SEC Form 10-Q filed by Inspired Entertainment Inc.

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2024

 

OR

 

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

 

For the transition period _______________

 

Commission File Number: 001-36689

 

INSPIRED ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		47-1025534
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

 

250 West 57th Street, Suite 415
New York, NY		10107
(Address of principal executive offices)		(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☒
	Emerging growth company ☐

 

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

 

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

 

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, par value $0.0001 per share		INSE		The NASDAQ Stock Market LLC

 

As of November 4, 2024, there were 26,578,302 shares of the Company’s common stock issued and outstanding.

 

 

 

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION	1
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income	2
	Condensed Consolidated Statement of Stockholders’ Deficit	3
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4.	CONTROLS AND PROCEDURES	42
PART II.	OTHER INFORMATION	43
ITEM 1.	LEGAL PROCEEDINGS	43
ITEM 1A.	RISK FACTORS	43
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	44
ITEM 4.	MINE SAFETY DISCLOSURES	44
ITEM 5.	OTHER INFORMATION	44
ITEM 6.	EXHIBITS	44
SIGNATURES		45

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

References in this report to “we,” “us,” “our,” the “Company” and “Inspired” refer to Inspired Entertainment, Inc. and its subsidiaries unless the context suggests otherwise.

 

Certain statements and other information set forth in this report, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, may relate to future events and expectations, and as such constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Our forward-looking statements include, but are not limited to, statements regarding our business strategy, plans and objectives and our expected or contemplated future operations, results, financial condition, beliefs and intentions. In addition, any statements that refer to projections, forecasts or other characterizations or predictions of future events or circumstances, including any underlying assumptions on which such statements are expressly or implicitly based, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “can,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “scheduled,” “seek,” “should,” “would” and similar expressions, among others, and negatives expressions including such words, may identify forward-looking statements.

 

Our forward-looking statements reflect our current expectations about our future results, performance, liquidity, financial condition, prospects and opportunities, and are based upon information currently available to us, our interpretation of what we believe to be significant factors affecting our business and many assumptions regarding future events. Actual results, performance, liquidity, financial condition, prospects and opportunities could differ materially from those expressed in, or implied by, our forward-looking statements. This could occur as a result of various risks and uncertainties, including the following:

 

	●	government regulation of our industries;
	●	our ability to compete effectively in our industries;
	●	the effect of evolving technology on our business;
	●	our ability to renew long-term contracts and retain customers, and secure new contracts and customers;
	●	our ability to maintain relationships with suppliers;
	●	our ability to protect our intellectual property;
	●	our ability to protect our business against cybersecurity threats;
	●	our ability to successfully grow by acquisition as well as organically;
	●	fluctuations due to seasonality;
	●	our ability to attract and retain key members of our management team;
	●	our need for working capital;
	●	our ability to secure capital for growth and expansion;
	●	changing consumer, technology and other trends in our industries;
	●	our ability to successfully operate across multiple jurisdictions and markets around the world;
	●	changes in local, regional and global economic and political conditions; and
	●	other factors described in the reports and documents we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”).

 

In light of these risks and uncertainties, and others discussed in this report, there can be no assurance that any matters covered by our forward-looking statements will develop as predicted, expected or implied. Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. We advise you to carefully review the reports and documents we file from time to time with the SEC.

