Assets
We
test for goodwill impairment at least annually on the last day of our fiscal period, and whenever other facts and circumstances indicate
that the carrying value may not be recoverable. For goodwill impairment evaluations, we first make a qualitative assessment to determine
if goodwill is likely to be impaired. If it is more-likely-than-not that a reporting unit’s fair value is less than its carrying
value, we then compare the fair value of the reporting unit to its respective carrying amount. Goodwill is carried, and therefore tested,
at the reporting unit level. We have four segments which are considered to represent reporting units, Gaming, Virtual Sports, Interactive
and Leisure, as detailed in Note 27. If the fair value of the reporting unit is less than its carrying amount, the amount of the impairment
loss, if any, will be measured by comparing the implied fair value of goodwill to its carrying amount and would be charged to operations
as an impairment loss. A mixture of qualitative and quantitative tests were carried out as of December 31, 2022 and 2021 and no impairment
was required at any of these dates.
We
assess the recoverability of long-lived assets and intangible assets with finite useful lives whenever events arise or circumstances
change that indicate the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets (or asset groups) to
be held and used is measured by a comparison of the carrying amount of the asset (or asset group) to the expected net future undiscounted
cash flows to be generated by that asset (or asset group) or, for identifiable intangibles with finite useful lives, by determining whether
the amortization of the intangible asset balance over its remaining life can be recovered through expected net future undiscounted cash
flows. The amount of impairment of other long-lived assets and intangible assets with finite lives is measured by the amount by which
the carrying amount of the asset exceeds the fair market value of the asset.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Equity
Method Investment
For
investments in entities over which the Company exercises significant influence, but which do not meet the requirements for consolidation,
the Company uses the equity method of accounting. On October 1, 2019, the Company acquired a 40% noncontrolling interest in Innov8 Gaming
Limited in connection with the Acquisition (see Note 2), and in April 2020 this interest was disposed of. The value of the Company’s
equity method investment was $0.7 million as of December 31, 2019, and was impaired to $Nil in March 2020 prior to disposal. The Company’s
share of earnings from its equity method investee, including the impairment, is presented in Loss from equity method investee in the
Consolidated Statement of Operations and Comprehensive Income (Loss).
The
Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying
amounts of such investment may not be recoverable. The difference between the carrying value of the equity method investment and its
estimated fair value is recognized as an impairment charge when the loss in value is deemed other-than-temporary. Since April 2020, the
Company has had no equity method investments and has therefore recognized no impairments.
Deferred
Revenue and Deferred Cost of Sales
Deferred
revenue arises from the timing differences between the shipment or installation of gaming terminals and systems products and the satisfaction
of all revenue recognition criteria consistent with our revenue recognition policy, as well as prepayment of contracts which are recognized
ratably over a service period, such as maintenance or licensing fees. Deferred cost of sales, recorded as prepaid expenses and other
assets, consists of the direct costs associated with the manufacture of gaming equipment and systems products for which revenue has been
deferred. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred
revenue in current liabilities. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date
are classified as deferred revenue, net of current portion.
Debt
Issuance Costs
Debt
issuance costs incurred in connection with the Company’s debt are capitalized and amortized as interest expense over the term of
the related debt. The Company presents debt issuance costs as a reduction from the carrying amount of debt. Only costs that are wholly
attributable to obtaining the related debt finance are treated as debt issuance costs. Any other costs are expensed to the Consolidated
Statement of Operations and Comprehensive Income (Loss) as part of Acquisition and integration related transaction expenses.
Value
Added Tax
The
Company is subject to Value Added Tax (“VAT”) in some locations. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods and services sold less VAT paid on purchases made with the relevant supporting invoices.
VAT is collected from customers by the Company on behalf of the tax authorities and is therefore not charged to the Consolidated Statement
of Operations and Comprehensive Income (Loss).
Common
Stock Purchase Warrants and Derivative Financial Instruments
The
Company reviews any common stock purchase warrants and other freestanding derivative financial instruments at each balance sheet date
and classifies them on the consolidated balance sheet as:
|
a) |
Equity
if they (i) require physical settlement (full or net-share settlement), or (ii) gives the Company a choice of net-cash settlement
or physical settlement in its own shares (full or net shares), or |
|
|
|
|
b) |
Assets
or liabilities if they (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs
and if that event is outside the Company’s control), or (ii) give the counterparty a choice of net-cash settlement or settlement
in shares (full physical settlement or net-share settlement). |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
At
each reporting date, the Company determines whether a change in classification between assets and liabilities is required.
During
the year ending December 31, 2021, (i) an aggregate of 2,651,129 shares of common stock were issued pursuant to the exercise of 5,302,258
Public Warrants and (ii) an aggregate of 1,027,836 shares of common stock were issued pursuant to the exercise (on a cashless basis)
of 9,049,230 Private Warrants. There were no warrants outstanding as of December 31, 2021 or December 31, 2022.
At
December 31, 2020, the Company considered that the warrants did not meet the criteria for equity classification and must be recorded
as liabilities. As the warrants met the definition of a derivative as contemplated in ASC 815, the warrants were measured at fair value
at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in
the Consolidated Statements of Operations and Comprehensive Income (Loss) in the period of change.
From
time to time we enter into foreign currency forward contracts to mitigate the risk associated with cash payments required to be made
in non-functional currencies or to mitigate the risk associated with cash to be received in non-functional currencies.
Accounting
Policy for Derivative Instruments and Hedging Activities
FASB
ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities
with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative
instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures
are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about
the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative
instruments.
As
required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value
of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging
relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.
Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying
as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash
flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation.
Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition
of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the
earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are
intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge
accounting.
In
accordance with the FASB’s fair value measurement guidance in ASU 2011-04, “Fair Value Measurements,” the Company made
an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements
on a net basis by counterparty portfolio.
Revenue
Recognition
Under
ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of distinct goods
and services, to a customer. Revenue is recognized when performance obligations are satisfied and the customer obtains control of promised
goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive
in exchange for goods or services. Under the standard, a contract’s transaction price is allocated to each distinct performance
obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company
performs the following five steps:
|
1. |
identify
the contracts with a customer; |
|
|
|
|
2. |
identify
the performance obligations within the contract, including whether they are distinct and capable of being distinct in the context
of the contract; |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
|
3. |
determine
the transaction price; |
|
4. |
allocate
the transaction price to the performance obligations in the contract; and |
|
|
|
|
5. |
recognize
revenue when, or as, the Company satisfies each performance obligation. |
Step
1 – Identify the contract
The
Company identifies contracts with its customers when all parties have approved the contract and are committed to perform their respective
obligations, when each party’s rights and the payment terms regarding the goods or services to be transferred can be identified.
The contract must also have commercial substance, and it must be probable that the Company will collect the consideration to which it
will be entitled.
Contracts
entered into at or near the same time with the same customer or related parties of the customer are accounted for as one contract if
any of the following criteria are met:
|
a. |
Contracts
were negotiated as a single commercial package (including whether a contract would be loss-making without taking into account the
consideration received under another contract) |
|
|
|
|
b. |
Consideration
in one contract depends on the other contract |
|
|
|
|
c. |
Goods
or services (or some of the goods or services) are a single performance obligation. |
Step
2 – Identify performance obligations
Performance
obligations are identified by considering whether a good or service is distinct. The Company considers a good or service to be distinct
only when the customer can benefit from it either on its own or together with other resources that are readily available, and when the
promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
The
Company applies the series guidance to its performance obligations where the following criteria apply:
|
a. |
Each
distinct good or service in the series meets the criteria to be a performance obligation satisfied over time. |
|
|
|
|
b. |
The
same method would be used to measure progress toward complete satisfaction of the performance obligation to transfer each distinct
good or service in the series to the customer. |
Step
3 – Determine the transaction price
The
Company considers all amounts to which it has rights in exchange for the goods or services transferred in determining the transaction
price. This includes fixed and variable consideration. Typically, consideration is stated in the contract with the customer.
The
Company assesses usage-based fees to determine whether they qualify as variable consideration. It also considers the impact of any liquidated
damages clauses or service level agreements.
Where
the Company’s performance obligations are determined to be a series, variable consideration is not estimated upfront in accordance
with the exception allowed by ASC 606.
Where
non-refundable upfront fees are included in the Company’s contracts with customer, the Company considers whether or not they represent
payment for a transferred good or service. Where they represent payment for future goods or services, the Company further considers whether
they represent a material right.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Step
4 – Allocate the transaction price
The
Company allocates a transaction price to each performance obligation based on the relative standalone selling prices of the goods or
services being provided. Where a contract includes multiple performance obligations, the Company determines the standalone selling price
at contract inception of the distinct good or service underlying each performance obligation in the contract and allocates the transaction
price in proportion to those standalone selling prices. Where possible, the Company uses the price charged for the good or service to
other customers in similar circumstances as evidence of standalone selling price. Where this is not possible, the standalone selling
price is estimated by experienced management using the best available judgement.
With
respect to performance obligations that are considered to be a series, where appropriate and where the required criteria are met, variable
consideration is allocated entirely to a distinct good or service that is part of a series.
Step
5 – Recognize revenue
The
Company recognizes revenue over time for performance obligations that meet one of the following criteria:
|
a. |
The
customer simultaneously receives and consumes the benefits provided by the Company’s performance as the Company performs. |
|
|
|
|
b. |
The
Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. |
|
|
|
|
c. |
The
Company’s performance does not create an asset with an alternative use to the Company, and the Company has an enforceable right
to payment for performance completed to date |
Revenue
for the Company’s remaining performance obligations that do not meet one of the above criteria is recognized at the point at which
the customer obtains control of the good or service.
Gaming
Revenue
Revenue
from Gaming terminals, access to our content and platform, including electronic table gaming products is recognized in accordance with
the criteria set forth in ASC 606 and is usually based upon a contracted percentage of the operator’s net winnings from the terminals’
daily use. Where this is not the case, including in the case of maintenance only contracts on self-serve betting terminals, revenue is
based upon a fixed daily or weekly usage fee. We recognize revenue from these arrangements in accordance with the series guidance over
time on a daily basis over the term of the arrangement, or when not specified over the expected customer relationship period. Performance
obligations under these arrangements may include the delivery and installation of our terminals for use over a term, as well as service
obligations related to terminal repairs and server based content and maintenance. Consideration with respect to these performance obligations
typically takes the form of usage based fees, billed at the end of a set period (usually monthly) and due typically 30 days from the
date of the invoice.
Terminal
sales take the form of a transfer of ownership of our developed gaming terminals, and are recognized as Product Sales at a point in time
upon such time as control passes to the customer as they are considered to meet the required criteria to be considered distinct. Payment for terminal sales is typically
due a set number of days after delivery.
Gaming
arrangements typically include service level agreements, consisting of a specified amount of ‘uptime’ with financial penalties
for breaches in excess of specified levels.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Virtual
Sports Revenue
Revenue
from licensing of our gaming software is recognized in accordance with the criteria set forth in ASC 606. Virtual sports retail revenue,
which includes the provision of virtual sports content and services to retail betting outlets, and virtual sports online revenue, which
includes the provision of virtual sports content and services to mobile operators, is usually based upon a contracted percentage of the
operator’s net winnings or, occasionally, a fixed rental fee. We recognize revenue for these fees over time on a daily or weekly
basis over the term of the arrangement, or, where appropriate when the contracted percentages vary prospectively with total operator’s
net winnings generated, we estimate the amount of variable consideration to which we will be entitled, up to and including the date at
which the contracted percentages reset, and recognize this estimated consideration over time. Consideration with respect to these performance
obligations typically takes the form of usage based fees, billed at the end of a set period (usually monthly) and due typically 30 days
from the date of the invoice.
These
arrangements also may include a perpetual license billed up front, granted to the customer for access to our gaming platform and content.
As these up front bills represent payment for future services, revenue from the licensing of perpetual licenses is recognized ratably
over time, or when not specified, over the expected customer relationship period. Upfront fees are normally billed upon signing of the
relevant agreement, and become due and payable at set times thereafter.
Revenue
from the development of bespoke games licensed on a perpetual basis to mobile and online operators is recognized at a point in time on
delivery and acceptance by the customer. We have no ongoing service obligations subsequent to customer acceptance of our bespoke games,
and they meet the criteria to be considered as distinct. Payment for bespoke games is typically due a set number of days after delivery.
Virtual
Sports arrangements may include service level agreements, consisting of a specified amount of ‘uptime’ with financial penalties
for breaches in excess of specified levels.
Interactive
Revenue
Interactive
revenue, which includes slot and table game offerings from our Gaming segment, as well as interactive-only content, via our remote gaming
servers, is based upon a contracted percentage of the operator’s net winnings or a fixed rental fee. We recognize revenue for these
fees over time on a daily or weekly basis over the term of the arrangement, or, where appropriate when the contracted percentages vary
prospectively with total operator’s net winnings generated, we estimate the amount of variable consideration to which we will be
entitled, up to and including the date at which the contracted percentages reset, and recognize this estimated consideration over time.
Consideration with respect to these performance obligations typically takes the form of usage based fees, billed at the end of a set
period (usually monthly) and due typically 30 days from the date of the invoice.
Leisure
Revenue
The
Leisure segment earns revenue from providing gaming machine terminals and amusement machine terminals to pubs, holiday resorts and amusement
arcades, both standalone and within motorway service stations. Revenue from these activities is based upon a contracted percentage of
the operator’s net winnings from the terminals’ daily use, or a fixed daily or weekly rental fee.
We
jointly operate arcades within holiday resorts with the resort owners. Revenue is based on a contractually agreed share of takings. We
also wholly operate a number of gaming arcades within certain motorway service stations.
We
recognize revenue from these arrangements, in accordance with the series guidance as set forth in ASC 606, over time over the term of
the arrangement, or when not specified over the expected customer relationship period. All revenue is recognized in the period that the
machine cash collections occur, with adjustments to account for the movement of income uncollected in the specific period.