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

		September 30, 2024				December 31, 2023
		(Unaudited)
Assets
Cash		$	35.7			$	40.0
Restricted cash			0.8				—
Accounts receivable, net			47.2				40.6
Inventory			31.6				32.3
Prepaid expenses and other current assets			50.1				39.6
Total current assets			165.4				152.5
Property and equipment, net			64.4				62.8
Software development costs, net			24.2				21.8
Other acquired intangible assets subject to amortization, net			17.2				13.4
Goodwill			61.9				58.8
Operating lease right of use asset			18.2				14.2
Costs of obtaining and fulfilling customer contracts, net			11.7				9.4
Other assets			25.6				8.0
Total assets		$	388.6			$	340.9
Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable and accrued expenses		$	60.4			$	60.8
Corporate tax and other current taxes payable			7.0				6.3
Deferred revenue, current			5.6				5.6
Operating lease liabilities			5.3				4.7
Current portion of long-term debt			20.1				19.1
Current portion of finance lease liabilities			7.8				0.7
Other current liabilities			3.1				3.5
Total current liabilities			109.3				100.7
Long-term debt			312.4				295.6
Finance lease liabilities, net of current portion			16.6				1.6
Deferred revenue, net of current portion			12.0				7.1
Operating lease liabilities			13.4				9.8
Other long-term liabilities			3.2				4.1
Total liabilities			466.9				418.9
Commitments and contingencies
Stockholders’ deficit
Preferred stock; $0.0001 par value; 1,000,000 shares authorized, no shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively.			—				—
Common stock; $0.0001 par value; 49,000,000 shares authorized; 26,574,804 shares and 26,219,021 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively			—				—
Additional paid in capital			390.7				386.1
Accumulated other comprehensive income			39.9				44.5
Accumulated deficit			(508.9	)			(508.6	)
Total stockholders’ deficit			(78.3	)			(78.0	)
Total liabilities and stockholders’ deficit		$	388.6			$	340.9

 

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

 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(in millions, except share and per share data)

(Unaudited)

 

		2024				2023				2024				2023
		Three Months Ended September 30,								Nine Months Ended September 30,
		2024				2023				2024				2023
Revenue:
Service		$	73.8			$	70.7			$	196.7			$	195.7
Product sales			4.2				26.8				20.0				46.1
Total revenue			78.0				97.5				216.7				241.8
Cost of sales:
Cost of service (1)			(20.7	)			(21.4	)			(55.6	)			(56.9	)
Cost of product sales (1)			(2.7	)			(26.7	)			(13.0	)			(41.8	)
Cost of sales			(2.7	)			(26.7	)			(13.0	)			(41.8	)
Selling, general and administrative expenses			(31.4	)			(26.9	)			(96.4	)			(82.7	)
Depreciation and amortization			(11.3	)			(10.3	)			(31.8	)			(29.8	)
Net operating income			11.9				12.2				19.9				30.6
Other expense
Interest expense, net			(7.6	)			(6.9	)			(20.9	)			(20.5	)
Other finance income			0.1				0.1				0.3				0.3
Total other expense, net			(7.5	)			(6.8	)			(20.6	)			(20.2	)
Net income (loss) before income taxes			4.4				5.4				(0.7	)			10.4
Income tax (expense) benefit			(1.0	)			(2.0	)			0.4				(2.8	)
Net income (loss)			3.4				3.4				(0.3	)			7.6
Other comprehensive (loss)/income:
Foreign currency translation (loss) gain			(6.3	)			3.6				(5.5	)			(2.0	)
Reclassification of loss on hedging instrument to comprehensive income			—				—				—				0.3
Actuarial gains on pension plan			0.3				0.2				0.9				0.7
Other comprehensive (loss) income			(6.0	)			3.8				(4.6	)			(1.0	)
Comprehensive (loss) income		$	(2.6	)		$	7.2			$	(4.9	)		$	6.6
Net income per common share – basic		$	0.12			$	0.12			$	(0.01	)		$	0.27
Net income per common share – diluted		$	0.12			$	0.12			$	(0.01	)		$	0.26
Weighted average number of shares outstanding during the period – basic			28,496,801				28,104,365				28,524,762				28,088,901
Weighted average number of shares outstanding during the period – diluted			29,188,787				29,105,267				28,524,762				29,149,285
Supplemental disclosure of stock-based compensation expense
Stock-based compensation included in:
Selling, general and administrative expenses		$	(1.8	)		$	(3.3	)		$	(5.7	)		$	(9.3	)

 

(1)	Excluding depreciation and amortization

 

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

 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD JANUARY 1, 2024 TO SEPTEMBER 30, 2024

(in millions, except share data)

(Unaudited)

 

		Shares				Amount				capital				income				deficit				deficit
		Common stock								Additional paid in				Accumulated other comprehensive				Accumulated				Total stockholders’
		Shares				Amount				capital				income				deficit				deficit
Balance as of January 1, 2024			26,219,021			$	—			$	386.1			$	44.5			$	(508.6	)		$	(78.0	)
Foreign currency translation adjustments			—				—				—				1.0				—				1.0
Reclassification of loss on pension plan to comprehensive income			—				—				—				0.3				—				0.3
Issuances under stock plans			340,735				—				(0.8	)			—				—				(0.8	)
Stock-based compensation expense			—				—				2.0				—				—				2.0
Net loss			—				—				—				—				(5.7	)			(5.7	)
Balance as of March 31, 2024			26,559,756			$	—			$	387.3			$	45.8			$	(514.3	)		$	(81.2	)
Foreign currency translation adjustments			—				—				—				(0.2	)			—				(0.2	)
Reclassification of loss on pension plan to comprehensive income			—				—				—				0.3				—				0.3
Issuances under stock plans			11,552				—				—				—				—				—
Stock-based compensation expense			—				—				1.7				—				—				1.7
Net income			—				—				—				—				2.0				2.0
Balance as of June 30, 2024			26,571,308			$	—			$	389.0			$	45.9			$	(512.3	)		$	(77.4	)
Foreign currency translation adjustments			—				—				—				(6.3	)			—				(6.3	)
Reclassification of loss on pension plan to comprehensive income			—				—				—				0.3				—				0.3
Issuances under stock plans			3,496				—				—				—				—				—
Stock-based compensation expense			—				—				1.7				—				—				1.7
Net income			—				—				—				—				3.4				3.4
Balance as of September 30, 2024			26,574,804			$	—			$	390.7			$	39.9			$	(508.9	)		$	(78.3	)

 

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

 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD JANUARY 1, 2023 TO SEPTEMBER 30, 2023

(in millions, except share data)

(Unaudited)

 

		Common stock								Additional paid in				Accumulated other comprehensive				Accumulated				Total stockholders’
		Shares				Amount				capital				income				deficit				deficit
Balance as of January 1, 2023			25,909,516			$	—			$	378.2			$	50.8			$	(514.6	)		$	(85.6	)
Foreign currency translation adjustments			—				—				—				(2.9	)			—				(2.9	)
Reclassification of loss on pension plan to comprehensive income			—				—				—				0.2				—				0.2
Reclassification of loss on hedging instrument to comprehensive income			—				—				—				0.2				—				0.2
Issuances under stock plans			353,554				—				—				—				—				—
Stock-based compensation expense			—				—				3.0				—				—				3.0
Net loss			—				—				—				—				(1.4	)			(1.4	)
Balance as of March 31, 2023			26,263,070			$	—			$	381.2			$	48.3			$	(516.0	)		$	(86.5	)
Foreign currency translation adjustments			—				—				—				(2.7	)			—				(2.7	)
Reclassification of loss on pension plan to comprehensive income			—				—				—				0.3				—				0.3
Reclassification of loss on hedging instrument to comprehensive income			—				—				—				0.1				—				0.1
Repurchase of common stock			(3,931	)			—				—				—				(0.1	)			(0.1	)
Issuances under stock plans			4,282				—				(0.2	)			—				—				(0.2	)
Stock-based compensation expense			—				—				3.1				—				—				3.1
Net income			—				—				—				—				5.6				5.6
Balance as of June 30, 2023			26,263,421			$	—			$	384.1			$	46.0			$	(510.5	)		$	(80.4	)
Balance			26,263,421			$	—			$	384.1			$	46.0			$	(510.5	)		$	(80.4	)
Foreign currency translation adjustments			—				—				—				3.6				—				3.6
Reclassification of loss on pension plan to comprehensive income			—				—				—				0.2				—				0.2
Repurchase of common stock			(121,847	)			—				—				—				(1.5	)			(1.5	)
Issuances under stock plans			73,165				—				(1.1	)			—				—				(1.1	)
Stock-based compensation expense			—				—				3.3				—				—				3.3
Net income			—				—				—				—				3.4				3.4
Net income (loss)			—				—				—				—				3.4				3.4
Balance as of September 30, 2023			26,214,739			$	—			$	386.3			$	49.8			$	(508.6	)		$	(72.5	)
Balance			26,214,739			$	—			$	386.3			$	49.8			$	(508.6	)		$	(72.5	)