Performance
obligations under these arrangements may include the delivery and installation of our terminals for use over a term, as well as service
obligations related to terminal repairs and content and maintenance. Consideration with respect to these performance obligations typically
takes the form of usage based fees, billed at the end of a set period (usually monthly) and due typically 30 days from the date of the
invoice.
We
also provide terminal and spares management services to third parties, including customers. Revenue in respect to these services takes
the form of fixed fee, either per machine or per time period, and is recognized at the point in time when control transfers to the customer,
which is normally upon delivery and acceptance by the customer, or at the point that services are rendered. This revenue is recognized
as Service Revenue when included as part of a larger performance obligation, and as Product Sales when it is offered as a separate distinct
performance obligation. Revenue is invoiced in arrears and settled within 30 days.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Disaggregation
of revenue
Information
on disaggregation of revenue is included in Note 26, “Segment Reporting and Geographic Information.”
Shipping
and Handling Costs
Shipping
and handling costs for products sales and terminals related to subscription services are included in cost of sales, excluding depreciation
and amortization for all periods presented.
Share-Based
Payment Arrangements
The
Company accounts for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation” (“ASC
718”). ASC 718 requires generally that all equity awards be accounted for at their “fair value.” This fair value is
measured on the grant date for stock-settled awards.. Fair value is equal to the underlying value of the stock for “full-value”
awards such as restricted stock and restricted stock units that have time vesting conditions, and stock options and performance shares
that have market conditions are valued using an option-pricing model with traditional inputs for “appreciation” awards.
Costs
equal to these fair values are recognized ratably over the requisite service period based on the number of awards that are expected to
vest, or in the period of grant for awards that vest immediately and have no future service condition. The Company accounts for forfeitures as they occur.
For awards that vest over time, previously recognized compensation cost is reversed if the service or performance conditions are not
satisfied and the award is forfeited.
Subsequent
modifications to outstanding awards result in incremental cost if the fair value is increased as a result of the modification. The incremental
cost is charged over the estimated derived service period.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Our provision for income taxes is principally based on current period income
(loss), changes in deferred tax assets and liabilities and changes in estimates with regard to uncertain tax positions. We estimate current
tax expense and assess temporary differences resulting from differing treatments of items for tax and accounting purposes using enacted
tax rates in effect for each taxing jurisdiction in which we operate for the period in which those temporary differences are expected
to be recovered or settled. These differences result in deferred tax assets and liabilities. Our total deferred tax assets are principally
comprised of depreciation and net operating loss carry forwards.
Significant
management judgment is required to assess the likelihood that deferred tax assets will be recovered from future taxable income. In assessing
the realizability of these deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. Management makes this assessment on a jurisdiction by jurisdiction basis considering the historical
trend of taxable losses, projected future taxable income and the reversal of deferred tax liabilities.
We
evaluate income tax uncertainties, assess the probability of the ultimate settlement with the applicable taxing authority and records
an amount based on that assessment. Interest and penalties, if any, associated with uncertain tax positions are included in income tax
expense.
Comprehensive
Loss
We
include and separately classify in comprehensive loss unrealized gains and losses and hedges from our foreign currency translation adjustments,
gains or losses associated with pension or other post-retirement benefits, prior service costs or credits associated with pension or
other post-retirement benefits and transition assets or obligations associated with pension or other post-retirement benefits.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Leases
We
determine if an arrangement is a lease at inception of the arrangement. Once it is determined that an arrangement is, or contains, a
lease, that determination should only be reassessed if the legal arrangement is modified. Changes to assumptions such as market-based
factors do not trigger a reassessment. Determining whether a contract contains a lease requires judgement. In general, arrangements are
considered to be a lease when all of the following apply:
|
● |
it
conveys the right to control the use of an identified asset for a period of time in exchange for consideration; |
|
● |
we
have substantially all economic benefits from the use of the asset; and |
|
● |
we
can direct the use of the identified asset. |
The
terms of a lease arrangement determine how a lease is classified and the resulting income statement recognition. When the terms of a
lease effectively transfer control of the underlying asset, the lease represents an in substance financed purchase (sale) of an asset
and the lease is classified as a finance lease by the lessee and a sales-type lease by the lessor. When a lease does not effectively
transfer control of the underlying asset to the lessee, but the lessor obtains a guarantee for the value of the asset from a third party,
the lessor would classify a lease as a direct financing lease. All other leases are classified as operating leases.
Where
a lease contains more than one component, the consideration in the contract is allocated on a relative standalone price basis to the
separate lease components and the non-lease components.
Leases
– the Company as lessee
Lease
assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement
date. As our operating leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available
on the date that we adopted Topic 842, January 1, 2019 or commencement date, if later, in determining the present value of future payments.
Finance leases are included using the rate implicit in the lease. The lease ROU asset includes any lease payment made and initial direct
costs incurred. Our operating lease terms may include options to extend or terminate the lease which are included in the measurement
of the ROU assets and lease liabilities when it is reasonably certain that we will exercise that option.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
lease expense for minimum operating lease payments is recognized on a straight-line basis over the lease term. Finance lease assets are
amortized straight-line over their useful life where the lease transfers ownership of the underlying asset, or to the earlier of the
end of the useful life of the asset and the end of the lease term where ownership is not transferred. Interest on finance leases is recognized
as the amount that results in a constant periodic discount rate on the remaining balance of the liability.
We
have operating lease agreements with lease and non-lease components. The Company did not make the election to treat the lease and non-lease
components as a single component and considers the non-lease components as a separate unit of account.
The
Company has elected not to apply the recognition requirements of ASC 842 to short-term operating leases. We recognize the lease payments
for short-term leases on a straight-line basis over the lease term and variable lease payments in the period in which the obligation
for those payments is incurred
Leases
– the Company as lessor
The
Company’s lease arrangements are a mixture of sales-type leases and operating leases.
Sales-type
lease receivables are recognized based on the net investment in the lease, at the present value of future minimum lease payments receivable
over the lease term, plus any guaranteed residual value of the underlying asset, at the commencement date.
The
discount rate used in determining the present value of the future minimum lease payments is the rate implicit in the lease. This is calculated
using the fair value of the underlying asset and the present value of any unguaranteed residual value.
The
underlying asset is derecognized at the point of inception and a selling profit is recognized at lease commencement. Subsequent interest
income is recognized over the term of the lease, at an amount that produces a constant periodic discount rate on the remaining balance
of the net investment in the lease.
For
operating leases, we continue to recognize the underlying asset. Lease income is recognized on a straight-line basis over the lease term.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Recently
Issued Accounting Standards
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments” (“ASU 2016-13”). In November 2018, the FASB issued ASU 2018-19, “Codification Improvements
to Topic 326, Financial Instruments - Credit Losses” (“ASU 2018-19”) and in November 2019, the FASB issued ASU 2019-11,
“Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2019-11”). ASU 2016-13
affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. ASU
2016-13 requires an entity to recognize expected credit losses rather than incurred losses for financial assets. The guidance will be
effective beginning on January 1, 2023, including interim periods within that year and requires a modified retrospective transition approach
through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Under the modified retrospective
method of adoption, prior year reported results are not restated. We have evaluated the effect of this guidance and the adoption of ASU
2016-13 is not expected to have a material impact on the Company’s financial statement presentation or disclosures.
In
October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers” (“ASU 2021-08”). ASU 2021-08 requires that an acquiring entity recognizes
and measures contract assets and liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date,
an acquirer should account for the related revenue contracts as if it had originated the contracts. The guidance will be effective beginning
on January 1, 2023, including interim periods within that year, and should be applied prospectively to business combinations occurring
on or after the effective date. The adoption of ASU 2021-08 will not have a material impact on the Company’s financial statement
presentation or disclosures.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2021 AND 2020, AND FOR THE YEARS ENDED
DECEMBER
31, 2021, 2020 AND 2019
2. |
Acquisitions
and Disposals |
In
January 2022, the Company sold its Italian VLT business, including all terminal and other assets, staff costs and facilities and contracts,
to a non-connected party for total proceeds of €1.1 million ($1.2 million), recognizing a profit on disposal of €0.8 million
($0.9 million). The Company continues to serve these Italian markets in the form of the provision of platform and games.
On
December 31, 2021, the Company acquired 100% of the membership interests of Sportech Lotteries, LLC, which has since been renamed Inspired
Entertainment Lotteries, LLC. The Company concluded that Inspired Entertainment Lotteries, LLC’s contract with its only customer
represented substantially all of the fair value of the gross assets acquired and, in accordance with ASC 805, determined that the asset
set did not comprise a business. The Company therefore applied asset acquisition accounting to the transaction, and recorded the acquisition
of the customer contract as an intangible asset in the amount of $12.3 million. The intangible asset will be amortized over its remaining
useful life of 13.2 years.
During
the year ended December 31, 2022, as a result of revisions made to management’s preliminary assessments, the Company recognized
an additional $0.9 million long-term receivable related to Inspired Entertainment Lotteries, LLC, and reduced the value of the customer
contract intangible asset accordingly.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Accounts
receivable consist of the following:
Schedule
of Accounts Receivable
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Trade receivables | |
$ | 44.6 | | |
$ | 36.2 | |
Less: long-term receivable recorded in other
assets | |
| (3.0 | ) | |
| (3.5 | ) |
Finance lease receivables | |
| 0.2 | | |
| 0.7 | |
Allowance for doubtful
accounts | |
| (1.3 | ) | |
| (1.7 | ) |
Total
accounts receivable, net | |
$ | 40.5 | | |
$ | 31.7 | |
Changes
in the allowance for doubtful accounts are as follows:
Schedule
of Changes in Allowance for Doubtful Accounts
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Beginning balance | |
$ | (1.7 | ) | |
$ | (2.3 | ) |
Additional provision for doubtful accounts | |
| (0.2 | ) | |
| (0.6 | ) |
Recoveries | |
| — | | |
| 0.1 | |
Write offs | |
| 0.4 | | |
| 1.1 | |
Foreign currency translation
adjustments | |
| 0.2 | | |
| — | |
Ending balance | |
$ | (1.3 | ) | |
$ | (1.7 | ) |
Inventory
consists of the following:
Schedule
of Inventory
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Component parts | |
$ | 21.4 | | |
$ | 10.8 | |
Work in progress | |
| 3.6 | | |
| 1.6 | |
Finished goods | |
| 6.0 | | |
| 4.5 | |
Total
inventories | |
$ | 31.0 | | |
$ | 16.9 | |
Component
parts include parts for gaming terminals. Included in inventory are reserves for excess and slow-moving inventory of $2.5 million and
$2.0 million as of December 31, 2022 and 2021, respectively. Our finished goods inventory primarily consists of gaming terminals which
are ready for sale.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
5. |
Prepaid
Expenses and Other Assets |
Prepaid
expenses and other assets consist of the following:
Schedule
of Prepaid Expenses and Other Assets
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Prepaid expenses and other assets | |
$ | 13.9 | | |
$ | 12.3 | |
Unbilled accounts receivable | |
| 18.2 | | |
| 17.4 | |
Corporate tax and other current taxes receivable | |
| — | | |
| 0.3 | |
Total
prepaid expenses and other assets | |
$ | 32.1 | | |
$ | 30.0 | |
6. |
Property
and Equipment, net |
Schedule
of Property and Equipment
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Short-term leasehold property | |
$ | 3.1 | | |
$ | 3.2 | |
Server based gaming terminals | |
| 167.9 | | |
| 178.8 | |
Computer equipment | |
| 10.9 | | |
| 10.6 | |
Plant and machinery | |
| 3.9 | | |
| 4.1 | |
Property and equipment, gross | |
| 185.8 | | |
| 196.7 | |
Less: accumulated depreciation
and amortization | |
| (141.1 | ) | |
| (145.8 | ) |
Property and equipment,
net | |
$ | 44.7 | | |
$ | 50.9 | |
Depreciation
expense amounted to $21.6 million, $25.9 million and $29.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.
7. |
Software
Development Costs, net |
Software
development costs, net consisted of the following:
Schedule
of Software Development Costs
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Software development costs | |
$ | 161.4 | | |
$ | 160.9 | |
Less: accumulated amortization | |
| (125.6 | ) | |
| (125.3 | ) |
Software development
Costs, net | |
$ | 35.8 | | |
$ | 35.6 | |
During
the years ended December 31, 2022 and 2021, the Company capitalized $18.5 million and $13.6 million of software development costs, respectively.
Amounts in the above table include $3.4 million and $2.2 million of internal use software as of December 31, 2022 and 2021, respectively.
The
total amount of software costs amortized was $14.0 million, $20.0 million and $20.0 million for the years ended December 31, 2022, 2021,
and 2020, respectively. Software costs written down to net realizable value amounted to $0.4 million, $0.2 million and $0.0 million for
the years ended December 31, 2022, 2021 and 2020, respectively. The weighted average amortization period was 3.4 years, 3.3 years and
3.2 years for the years ended December 31, 2022, 2021 and 2020, respectively.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
estimated software amortization expense for the years ending December 31 are as follows:
Schedule
of Estimated Software Amortization Expense
Year
ending December 31, (in millions) | |
| |
2023 | |
$ | 14.1 | |
2024 | |
| 10.8 | |
2025 | |
| 6.5 | |
2026 | |
| 3.5 | |
2027 | |
| 0.8 | |
Thereafter | |
| 0.1 | |
Total | |
$ | 35.8 | |
8. |
Intangible
Assets and Goodwill |
The
following tables present certain information regarding our intangible assets. Amortizable intangible assets are being amortized on a
straight-line basis over their estimated useful lives of ten to thirteen years with no estimated residual values, which materially approximates
the expected pattern of use.
Schedule
of Intangible Assets
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Trademarks | |
$ | 19.8 | | |
$ | 22.1 | |
Customer relationships | |
| 28.5 | | |
| 32.7 | |
Intangible assets, gross | |
| 48.3 | | |
| 54.8 | |
Less: accumulated amortization | |
| (33.6 | ) | |
| (35.9 | ) |
Intangible assets, net | |
$ | 14.7 | | |
$ | 18.9 | |
Aggregate
intangible asset amortization expense amounted to $1.6 million, $0.9 million and $2.4 million for the years ended December 31, 2022,
2021 and 2020, respectively.
The
estimated intangible asset amortization expense for the years ending December 31 are as follows:
Schedule
of Estimated Intangible Asset Amortization Expense
Year
ending December 31, (in millions) | |
| |
2023 | |
$ | 1.6 | |
2024 | |
| 1.6 | |
2025 | |
| 1.6 | |
2026 | |
| 1.6 | |
2027 | |
| 1.5 | |
Thereafter | |
| 6.8 | |
Total | |
$ | 14.7 | |
Goodwill
Goodwill
is summarized as follows:
Schedule
of Goodwill
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Balance at beginning of period | |
$ | 82.7 | | |
$ | 83.7 | |
Foreign currency translation adjustments | |
| (8.8 | ) | |
| (1.0 | ) |
Ending balance | |
$ | 73.9 | | |
$ | 82.7 | |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Other
assets consist of the following:
Schedule
of Other Assets
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Long term finance lease receivable | |
$ | 0.2 | | |
$ | 0.3 | |
Pension asset | |
| — | | |
| 3.0 | |
Long term receivables | |
| 3.0 | | |
| 3.5 | |
Long term prepaid expenses
and other assets | |
| 0.2 | | |
| 0.3 | |
Total | |
$ | 3.4 | | |
$ | 7.1 | |
Accrued
expenses consist of the following:
Schedule
of Accrued Expenses
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Payroll and related costs | |
$ | 10.2 | | |
$ | 8.0 | |
Cost of sales including inventory | |
| 9.1 | | |
| 12.4 | |
Non-current asset costs | |
| 2.2 | | |
| 0.7 | |
Interest payable - cash | |
| 1.8 | | |
| 2.0 | |
Selling, general and administrative costs | |
| 1.7 | | |
| 2.5 | |
Tax and professional fees | |
| 1.7 | | |
| 2.8 | |
Asset retirement obligations and other property
related costs | |
| 1.5 | | |
| 3.5 | |
Other creditors | |
| 0.3 | | |
| 0.7 | |
Accrued expenses, net | |
$ | 28.5 | | |
$ | 32.6 | |
The
analysis of the prior year expenses has been recharacterized to ensure consistency with the current year categorization. The recharacterization
has no impact on the previously reported total accrued expenses as of December 31, 2021.
11. |
Contract
Liabilities and Other Disclosures |
The
following table summarizes contract related balances:
Schedule
of Contract Related Balances
| |
Accounts
Receivable | | |
Unbilled
Accounts Receivable | | |
Deferred
Income | | |
Customer
Prepayments and Deposits | |
| |
(in millions) | |
At December 31, 2022 | |
$ | 44.6 | | |
$ | 18.2 | | |
$ | (8.5 | ) | |
$ | (2.4 | ) |
At December 31, 2021 | |
$ | 36.2 | | |
$ | 17.4 | | |
$ | (14.5 | ) | |
$ | (3.9 | ) |
At December 31, 2020 | |
$ | 30.4 | | |
$ | 8.2 | | |
$ | (22.9 | ) | |
$ | (1.6 | ) |
Revenue
recognized that was included in the deferred income balance at the beginning of the period amounted to $7.9 million, $10.9 million and
$10.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Other
liabilities consist of the following:
Schedule
of Other Liabilities
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Customer prepayments and deposits | |
$ | 2.4 | | |
$ | 3.9 | |
Foreign exchange contract
liabilities | |
| 0.2 | | |
| — | |
Total
other liabilities, current | |
| 2.6 | | |
| 3.9 | |
Asset retirement obligations | |
| 1.1 | | |
| 1.8 | |
Other creditors | |
| 0.8 | | |
| 1.3 | |
Pension liability | |
| 2.1 | | |
| — | |
Total
other liabilities, long-term | |
| 4.0 | | |
| 3.1 | |
Total other liabilities | |
$ | 6.6 | | |
$ | 7.0 | |
13. |
Long
Term and Other Debt |
Senior
Secured Notes
On
May 20, 2021, Inspired Entertainment (Financing) PLC, a wholly owned subsidiary of the Company, issued £235.0 million ($282.9 million,
as translated at December 31, 2022) aggregate principal amount of its 7.875% senior secured notes due 2026 (the “Senior Secured
Notes”). The Senior Secured Notes bear interest at a rate of 7.875% per annum and mature on June 1, 2026. Interest is payable on
the Senior Secured Notes on June 1 and December 1 of each year, commencing on December 1, 2021
The
Senior Secured Notes and related guarantees were issued under an indenture (the “Indenture”), among Inspired Entertainment
(Financing) PLC, as issuer, the Company and certain English and U.S. subsidiaries of the Company, as guarantors (collectively and together
with the Company, the “Guarantors”), GLAS Trustees Limited, as trustee, GLAS Trust Corporation Limited, as security agent
and GLAS Trust Company LLC as paying agent, transfer agent and registrar. The terms of the Senior Secured Notes and related guarantees
are governed by the Indenture.
The
Senior Secured Notes are fully and unconditionally guaranteed on a senior secured first-priority basis by the Guarantors on a joint and
several basis. The Senior Secured Notes and related guarantees are secured, subject to certain permitted collateral liens, on a first-priority
basis by substantially all assets of the Guarantors and all claims of the Inspired Entertainment (Financing) PLC under an intercompany
loan to Gaming Acquisitions Limited, a private limited liability company incorporated under the laws of England and Wales and an indirect
wholly-owned subsidiary of the Company (“GAL”), of the proceeds of the offering of the Senior Secured Notes.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
Indenture contains incurrence covenants that limit the ability of the Company and the Company’s restricted subsidiaries to, among
other things, (i) incur or guarantee additional debt and issue certain preferred stock of restricted subsidiaries; (ii) create or incur
certain liens; (iii) make restricted payments, including dividends or distributions to the Company’s stockholders or repurchase
the Company’s stock; (iv) prepay or redeem subordinated debt; (v) make certain investments, including participating joint ventures;
(vi) create encumbrances or restrictions on the payment of dividends or other distributions by restricted subsidiaries; (vii) sell assets,
or consolidate or merge with or into other companies; (viii) sell or transfer all or substantially all of the Company’s assets
or those of the Company’s subsidiaries on a consolidated basis; (ix) engage in certain transactions with affiliates; and (x) create
unrestricted subsidiaries. Certain of these covenants will be suspended if and for so long as the Senior Secured Notes have investment
grade ratings from any two of Moody’s Investors Service, Inc., Standard & Poor’s Investors Ratings Services and Fitch
Ratings, Inc. These covenants are subject to exceptions and qualifications as set forth in the Indenture.
Inspired
Entertainment (Financing) PLC may redeem the Senior Secured Notes, in whole or in part, at any time and from time to time prior to June
1, 2023, at a redemption price equal to 100% of the principal amount thereof, plus a “make-whole” premium as set forth in
the Indenture and form of the Senior Secured Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
Inspired Entertainment (Financing) PLC may also redeem the Senior Secured Notes, in whole or in part, at any time and from time to time
on or after June 1, 2023, at the redemption prices set forth in the Indenture and form of the Senior Secured Notes, plus accrued and
unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to June 1, 2023, Inspired Entertainment
(Financing) PLC may redeem up to 40% of the original aggregate principal amount of the Senior Secured Notes with the net cash proceeds
of one or more equity offerings, as described in the Indenture, at a redemption price equal to 107.875% of the principal amount thereof,
plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time prior to June 1, 2023, Inspired Entertainment
(Financing) PLC may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes within each 12-month period at a redemption
price equal to 103% of the aggregate principal amount of the Senior Secured Notes, plus accrued and unpaid interest, if any, to, but
excluding, the redemption date.
Revolving
Credit Facility
In
connection with the issuance of the Senior Secured Notes on May 20, 2021, the Company and certain of our direct and indirect wholly-owned
subsidiaries, entered into a Super Senior Revolving Credit Facility Agreement (the “RCF Agreement”) with Global Loan Agency
Services Limited, as agent, Barclays Bank plc (“Barclays”) and Macquarie Corporate Holdings Pty Limited (UK Branch) (“Macquarie
UK” and together with Barclays, the “Arrangers”) as arrangers and each lender party thereto (the “Lenders”),
pursuant to which the Lenders agreed to provide, subject to certain conditions, a secured revolving facility loan in an original principal
amount of £20 million ($24.1 million) under which certain of our subsidiaries are able to draw funds (the “RCF Loan”).
The RCF Loans will terminate on November 20, 2025.
The
funding of the RCF Loan is subject to customary conditions set forth in the RCF Agreement. The undrawn commitment of each Lender under
the RCF Loan will automatically terminate, unless previously terminated by the Company, on October 20, 2025.
The
RCF Loans will bear interest at a rate per annum equal to (i) SONIA for borrowings in sterling, (ii) LIBOR (or, on and after December
31, 2021, SOFR) for borrowings in dollars, or (iii) EURIBOR for borrowings in Euro, as applicable, plus, in each case, a margin (based
on the Company’s consolidated senior secured net leverage ratio) ranging from 4.25% to 4.75% per annum. With respect to the RCF
Loan, a commitment fee of 30% of the then applicable margin is payable at any time on any unutilized portion of the RCF Loan.
The
RCF Agreement contains various covenants (which include restrictions regarding the incurrence of liens, the incurrence of indebtedness
by the Company’s subsidiaries and fundamental changes, subject in each case to certain exceptions), representations, warranties,
limitations and events of default (which include non-payment, breach of obligations under the financing documents, cross-default, insolvency
and litigation) customary for similar facilities for similarly rated borrowers and subject to customary carve-outs and grace periods.
Following the occurrence of an event of default which has not been waived or remedied, the Lenders who represent more than 66.67% of
total commitments under the RCF may, subject to the terms of an intercreditor agreement (which governs the relationship between the Lenders
and the holders of the Senior Secured Notes), instruct the agent to (i) accelerate the RCF Loans, (ii) instruct the security agent to
enforce the transaction security and/or (iii) exercise any other remedies available to the Lenders.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
RCF Agreement requires that the Company maintain a maximum consolidated senior secured net leverage ratio of 6.25x on the test date for
the relevant period ending June 30, 2021, stepping down to 6.0x on March 31, 2022, 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 income (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
Agreement does not include a minimum interest coverage ratio or other financial covenants.
The
outstanding principal amount of each advance under the RCF Loans is payable on the last day of the interest period relating to such advance,
unless such advance is rolled over on a cashless basis in accordance with customary rollover provisions contained in the RCF Agreement,
with a final repayment on November 20, 2025.
Termination
of Prior Financing
The
Company’s previous debt consisted of two tranches of senior secured term loans in a principal amount of £145.8 million ($175.5
million) with a cash interest rate of 8.25% plus 3-month LIBOR and €93.1 million ($99.4 million) with a cash interest rate of 7.75%
plus 3-month EURIBOR, respectively and a secured revolving facility loan in a principal amount of £20.0 million ($24.1 million)
with a cash interest rate on any utilization of 6.50% plus 3-month LIBOR (the “Prior Financing”)..
In
connection with the issuance of the Senior Secured Notes and the entry into the RCF Agreement, on May 20, 2021, the Prior Financing was
repaid in full and the senior facilities agreement (dated September 27, 2019, as amended and restated on June 25, 2020, (the “Prior
SFA) see below) relating to the Prior Financing was terminated. No prepayment premium applied to the repayment (although customary break
cost provisions applied). Debt fees of $14.4 million were expensed to the Consolidated Statements of Operations and Consolidated Income (Loss)
within Interest Expense as part of the repayment. In addition, on May 19, 2021, we terminated the interest rate swaps relating to the
Prior Financing and applicable termination fees were settled on May 20, 2021 (see Note 14).
Senior
Facilities Agreement
The
Company’s Prior SFA (which was with Lucid Agency Services Limited, as agent, Nomura International plc and Macquarie Corporate Holdings
Pty Limited (UK Branch) as arrangers and/or bookrunners) was entered into in connection with the Company’s acquisition of the Gaming
Technology Group of Novomatic UK Ltd on October 1, 2019, and, provided for, subject to certain conditions, two tranches of senior secured
term loans, in an original principal amount of £140.0 million ($168.6 million) and €90.0 million ($96.1 million), respectively
and a secured revolving facility loan in an original principal amount of £20.0 million ($24.1 million). The term loans, which were
funded on October 1, 2019, were used to, among other things, pay the purchase price of the NTG Acquisition and refinance the Company’s
prior indebtedness.