 

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

 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

 

		2024				2023
		Nine Months Ended September 30,
		2024				2023
Cash flows from operating activities:
Net (loss) income		$	(0.3	)		$	7.6
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			31.8				29.8
Amortization of right of use asset			3.3				2.8
Stock-based compensation expense			5.7				9.3
Reclassification of loss on hedging instrument to comprehensive income			—				0.5
Non-cash interest expense relating to senior debt			0.7				1.0
Changes in assets and liabilities:
Accounts receivable			(4.4	)			11.7
Inventory			2.3				(9.4	)
Prepaid expenses and other assets			(3.0	)			(5.0	)
Corporate tax and other current taxes payable			(4.0	)			(9.6	)
Accounts payable and accrued expenses			(7.9	)			4.6
Deferred revenue and customer prepayment			3.9				2.9
Operating lease liabilities			(3.1	)			(2.8	)
Other long-term liabilities			(0.2	)			(0.4	)
Net cash provided by operating activities			24.8				43.0
Cash flows from investing activities:
Purchases of property and equipment			(11.7	)			(20.1	)
Acquisition of third-party company trade and assets			—				(0.6	)
Purchases of capital software and internally developed costs			(9.2	)			(11.0	)
Contract cost expense			(8.6	)			(7.7	)
Net cash used in investing activities			(29.5	)			(39.4	)
Cash flows from financing activities:
Repurchase of common stock			—				(1.6	)
Repayments of finance leases			(0.4	)			(1.0	)
Net cash used in financing activities			(0.4	)			(2.6	)
Effect of exchange rate changes on cash			1.6				0.4
Net (decrease) increase in cash			(3.5	)			1.4
Cash, beginning of period			40.0				25.0
Cash and restricted cash, end of period		$	36.5			$	26.4
Components of cash and restricted cash
Cash			35.7				26.4
Restricted cash			0.8				-
Total cash and restricted cash, end of period		$	36.5			$	26.4
Supplemental cash flow disclosures
Cash paid during the period for interest		$	12.8			$	12.1
Cash paid during the period for income taxes		$	2.5			$	4.8
Cash paid during the period for operating leases		$	7.2			$	4.9
Supplemental disclosure of non-cash investing and financing activities
Lease liabilities arising from obtaining right of use assets		$	(6.4	)		$	(0.4	)
Property and equipment acquired through finance lease		$	21.9			$	1.2
Additional paid in capital from net settlement of RSUs		$	(0.8	)		$	(1.3	)

 

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

 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

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 September 30, 2024, the Company’s cash on hand, excluding restricted cash, was $35.7 million, and the Company had working capital in addition to unrestricted cash of $20.4 million. The Company recorded a net loss of $0.3 million and net income of $7.6 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. Net (loss) income includes non-cash stock-based compensation of $5.7 million and $9.3 million for the nine months ended September 30, 2024 and September 30, 2023, respectively.

 

Historically, the Company has generally had positive cash flows from operating activities and has relied on a combination of cash flows provided by operations and the incurrence of debt and/or the refinancing of existing debt to fund its obligations. Cash flows provided by operations amounted to $24.8 million and $43.0 million for the nine months ended September 30, 2024 and September 30, 2023, respectively.

 

Management currently believes that the Company’s cash balances on hand, cash flows expected to be generated from operations, ability to control and defer capital projects and amounts available from the Company’s external borrowings will be sufficient to fund the Company’s net cash requirements through November 2025.