The
term loan for £140.0 million ($168.6 million) initially carried a cash interest rate of 7.25% plus 3-month LIBOR, and the term
loan for €90.0 million ($96.1 million) initially carried a cash interest rate of 6.75% plus 3-month EURIBOR. The £20.0 million
($24.1 million) revolving credit facility initially carried a cash interest rate on any utilization at 5.50% plus 3-month LIBOR, with
any unutilized amount initially carrying a cash interest cost at 30% of the applicable margin on the revolving credit facility loan.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
provisions from the June 2020 amendments to the Prior SFA included, among other things, (i) capitalizing certain interest payments that
fell due on April 1, 2020, (ii) resetting the applicable leverage and capital expenditure financial covenants, removing certain applicable
rating requirements, (iii) allowing the Company and its subsidiaries to incur additional indebtedness under the UK Coronavirus Large
Business Interruption Loan Scheme under a stand-alone facility, which may rank pari passu or junior to the facilities under the
Prior SFA, in an amount not exceeding £10.0 million ($12.0 million), (iv) removing certain applicable rating requirements, (v)
limiting the ability of the Company and its subsidiaries to incur additional indebtedness, including by reducing the amount of general
indebtedness the Company and its subsidiaries are permitted to incur and removing the ability to incur senior secured, second lien and
unsecured indebtedness in an amount not exceeding the aggregate of (A) an unlimited amount, as long as, pro forma for the utilization
of such indebtedness, the consolidated total net leverage ratio does not exceed the lower of 3.4:1 and the then applicable ratio with
respect to the consolidated total net leverage financial covenant summarized further below, plus (B) an amount equal to the greater of
£16.0 million ($19.2 million) and 25% of the consolidated pro forma EBITDA of the Company and its subsidiaries for the relevant
period (as defined, but disregarding, for the purposes of calculating the usage of such cap, any financial indebtedness applied to refinancing
other financial indebtedness, together with any related interest, fees, costs and expenses), (vi) increasing the margin applicable to
the Facilities (as defined) by 1%, and adding an additional payment-in-kind margin of 0.75% payable on any principal amounts outstanding
under Facility B (as defined in the Prior SFA) after September 24, 2021 (the “Relevant Date”), (vii) adding an exit fee payable
by the Company with respect to any repayment or prepayment of Facility B after the Relevant Date at the time of such repayment or prepayment
in an amount equal to 0.75% of the principal amount of Facility B being repaid or prepaid, (viii) removing any ability to carry forward
or carry back any unused allowance under the applicable capital expenditure financial covenant and (ix) granting certain additional information
rights to the lenders under the Prior SFA, including the provision of a budget, and certain board observation rights until December 31,
2022. All other material terms of the SFA remained unchanged in all material respects.
In
consideration for the amendments listed above, the Company agreed to pay the lenders an amendment fee equal to 1% of the Total Commitments
(as defined in the Prior SFA).The amendment fee was payable to the lenders pro rata to their commitments under the Prior SFA.
The
modification to the Prior SFA was not considered to be substantial in accordance with Topic 470-50 and was therefore not treated as a
debt extinguishment. The amendment fees, amounting to $3.1 million, were associated with the modified debt instrument and were to be
amortized along with the existing unamortized debt issuance costs. Fees payable to third parties were expensed as incurred, resulting
in $1.0 million charged to interest expense for the year ended December 31, 2020.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Outstanding
Debt and Finance Leases
The
following reflects outstanding debt and finance leases as of the dates indicated below:
Schedule
of Outstanding Debt and Finance Leases
| |
Principal | | |
Unamortized
deferred financing charge | | |
Book
value, December 31, 2022 | |
| |
(in millions) | |
Senior bank debt | |
$ | 282.9 | | |
$ | (5.3 | ) | |
$ | 277.6 | |
Finance lease liabilities | |
| 2.2 | | |
| — | | |
| 2.2 | |
Total long-term debt outstanding | |
| 285.1 | | |
| (5.3 | ) | |
| 279.8 | |
Less: current portion
of long-term debt | |
| (1.0 | ) | |
| — | | |
| (1.0 | ) |
Long-term
debt, excluding current portion | |
$ | 284.1 | | |
$ | (5.3 | ) | |
$ | 278.8 | |
| |
Principal | | |
Unamortized
deferred financing charge | | |
Book
value, December 31, 2021 | |
| |
(in millions) | |
Senior bank debt | |
$ | 316.7 | | |
$ | (7.7 | ) | |
$ | 309.0 | |
Finance lease liabilities | |
| 2.8 | | |
| — | | |
| 2.8 | |
Total long-term debt outstanding | |
| 319.5 | | |
| (7.7 | ) | |
$ | 311.8 | |
Less: current portion
of long-term debt | |
| (0.9 | ) | |
| — | | |
| (0.9 | ) |
Long-term
debt, excluding current portion | |
$ | 318.6 | | |
$ | (7.7 | ) | |
$ | 310.9 | |
The
Company is in compliance with all relevant financial covenants and the long-term debt portion is correctly classified as such in line
with the underlying agreements.
Long
term debt as of December 31, 2022 matures as follows:
Schedule of Maturities of Long-term Debt
Fiscal
period: | |
Senior
bank debt | | |
Finance
leases | | |
Total | |
| |
(in millions) | |
2023 | |
$ | — | | |
$ | 1.0 | | |
$ | 1.0 | |
2024 | |
| — | | |
| 0.7 | | |
| 0.7 | |
2025 | |
| — | | |
| 0.5 | | |
| 0.5 | |
2026 | |
| 282.9 | | |
| — | | |
| 282.9 | |
2027 | |
| — | | |
| — | | |
| — | |
Total | |
$ | 282.9 | | |
$ | 2.2 | | |
$ | 285.1 | |
14. |
Derivatives
and Hedging Activities |
On
January 15, 2020, the Company entered into two interest rate swaps with UBS AG designed to protect the Company against adverse fluctuations
in interest rates by reducing its exposure to variability in cash flows on a portion of the previous floating rate debt facilities. The
swaps fixed the variable interest rate of the debt facilities and provided protection over potential interest rate increases by providing
a fixed rate of interest payment in return. The interest rate swaps were for £95.0 million ($114.4 million) at a fixed rate of
0.9255% based on the 6-month LIBOR rate and for €60.0 million ($64.1 million) at a fixed rate of 0.102% based on the 6-month EURIBOR
rate.
In
connection with the issuance of the Senior Secured Notes and the entry into the RCF Agreement, on May 19, 2021, the Company terminated
its two interest rate swaps. The termination fees were settled on May 20, 2021, for £1.3 million ($1.9 million) and €0.1 million
($0.2 million), respectively.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Hedges
of Multiple Risks
The
Company’s objectives in using interest rate derivatives were to add stability to interest and to manage its exposure to interest
rate movements. To accomplish this objective, the Company primarily used 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 $0.3 million will be reclassified as an increase to interest expense.
As
of December 31, 2022 and 2021, the Company did not have any derivatives. Losses reclassified from accumulated other comprehensive
income into interest expense in the consolidated statements of operations and income (loss) for the year ended December 31, 2022
amounted to $0.7
million.
As
of December 31, 2020, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of
interest rate risk:
Schedule of Outstanding Derivatives Designated as Cash Flow Hedges
Interest
Rate Derivative |
|
Number
of
Instruments |
|
Notional |
Interest
rate swaps |
|
2 |
|
£95.0
million ($114.4 million) at a fixed rate of 0.9255% based on the 6-month LIBOR rate and €60.0 million ($64.1 million) at a fixed
rate of 0.102% based on the 6 month EURIBOR rate |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income for the year ended
December 31, 2021.
Schedule of Accumulated Other Comprehensive Income
| |
Amount
of
Gain/(Loss)
Recognized in Other Comprehensive Income on Derivative | | |
| |
Location
of
Gain/(Loss)
Reclassified from Accumulated Other Comprehensive Income into Income | |
| |
| (in
millions) | | |
| |
| (in
millions) | |
Interest
Rate Products | |
$ | 0.3 | | |
Interest
Expense | |
$ | (1.5 | ) |
Total | |
$ | 0.3 | | |
| |
$ | (1.5 | ) |
The
table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income for the year ended
December 31, 2020.
| |
Amount
of
Gain/(Loss)
Recognized in Other Comprehensive Income on Derivative | | |
| |
Location
of
Gain/(Loss)
Reclassified from Accumulated Other Comprehensive Income into Income | |
| |
| (in
millions) | | |
| |
| (in
millions) | |
Interest
Rate Products | |
$ | (2.9 | ) | |
Interest
Expense | |
$ | (1.5 | ) |
Total | |
$ | (2.9 | ) | |
| |
$ | (1.5 | ) |
The
table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations
for the year ended December 31, 2021.
Schedule of Consolidated Statements of Operations
| |
Interest
Expense | |
| |
| (in
millions) | |
Total amounts
of income and expense line items presented in the statement of operations and comprehensive loss in which the effects of fair value
or cash flow hedges are recorded | |
$ | 44.3 | |
| |
| | |
Gain/(loss) on cash
flow hedging relationships in Subtopic 815-20 | |
$ | (1.5 | ) |
The
table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations
for the year ended December 31, 2020.
| |
Interest
Expense | |
| |
| (in
millions) | |
Total amounts
of income and expense line items presented in the statement of operations and comprehensive loss in which the effects of fair value
or cash flow hedges are recorded | |
$ | 30.0 | |
| |
| | |
Gain/(loss) on cash
flow hedging relationships in Subtopic 815-20 | |
$ | (1.5 | ) |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
15. |
Fair
Value Measurements |
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset and liability in an orderly transaction between market participants at the measurement date.
We estimate the fair value of our assets and liabilities utilizing an established three-level hierarchy. The hierarchy is based upon
the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:
|
Level
1: |
Quoted
prices in active markets for identical assets or liabilities. |
|
|
|
|
Level
2: |
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient
volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable
or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as
quoted prices that were adjusted for security-specific restrictions. |
|
|
|
|
Level
3: |
Unobservable
inputs that are supported by little or no market activity that are significant to the fair value of the asset or liability. Level
3 inputs also include non-binding market consensus prices or non-binding broker quotes that are unable to be corroborated with observable
market data. |
The
fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate.
We believe the fair value of our financial instruments approximates their recorded values.
For
each period, derivative financial instrument assets and liabilities measured at fair value on a recurring basis are included in the financial
statements as per the table below.
Schedule of Derivative Financial Instrument Assets and Liabilities Measured at Fair Value on Recurring Basis
| |
| | |
December 31, | | |
December 31, | |
| |
Level | | |
2022 | | |
2021 | |
| |
| | | |
| (in
millions) | |
Long term receivable (included
in other assets) | |
| 2 | | |
$ | 3.0 | | |
$ | 3.5 | |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
fair value of our long-term senior debt as of December 31, 2022, was $261.0 million, based upon quoted prices in the marketplace, which
are considered Level 2 inputs.
Level
3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value
of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s
principal financial officer, who reports to the principal executive officer, determines its valuation policies and procedures. The development
and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of
the Company’s Principal Financial Officer and approved by the Principal Executive Officer.
At
December 31, 2022 and December 31, 2021, there were no Level 3 inputs, and no transfers in or out of Level 3 from other levels in the
fair value hierarchy.
16. |
Stockholders’
Deficit |
Preferred
Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share in one or more series. The Company’s
Board of Directors is authorized to fix the voting rights, if any, designations, powers, preferences, the relative, participating, optional
or other special rights and any qualifications, limitations and restrictions thereof, applicable to the shares of each series. At December
31, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.
Common
Stock
The
Company is authorized to issue 49,000,000 shares of common stock, par value $0.0001 per share. Holders of the Company’s common
stock are entitled to one vote for each common share.
Warrants
As
of December 31, 2020, the Company had 19,079,130 outstanding warrants to purchase an aggregate of 9,539,565 shares of the Company’s
common stock, which included 7,999,900 warrants originally issued as part of the initial public offering (the “IPO”) (the
“Public Warrants”) and 11,079,230 warrants issued in private placements in connection with the IPO and the Merger (the “Private
Placement Warrants”). The warrants became exercisable 30 days after the closing of the Merger and had an expiration date of December
23, 2021. Each warrant entitled its holder to purchase one-half of one share of the Company’s common stock at an exercise price
of $11.50 per whole share. The warrants were able to be exercised only for a whole number of shares of common stock.
As
of December 31, 2020, the warrants met the definition of a derivative under ASC 815 and were classified as a liability measured at fair
value, with changes in fair value each period reported in earnings.
During
the year ending December 31, 2021, (i) an aggregate of 2,651,129 shares of common stock were issued pursuant to the exercise of 5,302,258
Public Warrants and (ii) an aggregate of 1,027,836 shares of common stock were issued pursuant to the exercise (on a cashless basis)
of 9,049,230 Private Warrants. There were no warrants outstanding as of December 31, 2022 or 2021.
17. |
Stock-Based
Compensation |
The
Company’s stock-based compensation plans authorize awards of restricted stock units (“RSUs”), stock options and other
equity-related awards. The Company’s 2021 Omnibus Incentive Plan (“2021 Plan”) was adopted by the Company’s Board
of Directors on April 12, 2021 and approved by our stockholders on May 11, 2021. The 2021 Plan succeeds the Company’s 2018 Omnibus
Incentive Plan (the “2018 Plan”) such that shares subject to the 2018 Plan’s unused reserve (e.g., as a result of termination
or forfeiture of awards) are instead rolled over to the 2021 Plan. The Company has two other predecessor plans, the 2016 Long-Term Incentive
Plan and the Second Long-Term Incentive Plan (collectively, the “Prior Plans”), whose available balances were terminated
in connection with approval of the 2018 Plan. Although outstanding awards under the Prior Plans remain governed by the terms of the Prior
Plans, no new awards may be granted or become available for grant under the Prior Plans.
As
of December 31, 2022, there were (i) 1,857,036 shares subject to outstanding awards under the 2021 Plan, including 341,647 shares subject
to performance-based target awards, 232,500 shares subject to market-price vesting conditions, 311,558 shares subject to awards that
were previously subject to performance criteria that were determined to have been met for the applicable performance year which awards
continue to remain subject to a time-based vesting schedule and 259,492 shares subject to awards as to which the applicable vesting conditions
have been met which remain subject to deferred settlement; (ii) 174,964 shares subject to outstanding awards under the 2018 Plan, including
25,000 shares subject to performance-based target awards and 124,964 shares subject to awards as to which the applicable vesting conditions
have been met which remain subject to deferred settlement; and (iii) 1,318,686 shares subject to outstanding awards under the Prior Plans
as to which the applicable vesting conditions have been met which remain subject to deferred settlement. As of December 31, 2022, there
were 1,002,805 shares available for new awards under the 2021 Plan (which includes shares rolled over from the 2018 Plan) and no shares
available for new awards under the Prior Plans. All awards outstanding as of December 31, 2022 consisted of RSUs (including time-based
RSUs, performance-based RSUs and stock price based RSUs).
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
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. Offerings may also be under the ESPP’s subplan for UK-based employees (the “Subplan”) which was adopted
in June 2022 and is designed to meet the requirements of a sharesave scheme under UK law. The terms applicable to the offerings approved
in 2022 under the ESPP and Subplan are described below. Based on enrollments in these offerings, the Company estimates that approximately
76,000 shares will be purchased (4,000 shares under the ESPP and 72,000 under the Subplan).