 

Basis of Presentation

 

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

 

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

 

6

 

 

2. Allowance for Credit Losses

 

Changes in the allowance for credit losses are as follows:

 Schedule of Changes in Allowance for Credit Losses

		September 30, 2024				December 31, 2023
		(in millions)
Beginning balance		$	(1.1	)		$	(1.4	)
Additional allowance for credit losses			—				(0.2	)
Recoveries			—				0.2
Write offs			—				0.4
Foreign currency translation adjustments			(0.1	)			(0.1	)
Ending balance		$	(1.2	)		$	(1.1	)

 

3. Inventory

 

Inventory consists of the following:

 Schedule of Inventory

		September 30, 2024				December 31, 2023
		(in millions)
Component parts		$	19.8			$	23.3
Work in progress			1.4				0.4
Finished goods			10.4				8.6
Total inventories		$	31.6			$	32.3

 

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

 

4. Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets consist of the following:

 

 Schedule of Prepaid Expenses and Other Assets

		September 30, 2024				December 31, 2023
		(in millions)
Prepaid expenses and other assets		$	23.0			$	15.6
Unbilled accounts receivable			27.1				24.0
Total prepaid expenses and other assets		$	50.1			$	39.6

 

5. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consist of the following:

 Schedule of Accounts Payable and Accrued Expenses

		September 30, 2024				December 31, 2023
		(in millions)
Accounts payable		$	30.9			$	41.9
Interest payable			8.9				—
Payroll and related costs			4.1				5.5
Cost of sales including inventory			5.4				6.4
Other			11.1				7.0
Total accounts payable and accrued expenses		$	60.4			$	60.8

 

6. Contract Related Disclosures

 

The following table summarizes contract related balances:

 Schedule of Contract Related Balances

		Accounts Receivable				Unbilled Accounts Receivable				Right to recover asset				Deferred Income				Customer Prepayments and Deposits
		(in millions)
At September 30, 2024		$	45.1			$	27.1			$	0.7			$	(17.6	)		$	(3.1	)
At December 31, 2023		$	42.8			$	24.0			$	0.6			$	(12.7	)		$	(2.9	)

 

Revenue recognized that was included in the deferred income balance at the beginning of the periods amounted to $2.1 million and $3.9 million, as restated, for the nine months ended September 30, 2024 and 2023, respectively.

 

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

 

Transaction Price Allocated to Remaining Performance Obligations

 

At September 30, 2024, the transaction price allocated to unsatisfied performance obligations for contracts expected to be greater than one year, or performance obligations for which we do not have a right to consideration from the customer in the amount that corresponds to the value to the customer for our performance completed to date, variable consideration which is not accounted for in accordance with the sales-based or usage-based royalties guidance, or contracts which are not wholly unperformed, was approximately $96.2 million. Of this amount, we expect to recognize as revenue approximately 12% through December 31, 2024, approximately 60% through December 31, 2026, and the remaining 28% through December 31, 2030.

 

7

 

 

7. Long term Debt

 

Senior Secured Notes

 

Long-term debt consists of £235.0 million ($315.2 million) of Senior Secured Notes and $2.8 million of capitalized debt fees which are being amortized over the length of the Senior Secured Notes. The Senior Secured Notes bear interest at a fixed rate of 7.875% and are fully repayable on June 1, 2026.  

 

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

 

There were no covenant violations in the period ended September 30, 2024.

 

The Indenture governing the Senior Secured Notes contains covenants and certain reporting requirements including the requirement to provide the lender, within 60 days after the close of the quarter, unaudited quarterly financial statements with footnote disclosures. In the period ended September 30, 2023, the Company was unable to comply with this requirement due to the requirement to restate previously reported financial statements as reported in a Current Report on Form 8-K filed with the SEC on November 8, 2023. The debt agreement allows the Company a 30-day grace period to provide such financial information once they receive any notice of non-compliance. No such notice was received. Concurrent with the filing of the Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2023 with the SEC on February 27, 2024, the reporting requirement was met.