The
offering period approved in 2022 for the ESPP is for a period of twelve months (ending in October 2023), eligible employees may contribute
up to 10% of base compensation, a maximum of 1,000 shares may be purchased per participant, the purchase price will be equal to 85% of
the lower of the closing price of the common stock at the beginning of the offering period (the applicable closing price was $10.20)
and the end of the offering period and shares will be purchased on the last day of the offering period. Under the offering approved for
the Subplan, eligible employees may contribute a maximum amount of £350 per month through payroll deductions over a period of three
years (through October 2025), the purchase price will be equal to 85% of the closing price of the common stock on the day prior to commencement
of the enrollment window for the offering (the applicable closing price was $11.53), and participants have a period of six months following
the end of the offering to elect to purchase shares or receive a refund.
As
of December 31, 2022, a total of 467,751 shares remained available for purchase under the ESPP. A total of 7,649 shares were issued under
the ESPP in 2020 (at a purchase price of $3.2215 per share) and no shares were issued under the ESPP in 2021 or 2022.
A
summary of the Company’s RSU activity is as follows:
Schedule of Restricted Stock Unit Activity
| |
Number
of Shares | | |
Weighted
Average Grant Date Fair Value Per Share | |
Unvested Outstanding at January 1, 2022 | |
| 2,039,254 | | |
$ | 8.60 | |
Granted (1) | |
| 543,178 | | |
$ | 14.36 | |
Forfeited | |
| (55,198 | ) | |
$ | (11.06 | ) |
Vested
(2) | |
| (879,690 | ) | |
$ | (7.18 | ) |
Unvested Outstanding at December 31, 2022 | |
| 1,647,544 | | |
$ | 11.11 | |
(1) |
The
RSUs that were granted during the year ended December 31, 2022 included: (a) 48,716 RSUs under the Board’s compensation program
for non-employee directors which vest during the year of grant and, at the election of the participant, may remain unsettled until
the director leaves the Company; and (b) 450,882 RSUs under an incentive program for management and other personnel, as to which
one-half was in the form of performance-based RSUs that are conditioned on attainment of performance criteria for fiscal year 2022
and subject to a time-based service period through December 31, 2024 and the other one-half vests in installments through December
31, 2024. |
|
|
(2) |
The
RSUs that vested during the year ended December 31, 2022 included: (a) 119,492 RSUs that are
subject to deferred settlement terms; and (b) 682,474 RSUs that were settled on a net share basis on or about December 30,
2022, resulting in 374,546 shares being issued in and 307,928 withheld for taxes (the processing of the issuance and delivery of
such 374,546 shares occurred partially in December 2022 (as to 42,319 shares) and partially in January 2023 (as to 332,227 shares)). |
The
Company issued a total of 543,294 shares during the year ended December 31, 2022 in net settlement of RSUs which included an aggregate
of 442,817 shares in settlement of RSUs that vested during the prior year on December 31, 2021.
The
weighted average grant date fair value of awards granted for years ended December 31, 2022, December 31, 2021 and December 31, 2020 amounted
to $14.36,
$10.15
and $4.13,
respectively. The vesting date value of RSUs vesting for years ended December 31, 2022, December 31, 2021 and December 31, 2020 amounted
to $10.8
million, $16.1
million and $2.5
million, respectively. There
was no income tax benefit recognized related to awards that vested during the years ended December 31, 2022, 2021, and 2020 ,
respectively as there is a full valuation allowance in place against the RSU scheme’s deferred tax asset.
Stock-based
compensation is recognized as an expense 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. For market-based awards that are contingent upon the
Company’s stock achieving certain pre-determined price targets, compensation expense is calculated based upon the determination
of the fair value of the awards as derived through multiple running of the Monte Carlo valuation model, with the fair value recognized
on a straight-line basis over the requisite service period. The requisite service period for awards to employees is generally satisfied
over a vesting period of three years (and one year for non-employee directors). The Company accounts for forfeitures as they occur. For
stock purchase rights under the Company’s ESPP (including its subplan), the Company estimates fair value using the Black-Scholes
option pricing model on the dates of grant, with the compensation expense recognized over the requisite service period.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
Company recognized stock-based compensation expense as follows:
Schedule
of Stock Based Compensation Expense
| |
Year
Ended December 31, 2022 | | |
Year
Ended December 31, 2021 | | |
Year
Ended December 31, 2020 | |
| |
(in millions) | |
Restricted Stock and RSUs | |
$ | 10.1 | | |
$ | 11.9 | | |
$ | 4.6 | |
Payroll taxes on vesting
of RSUs | |
| 0.7 | | |
| 1.1 | | |
| 0.2 | |
| |
$ | 10.8 | | |
$ | 13.0 | | |
$ | 4.8 | |
Total
unrecognized compensation expense related to unvested stock awards and unvested RSUs at December 31, 2022 amounts to $8.8 million and
is expected to be recognized over a weighted average period of 1.6 years.
18. |
Accumulated
Other Comprehensive Loss (Income) |
The
accumulated balances for each classification of comprehensive loss (income) are presented below:
Schedule of Accumulated Other Comprehensive Loss (Income)
| |
Foreign
Currency Translation Adjustments | | |
Change
in Fair Value of Hedging Instrument | | |
Unrecognized
Pension Benefit Costs | | |
Accumulated
Other Comprehensive (Income) | |
| |
(in millions) | |
Balance at January 1, 2020 | |
$ | (76.5 | ) | |
$ | 1.4 | | |
$ | 30.0 | | |
$ | (45.1 | ) |
Change during the period | |
| 5.4 | | |
| 1.4 | | |
| 7.2 | | |
| 14.0 | |
Balance at December 31, 2020 | |
| (71.1 | ) | |
| 2.8 | | |
| 37.2 | | |
| (31.1 | ) |
Change during the period | |
| (0.4 | ) | |
| (1.8 | ) | |
| (10.5 | ) | |
| (12.7 | ) |
Balance at December 31, 2021 | |
| (71.5 | ) | |
| 1.0 | | |
| 26.7 | | |
| (43.8 | ) |
Change during the period | |
| (8.2 | ) | |
| (0.7 | ) | |
| 6.4 | | |
| (2.5 | ) |
Balance at December 31, 2022 | |
$ | (79.7 | ) | |
$ | 0.3 | | |
$ | 33.1 | | |
$ | (46.3 | ) |
Included
within accumulated other comprehensive income is an amount of $0.3 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 instruments, in accordance with US GAAP.
19. |
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, restricted
stock, RSUs and warrants, using the treasury stock method, and convertible debt or convertible preferred stock, using the if-converted
method, 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:
Schedule of Anti-dilutive Securities Excluded from Computation of Earnings per Share
| |
Year
Ended December 31, 2022 | | |
Year
Ended December 31, 2021 | | |
Year
Ended December 31, 2020 | |
RSUs | |
| 382,500 | | |
| 3,622,904 | | |
| 3,522,140 | |
Unvested Restricted Stock | |
| — | | |
| — | | |
| 624,116 | |
Stock Warrants | |
| — | | |
| — | | |
| 9,539,565 | |
Anti-dilutive
securities | |
| 382,500 | | |
| 3,622,904 | | |
| 13,685,821 | |
The
following table reconciles the numerators and denominators of the basic and diluted EPS computations for the year ended December 31,
2022. There were no reconciling items for the years ended December 31, 2021 or December 31, 2020, respectively.
Schedule
of Numerators and Denominators of the Basic and Diluted EPS Computations
| |
Income (Numerator) | | |
Shares (Denominator) | | |
Per-Share Amount, Year Ended December 31, 2022 | |
| |
(in millions) | |
Basic EPS | |
| | | |
| | | |
| | |
Income available to common stockholders | |
$ | 22.3 | | |
| 26,446,374 | | |
$ | 0.84 | |
Effect of Dilutive Securities | |
| | | |
| | | |
| | |
RSUs | |
| | | |
| 2,589,411 | | |
| | |
Diluted EPS | |
| | | |
| | | |
| | |
Income available to common stockholders | |
$ | 22.3 | | |
$ | 29,035,785 | | |
$ | 0.77 | |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
20. |
Repurchase
of Common Stock |
On
May 10, 2022, the Board of Directors authorized the Company to use up to $25.0 million to repurchase Inspired common shares (such amount
being exclusive of any fees, commissions or other expenses), subject to repurchases being effected on or before May 10, 2025 (the “Share
Repurchase Program”). Management has discretion as to whether to repurchase shares of the Company.
During
the year ended December 31, 2022, the Company repurchased 1,067,340 shares under the Share Repurchase Program for gross payments of approximately
$10.5 million, which were canceled and retired during the year ended December 31, 2022. As of December 31, 2022, approximately $14.6
million remained available for future repurchases under the Share Repurchase Program.
Refer
Part II, Item 5 of this report for further details regarding shares repurchased during the three months ended December 31, 2022.
21. |
Other
Finance (Expense) Income |
Other
finance (expense) income consisted of the following:
Schedule of Other Finance Income (expense)
| |
Year
Ended December 31, 2022 | | |
Year
Ended December 31, 2021 | | |
Year
Ended December 31, 2020 | |
| |
(in millions) | |
Pension interest cost | |
$ | (2.1 | ) | |
$ | (1.6 | ) | |
$ | (2.2 | ) |
Expected return on pension plan assets | |
| 3.2 | | |
| 2.7 | | |
| 3.1 | |
Foreign currency translation
on senior bank debt | |
| — | | |
| 4.6 | | |
| (5.6 | ) |
Other finance income (Costs) | |
$ | 1.1 | | |
$ | 5.7 | | |
$ | (4.7 | ) |
The effective tax rates for the years ended December 31, 2022 and 2021
were 12.6% and 4.2% respectively. For the year ended December 31, 2022, the Company’s effective tax rate differs from the federal
statutory rate primarily due to losses in certain jurisdictions where the Company presently has recorded a valuation allowance against
the related tax benefit as well as an inclusion for global intangible low-taxed income. For the year ended December 31, 2021, the Company’s
effective tax rate differs from the federal statutory rate primarily due to losses in certain jurisdictions where the Company presently
has recorded a valuation allowance against the related tax benefit and non-deductible officer’s compensation.
The
components of earnings (loss) before income taxes on the Company’s consolidated statement of operations by the United States and
foreign jurisdictions were as follows:
Schedule
of Earnings (Loss) Before Income Tax
| |
Year
Ended
December
31,
2022 | | |
Year
Ended
December
31,
2021 | | |
Year
Ended
December
31,
2020 | |
| |
| (in
millions) | |
United
States | |
$ | (14.1 | ) | |
$ | (13.5 | ) | |
$ | (14.4 | ) |
Foreign
jurisdictions | |
| 39.6 | ) | |
| (24.8 | ) | |
| (17.6 | ) |
Income
tax provision (benefit), as reflected in the Company’s consolidated statement of operations, consists of the following:
Schedule
of Provision for Income Taxes
| |
Year
Ended
December 31,
2022 | | |
Year
Ended
December 31,
2021 | | |
Year
Ended
December 31,
2020 | |
| |
| (in
millions) | |
Current
provision (benefit) | |
| | | |
| | | |
| | |
Federal | |
$ | 1.6 | | |
$ | — | | |
$ | — | |
State | |
| 0.2 | | |
| — | | |
| — | |
Foreign | |
| 1.4 | | |
| (1.6 | ) | |
| 0.4 | |
Total
current | |
$ | 3.2 | | |
$ | (1.6 | ) | |
$ | 0.4 | |
| |
Year
Ended December 31, 2022 | | |
Year
Ended December 31, 2021 | | |
Year
Ended December 31, 2020 | |
| |
| (in
millions) | |
Deferred
provision (benefit) | |
| | | |
| | | |
| | |
Federal | |
$ | — | | |
$ | — | | |
$ | — | |
State | |
| — | | |
| — | | |
| — | |
Foreign | |
| — | | |
| — | | |
| — | |
Total
deferred | |
$ | — | | |
$ | — | | |
$ | — | |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
differences between the federal statutory tax rate and our effective rate are reflected in the following table for the years ended December
31, 2022, 2021 and 2020:
Schedule of Differences Between the Federal Statutory Tax Rate and our Effective Rate
| |
December
31, 2022 | | |
December
31, 2021 | | |
December
31, 2020 | |
| |
(in millions) | |
Statutory income tax | |
| 21.0 | % | |
| 21.0 | % | |
| 21.0 | % |
State taxes (net of federal) | |
| 0.8 | % | |
| 0.0 | % | |
| 0.0 | % |
Non-deductible officers’ compensation | |
| 6.7 | % | |
| (5.4 | )% | |
| 0.0 | % |
Global intangible low-taxed income | |
| 32.4 | % | |
| 0.0 | % | |
| 0.0 | % |
Other permanent differences | |
| (0.7 | )% | |
| (1.5 | )% | |
| (6.2 | )% |
Effect of rates different than statutory | |
| (2.0 | )% | |
| (4.0 | )% | |
| 0.5 | % |
Non-creditable withholding taxes | |
| 4.2 | % | |
| 0.0 | % | |
| 0.0 | % |
Foreign
tax true ups | |
| (0.1 | )% | |
| 4.6 | % | |
| 0.1 | % |
Research and development tax credits | |
| (1.1 | )% | |
| 0.3 | % | |
| 0.0 | )% |
Change
in valuation allowance | |
| (48.6 | )% | |
| (10.8 | )% | |
| (16.6 | )% |
Effective
income tax rate | |
| 12.6 | % | |
| 4.2 | % | |
| (1.2 | )% |
The
net deferred tax assets and liabilities arising from temporary differences are as follows:
Schedule
of Deferred Tax Assets and Liabilities
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(in millions) | |
Depreciation | |
$ | 52.3 | | |
$ | 71.4 | |
Net operating losses | |
| 22.9 | | |
| 31.6 | |
Other temporary differences | |
| 3.1 | | |
| 4.4 | |
Intangible Assets | |
| 0.7 | | |
| 0.0 | |
Right of Use Liability | |
| 2.2 | | |
| 0.0 | |
Total gross deferred tax assets | |
| 81.2 | | |
| 107.4 | |
Valuation allowance
balance | |
| (79.1 | ) | |
| (104.5 | ) |
Gross deferred tax assets | |
| 2.1 | | |
| 2.9 | |
Intangible assets | |
| 0.0 | | |
| (0.3 | ) |
Other temporary differences | |
| 0.0 | | |
| (2.6 | ) |
Right of Use Asset | |
| (2.1 | ) | |
| 0.0 | |
Gross deferred tax liabilities | |
| (2.1 | ) | |
| (2.9 | ) |
Net
deferred tax assets | |
$ | — | | |
$ | — | |
Changes
in the valuation allowance are as follows:
Schedule of Changes in the Valuation Allowance
| |
December
31,
2022 | | |
December
31,
2021 | |
| |
| (in
millions) | |
Beginning balance | |
$ | 104.5 | | |
$ | 76.4 | |
(Decrease) increase | |
| (25.4 | ) | |
| 28.1 | |
Reversal of allowance | |
| — | | |
| — | |
Ending balance | |
$ | 79.1 | | |
$ | 104.5 | |
As of December 31, 2022 and 2021, the Company has
$9.0 million and $39.5 million, respectively, of gross federal net operating loss carry forwards, these losses have an unlimited carry
forward. The cumulative state net operating losses as of December 31, 2022 are $58.4 million, which begin to expire in 2026. The utilization
of both the Company’s federal and state net operating losses may be subject to a limitation in the future due to the “change
of ownership provisions” under Section 382 of the Internal Revenue Code. As of December 31, 2022, the Company has not had an ownership
change under Section 382.
As of December 31, 2022 and 2021, the Company also
has gross net operating losses in foreign jurisdictions, primarily the United Kingdom, totalling $74.5 million and $83.2 million, respectively.
The majority of these net operating losses have an unlimited carry forward period.
The
Company recorded a valuation allowance against all of our deferred tax assets as of both December 31, 2022, and December 31, 2021. 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. The valuation allowance we recorded as of December 31, 2022 and December 31, 2021 was $79.1
million and $104.5 million, respectively.
The
Company has not recognized deferred tax liabilities in respect of unremitted earnings that are considered indefinitely reinvested in
foreign subsidiaries. We do not provide for taxes on our undistributed earnings of foreign subsidiaries that have not been previously
taxed because we intend to invest such undistributed earnings indefinitely outside of the United States.
Currently, there are no federal, state or foreign jurisdiction tax audits
pending. The Company’s corporate federal and state tax returns from 2019 to 2021 remain subject to examination by tax authorities
and the Company’s foreign tax returns from 2014 to 2021 remain subject to examination by tax authorities.
In accordance with ASC 740, the Company has evaluated
its tax positions to determine if there are any uncertain tax positions. As of December 31, 2021 and 2022, the Company has no unrecognized
tax benefits for uncertain tax positions and has no accrued interest or penalties related to uncertain tax positions. The Company does
not anticipate any material change in the total amount of unrecognized tax benefits will occur within the next twelve months.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Macquarie
Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK”), (an arranger and lending party under our RCF Agreement), and
Macquarie Capital (Europe) Limited (“Macquarie EUR”), (an arranger and initial purchaser of our Senior Secured Notes), are
affiliates of MIHI LLC, which beneficially owned approximately 11.7% of our common stock as of December 31, 2022, and 11.4% of our common
stock as of December 31, 2021. Macquarie UK was also one of the lending parties with respect to the Prior Financing and its associated
revolving credit facility. Macquarie UK did not hold any of the Company’s aggregate senior debt at December 31, 2022 or December
31, 2021. Interest expense payable to Macquarie UK for the years ended December 31, 2022, 2021 and 2020 amounted to $0.0 million, $0.9
million and $2.2 million, respectively. In addition, Macquarie EUR received $0.6 million of $5.5 million of fees paid in connection with
the issuance of the Senior Secured Notes and the RCF in the year ended December 31, 2021, and Macquarie UK received $0.3 million of a
total $3.1 million of amendment fees paid with respect to the Prior Financing in the year ended December 31, 2020. 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.
HG
Vora Special Opportunities Master Fund Limited (“HG Vora”) (a purchaser of our Senior Secured Notes issued on May 20, 2021)
was a significant stockholder until October 12, 2021. Interest expense payable to HG Vora while a related party for the year ended December
31, 2021 amounted to $1.7 million.
On December 31, 2021, the Company entered into a consultancy agreement
with Richard Weil, the brother of A. Lorne Weil, our Executive Chairman, under which he received a success fee in the amount of $0.1 million
for services he provided in connection with our acquisition of Sportech Lotteries, LLC. The success fee was paid during the year ended
December 31, 2022. Under the agreement, as extended in November 2022, he will provide consulting services relating to the lottery in the
Dominican Republic through to June 30, 2023 at a rate of $10,000 per month and, with respect to such services, the aggregate amount incurred
by the Company in consulting fees for the year ended December 31, 2022 was $0.1 million.
We
incurred certain offering expenses in connection with an underwritten public offering of shares held by a significant stockholder, the
Landgame Trust, which closed on June 1, 2021, as to which our expenses were reimbursed by the stockholder. For the year ended December
31, 2021, the aggregate amount invoiced for reimbursement was $0.2 million. The stockholder sold an aggregate of 6,217,628 shares in
the offering (including 810,995 shares subject to an over-allotment option that was exercised in full) at an offering price of $9.25
per share, less underwriting discounts and commissions of $0.4625 per share. One of the participating underwriters in the offering was
Macquarie Capital (USA) Inc., an affiliate of MIHI LLC (see paragraph above), pursuant to which it purchased 870,468 of the shares including
113,539 shares subject to the over-allotment option.
The
Company held a 40% non-controlling equity interest in Innov8 Gaming Limited (“Innov8”) from October 2019 until April 2020
when the Company disposed of its interest. Revenue earned from Innov8 while a related party for the year ended December 31, 2020 amounted
to $0.6 million and purchases from Innov8 while a related party for the year ended December 31, 2020 amounted to $0.2 million. The value
of the investment was impaired by $0.7 million to $Nil in March 2020 prior to disposal.
The
Company as Lessee
The
Company is party to operating leases with third parties with respect to various real estate and vehicles. Real estate leases typically
include a lease (of the property) and a non-lease (provision of services) component which are accounted for separately. Where lease costs
are variable due to future rent reviews, these are treated as part of the lease asset and lease liabilities as they are considered to
qualify as variable lease costs which are subject to an index or rate. These costs are included at the amount prior to any reviews, as
it is not permitted to estimate future rent reviews. Where real estate leases contain an option to terminate, any period beyond the option
date is only included as part of the lease term if the Company is reasonably certain not to exercise the option. Vehicle leases typically
contain a lease (of the vehicle) and a non-lease (provision of services) component which are accounted for separately.
The
leases have remaining terms of 1 to 10 years.
During
the years to December 31, 2021 and 2020, certain concessions were granted with respect to the Company’s operating leases in light
of Covid-19. These took the form of lease extensions, where nothing was paid for a period of time with that same period of time and payments
added onto the lease at the end, payment holidays, where payments were deferred until a later date, but with no lease extension, and
discounted payments, where payments were reduced and not repaid either at a later date or through lease extensions. The Company elected
to use the practical expedient granted by the FASB and account for the concessions as if they were part of the enforceable rights and
obligations of the parties under the existing lease contract for all affected operating leases. Lease extensions and discounted payments
were accounted using the ‘cash basis’ approach, with the lease liability and right-of-use asset continuing to be accounted
for as if payments were still being made under the original terms of the lease. Payment holidays were accounted for using the ‘remeasurement
consistent with resolving a contingency’ approach, which involved remeasuring the liability and the right-of-use asset and continuing
to recognize the total cost of the lease on a straight line basis over the period to which it relates.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
Company is also party to finance leases with third parties with respect to gaming machines. The leases have remaining terms of between
24 and 36 months.
The
components of lease expense were as follows:
Schedule
of Lease Expense
| |
Year
Ended December 31, 2022 | | |
Year
Ended December 31, 2021 | | |
Year
Ended December 31, 2020 | |
| |
(in millions) | |
Finance lease costs: | |
| | | |
| | | |
| | |
Depreciation | |
$ | 0.9 | | |
$ | 0.5 | | |
$ | 0.1 | |
Interest | |
| 0.2 | | |
| 0.2 | | |
| 0.1 | |
Operating lease costs | |
| 4.0 | | |
| 4.4 | | |
| 4.3 | |
Short-term lease costs | |
| 1.2 | | |
| 1.3 | | |
| 1.5 | |
Variable lease costs | |
| 4.3 | | |
| 2.9 | | |
| 1.7 | |
Total | |
$ | 10.6 | | |
$ | 9.3 | | |
$ | 7.7 | |
| |
December
31, 2022 | | |
December
31, 2021 | |
Weighted average remaining lease term –
finance leases | |
| 29.8
months | | |
| 39.1
months | |
Weighted average remaining lease term –
operating leases | |
| 68.5
months | | |
| 69.4
months | |
Weighted average discount rate
– finance leases | |
| 9.0 | % | |
| 8.9 | % |
Weighted average discount
rate – operating leases | |
| 8.9 | % | |
| 8.7 | % |
Assets
leased under finance leases had a cost of $2.3 million and $4.2 million at December 31, 2022 and 2021, respectively, and accumulated
depreciation associated with these assets was $1.2 million and $0.6 million at December 31, 2022 and 2021, respectively.
Future
minimum finance lease payments as of December 31, 2022 were as follows:
Schedule
of Future Minimum Finance Lease Payments
Year
ending December 31, (in millions) | |
| |
2023 | |
$ | 1.2 | |
2024 | |
| 0.9 | |
2025 | |
| 0.5 | |
2026 | |
| — | |
2027 | |
| — | |
Thereafter | |
| — | |
Total future minimum lease
payments | |
| 2.6 | |
Less:
imputed interest | |
| (0.4 | ) |
Total | |
$ | 2.2 | |
Future
minimum operating lease payments as of December 31, 2022 were as follows:
Schedule
of Future Minimum Operating Lease Payments
Year
ending December 31, (in millions) |
|
|
|
2023 |
|
$ |
3.0 |
|
2024 |
|
|
2.5 |
|
2025 |
|
|
1.4 |
|
2026 |
|
|
0.9 |
|
2027 |
|
|
0.7 |
|
Thereafter |
|
|
2.7 |
|
Total
future minimum lease payments |
|
|
11.2 |
|
Less:
imputed interest |
|
|
(2.5 |
) |
Total |
|
$ |
8.7 |
|
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
Company as Lessor
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, both of which are included in the amounts disclosed.
The
leases have remaining terms of 3 to 36 months.
During
the years to December 31, 2021 and 2020, the Company granted concessions to customers in the form of lease extensions granted during
the lockdown period, where nothing was paid during the concession period, with that same period of time and payments added onto the lease
at the end. The Company elected to use the practical expedient granted by the FASB and account for the concessions as if they were part
of the enforceable rights and obligations of the parties under the existing lease contract for all affected leases.
Assets
leased under operating leases had a cost of $5.3 million and $6.8 million at December 31, 2022 and 2021, respectively, and accumulated
depreciation associated with these assets was $3.6 million and $2.8 million at December 31, 2022 and 2021, respectively. Depreciation
expense for the year ended December 31, 2022, 2021 and 2020 amounted to $1.5 million, $1.4 million and $1.5 million, respectively.
The
components of lease income were as follows:
Schedule of Lease Income
| |
Year
Ended December 31, 2022 | | |
Year
Ended December 31, 2021 | | |
Year
Ended December 31, 2020 | |
| |
(in millions) | |
Interest receivable from sales
type leases | |
$ | — | | |
$ | — | | |
$ | 0.1 | |
Operating lease income | |
| 8.3 | | |
| 3.3 | | |
| 2.3 | |
Profit recognized at commencement date of sales
type leases | |
| 0.3 | | |
| — | | |
| — | |
Variable income from
sales type leases | |
| — | | |
| 0.1 | | |
| 0.7 | |
Total | |
$ | 8.6 | | |
$ | 3.4 | | |
$ | 3.1 | |
Future
minimum sales type lease receivables as of December 31, 2022 were as follows:
Schedule
of Future Minimum Sales Type Lease Receivables
Year
ending December 31, (in millions) | |
| |
2023 | |
$ | 0.3 | |
2024 | |
| 0.1 | |
2025 | |
| 0.1 | |
2026 | |
| — | |
2027 | |
| — | |
Total future minimum lease
receivables | |
| 0.5 | |
Less:
imputed interest | |
| (0.1 | ) |
Total | |
$ | 0.4 | |
Future
minimum operating lease receivables as of December 31, 2022 were as follows:
Schedule
of Future Minimum Operating Type Lease Receivables
Year
ending December 31, (in millions) | |
| |
2023 | |
$ | 8.2 | |
2024 | |
| 5.2 | |
2025 | |
| 2.6 | |
2026 | |
| — | |
2027 | |
| — | |
Total
future minimum lease receivables | |
$ | 16.0 | |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
25. |
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.
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 an independently administered fund. The defined contribution
pension cost charge represents contributions payable by the Company and amounted to $2.9 million, $2.4 million and $2.3 million for the
year ended December 31, 2022, 2021 and 2020, respectively. Contributions totaling $1.2 million and $0.8 million were payable to the fund
as at December 31, 2022 and 2021, respectively.
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 in these consolidated financial statements. Retirement benefits are generally
based on a portion of an employee’s pensionable earnings during years prior to 2010.