 

8. Stock-Based Compensation

 

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

 Schedule of Restricted Stock Unit Activity

		Number of Shares
Unvested Outstanding at January 1, 2024 (1)			1,242,175
Granted (2)			620,934
Forfeited			(185,468	)
Vested			(110,647	)
Unvested Outstanding at September 30, 2024			1,566,994

 

(1)

The amount shown as “unvested outstanding at January 1, 2024” does not include certain tranches of Adjusted EBITDA RSUs that have performance criteria for annual periods later than 2023 (an aggregate of 312,500 RSUs, including 62,500 subject to 2024 criteria), which were part of sign-on tranches approved for our Executive Chairman and our Chief Executive Officer during the years 2021 and 2023, as the applicable performance targets were not set by January 1, 2024 (and, accordingly, the accounting grant dates had not yet occurred for the tranches). Such tranches had previously been included in the amounts shown in 2023 as unvested outstanding since the initial approval date for the tranches.

(2)

The amount shown as “granted” includes 245,694 performance-based target RSUs for 2024 as to which the number that ultimately vests would range from 0% to 200% of the target amount of RSUs (a maximum of 491,388 RSUs based on attainment of Adjusted EBITDA targets for 2024). The amount shown also includes a tranche of 62,500 Adjusted EBITDA RSUs (subject to performance criteria for 2024) which can be earned at up to 100% of the target amount of RSUs; such tranche was part of a sign-on award of multiple tranches approved in 2021 for our Executive Chairman with respect to which the accounting grant date for the 2024 tranche did not occur until the targets were set in February 2024.

 

The Company issued a total of 355,783 shares during the nine months ended September 30, 2024, in connection with the Company’s equity-based plans, which included an aggregate of 333,161 shares issued in connection with the net settlement of RSUs that vested during the prior year (primarily on December 29, 2023).

 

9. 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, 2024		$	(78.3	)		$	—			$	33.8			$	(44.5	)
Change during the period			(1.0	)			—				(0.3	)			(1.3	)
Balance at March 31, 2024			(79.3	)			—				33.5				(45.8	)
Change during the period			0.2				—				(0.3	)			(0.1	)
Balance at June 30, 2024			(79.1	)			—				33.2				(45.9	)
Change during the period			6.3				—				(0.3	)			6.0
Balance at September 30, 2024		$	(72.8	)		$	—			$	32.9			$	(39.9	)

 

		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, 2023		$	(84.2	)		$	0.3			$	33.1			$	(50.8	)
Change during the period			2.9				(0.2	)			(0.2	)			2.5
Balance at March 31, 2023			(81.3	)			0.1				32.9				(48.3	)
Change during the period			2.7				(0.1	)			(0.3	)			2.3
Balance at June 30, 2023			(78.6	)			—				32.6				(46.0	)
Change during the period			(3.6	)			—				(0.2	)			(3.8	)
Balance at September 30, 2023		$	(82.2	)		$	—			$	32.4			$	(49.8	)

 

8

 

 

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

 

10. Net Income (Loss) per Share

 

Basic income/loss per share (“EPS”) is computed by dividing net income/loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period, including stock options and RSUs, unless the inclusion would be anti-dilutive.

 

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

 Schedule of Anti-dilutive Securities Excluded from Computation of Earnings per Share 

		2024				2023				2024				2023
		Three Months Ended September 30,								Nine Months Ended September 30,
		2024				2023				2024				2023
RSUs			574,465				805,619				1,566,994				805,619

 

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

 Schedule of Numerators and Denominators of the Basic and Diluted EPS Computations

Three months ended September 30, 2024		Income (Numerator) (in millions)				Shares (Denominator)				Per-Share Amount
Basic EPS
Income available to common stockholders		$	3.4				28,496,801			$	0.12
Effect of Dilutive Securities
RSUs			—				691,986			$	—
Diluted EPS
Income available to common stockholders		$	3.4			$	29,188,787			$	0.12

 

Three months ended September 30, 2023		Income (Numerator) (in millions)				Shares (Denominator)				Per-Share Amount
Basic EPS
Income available to common stockholders		$	3.4				28,104,365			$	0.12
Effect of Dilutive Securities
RSUs			—				1,000,902			$	—
Diluted EPS
Income available to common stockholders		$	3.4			$	29,105,267			$	0.12

 

9

 

 

Nine months ended September 30, 2023		Income (Numerator) (in millions)				Shares (Denominator)				Per-Share Amount
Basic EPS
Income available to common stockholders		$	7.6				28,088,901			$	0.27
Effect of Dilutive Securities
RSUs			—				1,060,384			$	(0.01	)
Diluted EPS
Income available to common stockholders		$	7.6			$	29,149,285			$	0.26

 

The calculation of Basic EPS includes the effects of 1,921,997 and 1,790,728 shares for the three and nine months ended September 30, 2024 and 2023, respectively, with respect to RSU awards that have vested but have not yet been issued.