The
latest triennial actuarial valuation of the scheme as at March 31, 2021 was finalized in June 2022. The actuarial valuation revealed
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 of £8.2 million ($9.9 million) at the valuation date. Under the Recovery Plan and Schedule of
Contributions agreed between the Trustee and the Company on June 28, 2022, it was agreed that the shortfall will be met by contributions
of £0.9 million ($1.1 million) for each the years ended December 31 2021, 2022, 2023 and 2024, of £0.7 million ($0.8 million)
for the year ended December 31, 2025 and of £0.5 million ($0.6 million) for the period January 1, 2026 to October 31, 2026. The
Company will also make expense contributions of £0.3 million ($0.4 million) per annum for the period covered by the Recovery Plan
and Schedule of Contributions.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
trustee has made an allowance for the pension scheme liability profile when deciding the investment strategy of the pension scheme. Since
the pension scheme is closed to new entrants and ceased future accrual with effect from March 31, 2010, it has continued to mature gradually.
Therefore, the trustee reviews the investment strategy regularly to check whether any changes are needed. When considering the investment
strategy, the trustee has taken into account the effect of any possible increases in the deficit reduction contributions on the financial
position of the Company, and the extent to which the Company will be able to bear these changes.
The
scheme’s investment policy is to maximize long-term financial return commensurate with security and minimizing risk, with an objective
of achieving a return of around 3% per annum above the return on UK Government bonds. This is achieved by holding a portfolio of marketable
investments that avoids over-concentration of investment and spreads assets both over industries and geographies. In setting investment
strategy, the trustees considered the lowest risk strategy that they could adopt in relation to the scheme’s liabilities and designed
an asset allocation to achieve a higher return while maintaining a cautious approach to meeting the scheme’s liabilities. The trustees
undertake periodic reviews of the investment strategy and take advice from their investment advisors. They consider a full range of asset
classes, the risks and rewards of a range of alternative asset allocation strategies, the suitability of each asset class and the need
for appropriate diversification. The current strategy is to hold 12% in a diversified growth fund, 24% in diversified credit, 18% in
a equity-linked liability-driven investment funds, 6% in credit-linked liability-driven investment funds and 40% in a buy-in policy.
Our
pension benefit costs are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates,
inflation, expected returns on plan assets, mortality rates and other factors. The assumptions used in recording the obligations under
our plans represent our best estimates, and we believe that they are reasonable, based on information as to historical experience and
performance as well as other factors that might cause future expectations to differ from past trends. Differences in actual experience
or changes in assumptions may affect our pension obligations and future expense. The principal factors contributing to actuarial gains
and losses each year are (1) changes in the discount rate used to value pension benefit obligations as of the measurement date and (2)
differences between the expected and the actual return on plan assets.
Our
valuation methodologies used for pension assets measured at fair value are as follows. There have been no changes in the methodologies
used at December 31, 2022 and December 31, 2021.
The
diversified fund is valued at fair value by using the net asset value (“NAV”) of shares held by the plan at the year end.
The NAV of the diversified fund is not publicly quoted. The majority of the underlying securities have observable Level 1 or 2 pricing
inputs, including quoted prices for similar assets in active or non-active markets. ASC 820, Fair Value Measurements and Disclosures,
allows NAV per share to serve as a practical expedient to estimate the fair value of the diversified fund. ASC 820 also states that where
NAV is allowed to be used as an estimate of fair value, if the reporting entity has the ability to redeem its investment at NAV as of
the measurement date, that investment shall be categorized as a Level II fair value measurement. If the investment cannot be redeemed
at the measurement date, but may be redeemable in the future, but at an uncertain date, the investment shall be categorized as a Level
3 fair value measurement.
As
of December 31, 2022 and December 31, 2021, the diversified fund was redeemable at NAV as of the measurement dates and, therefore, classified
as Level 2.
With
respect to the buy-in contract, it was agreed during the year ended September 27, 2014, that 281 pensioners of the plan would be insured
by means of a pensioner buy-in. The liabilities and assets in respect of insured pensioners are assumed to match for the purposes of
ASC 715, Pensions - Retirement Benefits, disclosures (i.e. the full benefits have been insured). The approach adopted has therefore been
to include within the total value of assets, an amount equal to the calculated total liability value of the insured pensioners on the
actuarial assumptions adopted for ASC 715 purposes. The buy-in contract is, therefore, classified as Level 3.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
following table sets forth 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:
Schedule of Pension Plans and their Reconciliation
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
(in millions) | |
Change in benefit obligation: | |
| | | |
| | |
Benefit obligation at beginning
of period | |
$ | 114.7 | | |
$ | 127.8 | |
Interest cost | |
| 2.1 | | |
| 1.6 | |
Actuarial (gain) loss | |
| (35.5 | ) | |
| (9.8 | ) |
Benefits paid | |
| (3.5 | ) | |
| (3.5 | ) |
Foreign currency translation
adjustments | |
| (10.4 | ) | |
| (1.4 | ) |
Benefit obligation at
end of period | |
$ | 67.4 | | |
$ | 114.7 | |
Change in plan assets: | |
| | | |
| | |
Fair value of plan assets at beginning of period | |
$ | 117.7 | | |
$ | 118.7 | |
Actual (loss) gain on plan assets | |
| (39.1 | ) | |
| 2.5 | |
Employer contributions | |
| 1.4 | | |
| 1.5 | |
Benefits paid | |
| (3.5 | ) | |
| (3.5 | ) |
Foreign currency translation
adjustments | |
| (11.2 | ) | |
| (1.5 | ) |
Fair value of assets at end of period | |
$ | 65.3 | | |
$ | 117.7 | |
Amount recognized in the
consolidated balance sheets: | |
| | | |
| | |
(Unfunded) Overfunded
status (non-current) | |
$ | (2.1 | ) | |
$ | 3.0 | |
Net amount recognized | |
$ | (2.1 | ) | |
$ | 3.0 | |
The
following table presents the components of our net periodic pension (benefit) cost:
Schedule of Defined Benefit Plans
| |
Year
Ended December 31, 2022 | | |
Year
Ended December 31, 2021 | | |
Year
Ended December 31, 2020 | |
| |
(in millions) | |
Components of net periodic pension (benefit)
cost: | |
| | |
| | |
| |
Interest cost | |
$ | 2.1 | | |
$ | 1.6 | | |
$ | 2.2 | |
Expected return on plan assets | |
| (3.2 | ) | |
| (2.7 | ) | |
| (3.1 | ) |
Amortization of net
loss | |
| 0.5 | | |
| 0.9 | | |
| 0.6 | |
Net periodic (benefit)
cost | |
$ | (0.6 | ) | |
$ | (0.2 | ) | |
$ | (0.3 | ) |
The
accumulated benefit obligation for all defined benefit pension plans was $67.4 million and $114.7 million as of December 31, 2022 and
December 31, 2021, respectively. The (underfunded) overfunded status of our defined benefit pension plans recorded as a (liability) asset
in our consolidated balance sheets as of December 31, 2022 and December 31, 2021 was $(2.1) million and $3.0 million, respectively.
The
estimated net loss, net transition asset (obligation) and prior service cost for the plan that will be amortized from accumulated other
comprehensive income into net periodic pension cost over the next fiscal year are $0.9 million, $nil and $nil, respectively.
The
fair value of the plan assets at December 31, 2022 by asset category is presented below:
Schedule
of Fair Value of Plan Assets
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| |
(in millions) | |
Diversified fund | |
$ | — | | |
$ | 40.7 | | |
$ | — | | |
$ | 40.7 | |
Buy-in contract | |
| — | | |
| — | | |
| 24.3 | | |
| 24.3 | |
Cash and other current
assets | |
| 0.3 | | |
| — | | |
| — | | |
| 0.3 | |
Total | |
$ | 0.3 | | |
$ | 40.7 | | |
$ | 24.3 | | |
$ | 65.3 | |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
The
fair value of the plan assets at December 31, 2021 by asset category is presented below:
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| |
(in millions) | |
Diversified fund | |
$ | — | | |
$ | 79.1 | | |
$ | — | | |
$ | 79.1 | |
Buy-in contract | |
| — | | |
| — | | |
| 38.1 | | |
| 38.1 | |
Cash | |
| 0.5 | | |
| — | | |
| — | | |
| 0.5 | |
Total | |
$ | 0.5 | | |
$ | 79.1 | | |
$ | 38.1 | | |
$ | 117.7 | |
The
table below presents the weighted-average actuarial assumptions used to determine the benefit obligation and net periodic benefit cost
for the Plan.
Schedule
of Benefit Obligation and Net Periodic Benefit Cost for Plan
| |
December
31, 2022 | | |
December
31, 2021 | |
Discount rate | |
| 5.00 | % | |
| 2.00 | % |
Expected return on assets | |
| 5.70 | % | |
| 3.00 | % |
RPI inflation | |
| 3.13 | % | |
| 3.25 | % |
CPI inflation – pre 2030 | |
| 2.13 | % | |
| 2.25 | % |
CPI inflation – post 2030 | |
| 2.93 | % | |
| 3.05 | % |
Pension increases – pre-2006 service | |
| 2.90 | % | |
| 3.15 | % |
Pension increases – post-2006 service | |
| 1.89 | % | |
| 2.20 | % |
Pension increases – post 1988 GMP –
pre 2030 | |
| 1.83 | % | |
| 2.10 | % |
Pension increases – post 1988 GMP –
post 2030 | |
| 2.21 | % | |
| 2.60 | % |
The
following benefit payments are expected to be paid:
Schedule
of Benefit Payments are Expected to Be Paid
| |
(in
millions) | |
2023 | |
$ | 3.2 | |
2024 | |
$ | 2.8 | |
2025 | |
$ | 3.2 | |
2026 | |
$ | 3.3 | |
2027 | |
$ | 3.6 | |
2028 to 2032 | |
$ | 20.5 | |
27. |
Segment
Reporting and Geographic Information |
Operating
segments are identified as components of an enterprise for which separate and discrete financial information is available and is used
by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance.
The Company’s chief decision-maker is the Office of the Executive Chairman.
The
Company’s chief decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information
about revenue and operating profit by reporting unit. This information is used for purposes of allocating resources and evaluating financial
performance.
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
accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies.”
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
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 years ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively,
by business segment. Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating
segments because these costs are not allocable and to do so would not be practical. Corporate function costs consist primarily of selling,
general and administrative expenses, depreciation and amortization, capital expenditures, right of use assets, cash, prepaid expenses
and property and equipment and software development costs relating to corporate/shared functions. All acquisition and integration related
transaction expenses are allocated as corporate function costs.
Segment
Information
Schedule of Segment Reporting Information by Segment
Year
Ended December 31, 2022
| |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate Functions | | |
Total | |
| |
(in millions) | |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
| |
Service | |
$ | 80.4 | | |
$ | 55.1 | | |
$ | 23.1 | | |
$ | 93.2 | | |
$ | — | | |
$ | 251.8 | |
Product
sales | |
| 31.3 | | |
| — | | |
| — | | |
| 2.3 | | |
| — | | |
| 33.6 | |
Total
revenue | |
| 111.7 | | |
| 55.1 | | |
| 23.1 | | |
| 95.5 | | |
| — | | |
| 285.4 | |
Cost of sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of service | |
| (19.3 | ) | |
| (2.4 | ) | |
| (3.7 | ) | |
| (23.9 | ) | |
| — | | |
| (49.3 | ) |
Cost of product sales | |
| (21.0 | ) | |
| — | | |
| — | | |
| (1.7 | ) | |
| — | | |
| (22.7 | ) |
Selling, general and administrative expenses | |
| (30.1 | ) | |
| (6.9 | ) | |
| (7.1 | ) | |
| (45.8 | ) | |
| (25.7 | ) | |
| (115.6 | ) |
Stock-based compensation expense | |
| (1.6 | ) | |
| (0.7 | ) | |
| (0.7 | ) | |
| (0.6 | ) | |
| (7.2 | ) | |
| (10.8 | ) |
Acquisition and integration related transaction
expenses | |
| — | | |
| — | | |
| — | | |
| — | | |
| (0.5 | ) | |
| (0.5 | ) |
Depreciation and amortization | |
| (16.6 | ) | |
| (2.6 | ) | |
| (2.9 | ) | |
| (13.5 | ) | |
| (2.0 | ) | |
| (37.6 | ) |
Segment
operating income (loss) | |
| 23.1 | | |
| 42.5 | | |
| 8.7 | | |
| 10.0 | | |
| (35.4 | ) | |
| 48.9 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
operating income | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 48.9 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets at December
31, 2022 | |
$ | 107.8 | | |
$ | 59.4 | | |
$ | 15.1 | | |
$ | 81.0 | | |
$ | 46.1 | | |
$ | 309.4 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total goodwill at December
31, 2022 | |
$ | 1.3 | | |
$ | 42.3 | | |
$ | 0.4 | | |
$ | 29.9 | | |
$ | — | | |
$ | 73.9 | |
Total
capital expenditures for the year ended December 31, 2022 | |
$ | 16.7 | | |
$ | 4.0 | | |
$ | 5.3 | | |
$ | 10.5 | | |
$ | 3.6 | | |
$ | 40.1 | |
Year
Ended December 31, 2021
| |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate Functions | | |
Total | |
| |
(in millions) | |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
| |
Service | |
$ | 58.8 | | |
$ | 36.0 | | |
$ | 22.8 | | |
$ | 65.7 | | |
$ | — | | |
$ | 183.3 | |
Product
sales | |
| 22.6 | | |
| — | | |
| — | | |
| 3.0 | | |
| — | | |
| 25.6 | |
Total
revenue | |
| 81.4 | | |
| 36.0 | | |
| 22.8 | | |
| 68.7 | | |
| — | | |
| 208.9 | |
Cost of sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of service | |
| (12.8 | ) | |
| (1.9 | ) | |
| (3.7 | ) | |
| (15.9 | ) | |
| — | | |
| (34.3 | ) |
Cost of product sales | |
| (14.4 | ) | |
| — | | |
| — | | |
| (2.0 | ) | |
| — | | |
| (16.4 | ) |
Selling, general and administrative expenses | |
| (28.1 | ) | |
| (7.1 | ) | |
| (6.1 | ) | |
| (35.1 | ) | |
| (20.8 | ) | |
| (97.2 | ) |
Stock-based compensation expense | |
| (1.8 | ) | |
| (0.8 | ) | |
| (0.6 | ) | |
| (0.6 | ) | |
| (9.2 | ) | |
| (13.0 | ) |
Acquisition and integration related transaction
expenses | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1.6 | ) | |
| (1.6 | ) |
Depreciation and amortization | |
| (22.5 | ) | |
| (3.4 | ) | |
| (3.2 | ) | |
| (16.1 | ) | |
| (1.8 | ) | |
| (47.0 | ) |
Segment
operating income (loss) | |
| 1.8 | | |
| 22.8 | | |
| 9.2 | | |
| (1.0 | ) | |
| (33.4 | ) | |
| (0.6 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
operating loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | (0.6 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets at December
31, 2021 | |
$ | 100.5 | | |
$ | 61.6 | | |
$ | 12.3 | | |
$ | 85.7 | | |
$ | 71.6 | | |
$ | 331.7 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total goodwill at December
31, 2021 | |
$ | 1.4 | | |
$ | 47.4 | | |
$ | 0.4 | | |
$ | 33.5 | | |
$ | — | | |
$ | 82.7 | |
Total
capital expenditures for the year ended December 31, 2021 | |
$ | 10.9 | | |
$ | 3.3 | | |
$ | 3.7 | | |
$ | 8.9 | | |
$ | 1.4 | | |
$ | 28.2 | |
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
Year
Ended December 31, 2020
| |
Gaming | | |
Virtual Sports | | |
Interactive | | |
Leisure | | |
Corporate Functions | | |
Total | |
| |
(in millions) | |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
| |
Service | |
$ | 92.2 | | |
$ | 32.4 | | |
$ | 13.3 | | |
$ | 40.8 | | |
$ | — | | |
$ | 178.7 | |
Product
sales | |
| 18.3 | | |
| — | | |
| — | | |
| 2.8 | | |
| — | | |
| 21.1 | |
Total
revenue | |
| 110.5 | | |
| 32.4 | | |
| 13.3 | | |
| 43.6 | | |
| — | | |
| 199.8 | |
Cost of sales, excluding depreciation and amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of service | |
| (15.7 | ) | |
| (2.9 | ) | |
| (1.9 | ) | |
| (9.6 | ) | |
| — | | |
| (30.1 | ) |
Cost of product sales | |
| (12.4 | ) | |
| — | | |
| — | | |
| (2.0 | ) | |
| — | | |
| (14.4 | ) |
Selling, general and administrative expenses | |
| (24.5 | ) | |
| (4.4 | ) | |
| (3.9 | ) | |
| (30.8 | ) | |
| (21.2 | ) | |
| (84.8 | ) |
Stock-based compensation expense | |
| (0.8 | ) | |
| (0.4 | ) | |
| (0.3 | ) | |
| (0.1 | ) | |
| (3.2 | ) | |
| (4.8 | ) |
Acquisition and integration related transaction
expenses | |
| — | | |
| — | | |
| — | | |
| — | | |
| (7.0 | ) | |
| (7.0 | ) |
Depreciation and amortization | |
| (27.6 | ) | |
| (3.7 | ) | |
| (2.3 | ) | |
| (16.9 | ) | |
| (1.8 | ) | |
| (52.3 | ) |
Segment
operating income (loss) | |
| 29.5 | | |
| 21.0 | | |
| 4.9 | ) | |
| (15.8 | ) | |
| (33.2 | ) | |
| 6.4 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
operating loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 6.4 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
capital expenditures for the year ended December 31, 2020 | |
$ | 8.9 | | |
$ | 4.8 | | |
$ | 2.7 | | |
$ | 8.7 | | |
$ | 4.9 | | |
$ | 30.0 | |
Geographic
Information
Geographic
information for revenue is set forth below:
Schedule of Geographic Information
| |
Year
Ended December 31, 2022 | | |
Year
Ended December 31, 2021 | | |
Year
Ended December 31, 2020 | |
| |
(in millions) | |
Total revenue | |
| | | |
| | | |
| | |
UK | |
$ | 209.5 | | |
$ | 149.1 | | |
$ | 152.3 | |
Greece | |
| 22.9 | | |
| 18.6 | | |
| 17.0 | |
Rest of world | |
| 53.0 | | |
| 41.2 | | |
| 30.5 | |
Total | |
$ | 285.4 | | |
$ | 208.9 | | |
$ | 199.8 | |
Total
revenue | |
$ | 285.4 | | |
$ | 208.9 | | |
$ | 199.8 | |
UK
revenue includes revenue from customers headquartered in the UK, but whose revenue is generated globally.
Software
development costs are included as attributable to the market in which they are utilized.
INSPIRED
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2022 AND 2021, AND FOR THE YEARS ENDED
DECEMBER
31, 2022, 2021 AND 2020
28. |
Customer
Concentration |
During
the year ended December 31, 2022, one customer represented at least 10% of revenues, accounting for 13% of the Company’s revenues.
This customer was served by the Virtual Sports and Interactive segments. During the year ended December 31, 2021, no customers represented
at least 10% of revenues. During the year ended December 31, 2020, one customer represented at least 10% of revenues, accounting for
22% of the Company’s revenues. This customer was served by the Gaming, Virtual Sports and Interactive segments.
At
December 31, 2022, there was one customer that represented at least 10% of the Company’s accounts receivable, accounting for 24%
of the Company’s accounts receivable. At December, 2021, there were no customers that represented at least 10% of the Company’s
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. The Company did not identify subsequent events that would have required adjustment
or disclosure in the consolidated financial statements.
Item
16. Form 10-K Summary.
None.
Exhibits
Exhibit
Number |
|
Description |
2.1 |
|
Share
Sale Agreement, dated July 13, 2016, by and among Hydra Industries Acquisition Corp., the Vendors, Target Parent, DMWSL 632 Limited
and Gaming Acquisitions Limited (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company,
filed with the SEC on July 19, 2016). |
|
|
|
2.2 |
|
Completion
Arrangements Agreement, dated December 23, 2016, between Hydra Industries Acquisition Corp. and the Vendors listed in schedule 1
to the Share Sale Agreement (incorporated herein by reference to Exhibit 10.18 to the Current Report on Form 8-K of the Company,
filed with the SEC on December 30, 2016). |
|
|
|
2.3 |
|
Share
Purchase Agreement, dated as of June 11, 2019, by and between Inspired Gaming (UK) Limited and Novomatic UK Ltd. (incorporated herein
by reference to Exhibit 2.1 of the Current Report on Form 8-K of the Company, filed with the SEC on June 11, 2019). |
|
|
|
3.1(a) |
|
Second
Amended and Restated Certificate of Incorporation of Inspired Entertainment, Inc. (incorporated herein by reference to Exhibit 3.1
to the Current Report on Form 8-K of the Company, filed with the SEC on December 30, 2016). |
|
|
|
3.1(b) |
|
Certificate
of Elimination of Series A Junior Participating Preferred Stock, dated August 13, 2020 (incorporated herein by reference to Exhibit
3.1 of the Current Report on Form 8-K of the Company, filed with the SEC on August 14, 2020). |
|
|
|
3.2 |
|
Amended and Restated Bylaws of Inspired Entertainment, Inc. (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K Company, filed with the SEC on November 11, 2019).
|
|
|
|
4.1 |
|
Registration
Rights Agreement, dated October 24, 2014, between Hydra Industries Acquisition Corp. and certain security holders (incorporated herein
by reference to Exhibit 10.5 to the Current Report on Form 8-K of the Company, filed with the SEC on October 29, 2014). |
|
|
|
4.2 |
|
Registration
Rights Agreement, dated December 23, 2016, by and among Hydra Industries Acquisition Corp. and the Vendors (incorporated herein by
reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company, filed with the SEC on December 30, 2016). |
|
|
|
4.3 |
|
Description of Securities (incorporated herein by reference to Exhibit 4.4 to the Annual Report on Form 10-K of the Company, filed with the SEC on March 31, 2022. |
|
|
|
4.4 |
|
Indenture, dated as of May 20, 2021, among Inspired Entertainment (Financing) PLC, as issuer, the Company, as a guarantor, the subsidiaries of the Company named therein, as additional guarantors, GLAS Trustees Limited, as trustee, GLAS Trust Corporation Limited as security agent and GLAS Trust Company LLC as paying agent, transfer agent and registrar (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K of the Company, filed with the SEC on May 20, 2021). |
|
|
|
4.5 |
|
Form
of 7.875% Senior Secured Notes due 2026 (included in Exhibit 4.5). |
|
|
|
10.1 |
|
Super
Senior Revolving Credit Facilities Agreement, dated as of May 20, 2021, among the Company, Gaming Acquisition Limited, Inspired Entertainment
(Financing) PLC and Inspired Gaming (UK) Limited as original borrowers, the subsidiaries of the Company named therein as original
guarantors, Global Loan Agency Services Limited as agent, GLAS Trust Corporation Limited as security agent and Barclays Bank plc
and Macquarie Corporate Holdings Pty Limited (UK Branch) as arrangers and original lenders (incorporated herein by reference to Exhibit
10.1 to the Current Report on Form 8-K of the Company, filed with the SEC on May 20, 2021). |
Exhibit
Number |
|
Description |
10.2 |
|
Form
of Director and Officer Indemnity Agreement (incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K of
the Company, filed with the SEC on December 30, 2016). |
|
|
|
10.3 |
|
Stockholders
Agreement, dated December 23, 2016, by and among the Company, Hydra Industries Sponsor LLC, Macquarie Sponsor and the Vendors (incorporated
herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Company, filed with the SEC on December 30, 2016). |
|
|
|
10.4# |
|
Inspired
Entertainment, Inc. 2016 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Annual Report on Form
10-K of the Company, filed with the SEC on December 4, 2017). |
|
|
|
10.5# |
|
Inspired
Entertainment, Inc. Second Long-Term Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.5 to the Post-Effective
Amendment to the Registration Statement on Form S-1 of the Company, filed with the SEC on December 29, 2017). |
|
|
|
10.6# |
|
Inspired
Entertainment, Inc. 2018 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.6 to the Annual Report on Form 10-K
of the Company, filed with the SEC on December 10, 2018). |
|
|
|
10.7# |
|
Inspired
Entertainment, Inc. 2021 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the Annual Report on Form 10-K
of the Company, filed with the SEC on March 31, 2022). |
|
|
|
10.8#* |
|
Forms of Grant Agreements for fiscal year 2022 under the Inspired Entertainment, Inc. 2021 Omnibus Incentive Plan (Time-Based Form of Agreement and Performance-Based Form of Agreement). |
|
|
|
10.9#* |
|
Inspired Entertainment, Inc. 2022 Short-Term Incentive Bonus Plan. |
|
|
|
10.10# |
|
Employment
Agreement, dated as of October 9, 2020, by and between the Company and A. Lorne Weil (incorporated herein by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on October 13, 2020). |
|
|
|
10.11# |
|
Letter, dated April 21, 2021, from the Company to A. Lorne Weil (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of the Company, filed with the SEC on May 14, 2021). |
|
|
|
10.12# |
|
Addendum, effective June 21, 2021, to the Employment Agreement dated October 9, 2020 by and between the Company and A. Lorne Weil (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company, filed with the Company on June 24, 2021). |
Exhibit
Number |
|
Description |
10.13# |
|
Second Addendum, effective January 1, 2023, to the Employment Agreement dated October 9, 2020, as amended, by and between the Company and A. Lorne Weil (incorporated herein by reference to Exhibit 10.2 to the Current Report on form 8-K of the Company, filed with the SEC on January 17, 2023). |
|
|
|
10.14# |
|
Employment
Agreement, dated February 17, 2020, between Inspired Entertainment, Inc. and Brooks H. Pierce (incorporated by reference to Exhibit
10.15 to the Annual Report on Form 10-K of the Company, filed with the SEC on March 30, 2020). |
|
|
|
10.15# |
|
Letter Agreement, dated July 21, 2021, by and between the Company and Brooks H. Pierce (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company, filed with the SEC on July 23, 2021). |
|
|
|
10.16# |
|
Second Addendum, effective January 1, 2023, to the Employment Agreement dated February 17, 2020, as amended, by and between the Company and Brooks H. Pierce (incorporated herein by reference to Exhibit 10.1 to the Current Report on form 8-K of the Company, filed with the SEC on January 17, 2023. |
|
|
|
10.17# |
|
Employment
Agreement, dated December 14, 2016, between Hydra Industries Acquisition Corp. and Daniel B. Silvers (incorporated herein by reference
to Exhibit 10.3 to the Current Report on Form 8-K of the Company, filed with the SEC on December 30, 2016). |
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10.18# |
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Amendment,
dated December 22, 2017, to the Employee Agreement, dated December 14, 2016, between Hydra Industries Acquisition Corp. and Daniel
B. Silvers (incorporated herein by reference to Exhibit 10.13 to the Post-Effective Amendment to the Registration Statement on Form
S-1 of the Company, filed with the SEC on December 29, 2017). |
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10.19# |
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Amendment
effective January 31, 2020, to the Employment Agreement dated December 14, 2016 (as amended) by and between the Company and Daniel
B. Silvers (incorporated herein by reference to Exhibit 99.1 to the Current Report on Form 8-K of the Company, filed with the SEC
on February 6, 2020). |
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10.20#* |
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Separation and Release Agreement, dated January 10, 2023, between the Company and Daniel B. Silvers. |
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10.21# |
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Employment
Agreement, dated August 3, 2021, by and between IG UK and Stewart F.B. Baker (incorporated herein by reference to Exhibit 10.1 to
the Current Report on Form 8-K of the Company, filed with the SEC on August 5, 2021). |
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10.22# |
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Employment Agreement, dated August 3, 2021, by and between IG UK and Carys Damon (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Company, filed with the SEC on August 5, 2021). |
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10.23# |
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Inspired Entertainment, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 of the Company, filed with the SEC on July 14, 2017). |
# |
Indicates
management contract or compensatory plan. |
* |
Filed
herewith. |
** |
Furnished
herewith. |