 

11. Other Finance Income (Expense)

 

Other finance income (expense) consisted of the following for the three and nine months ended September 30, 2024 and 2023:

 Schedule of Other Finance Income (Expense)

		2024				2023				2024				2023
		Three Months Ended September 30,								Nine Months Ended September 30,
		2024				2023				2024				2023
		(in millions)								(in millions)
Pension interest cost		$	(0.9	)		$	(0.8	)		$	(2.7	)		$	(2.5	)
Expected return on pension plan assets			1.0				0.9				3.0				2.8
Other finance income (expense)		$	0.1			$	0.1			$	0.3			$	0.3

 

12. Income Taxes

 

The effective income tax rate for the three months ended September 30, 2024 and 2023 was 23.3% and 37.6%, respectively, resulting in a $1.0 million and $2.0 million income tax expense, respectively. The effective income tax rate for the nine months ended September 30, 2024 and 2023 was 56.8% and 27.6%, respectively, resulting in a $0.4 million income tax benefit and a $2.8 million income tax expense, respectively.

 

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

 

The Company recorded a valuation allowance against all of our deferred tax assets as of both September 30, 2024 and September 30, 2023. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that 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.

 

10

 

 

13. Related Parties

 

Macquarie Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK”) (an arranger and lending party under our RCF Agreement) is an affiliate of MIHI LLC, which beneficially owned approximately 11.4% of our common stock as of September 30, 2024. Macquarie UK held $2.2 million of the total $20.1 million of RCF drawn at September 30, 2024, and $2.1 million of the total $19.1 million of RCF drawn at December 31, 2023. Interest expense payable to Macquarie UK for the RCF for the three months ended September 30, 2024 and September 30, 2023 (including non-utilization fees) amounted to $0.1 million and $0.0 million, respectively, and for the nine months ended September 30, 2024 and September 30, 2023 (including non-utilization fees) amounted to $0.2 million and $0.0 million, respectively. Macquarie UK did not hold any of the Company’s senior notes at September 30, 2024 or December 31, 2023. MIHI LLC is also a party to a stockholders agreement with the Company and other stockholders, dated December 23, 2016, pursuant to which, subject to certain conditions, MIHI LLC, jointly with Hydra Industries Sponsor LLC, are permitted to designate two directors to be nominated for election as directors of the Company at any annual or special meeting of stockholders at which directors are to be elected, until such time as MIHI LLC and Hydra Industries Sponsor LLC in the aggregate hold less than 5% of the outstanding shares of the Company.

 

Richard Weil, the brother of A. Lorne Weil, our Executive Chairman, provides consulting services to the Company relating to our lottery operations in the Dominican Republic under a consultancy agreement dated December 31, 2021, as amended. The aggregate amount incurred by the Company in consulting fees was $37,500 and $37,500 for the three months ended September 30, 2024 and September 30, 2023, respectively, and $112,500 and $97,500 for the nine months ended September 30, 2024 and September 30, 2023, respectively

 

14. Leases

 

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

 

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

 Schedule of Lease Income from Sales

		2024				2023				2024				2023
		Three Months Ended September 30,								Nine Months Ended September 30,
		2024				2023				2024				2023
		(in millions)								(in millions)
Interest receivable		$	0.2				—			$	0.5				—
Profit recognized at commencement date of sales type leases			0.7				—				2.0				—
Total		$	0.9			$	—			$	2.5			$	—

 

During the three months ended September 30, 2024 the Company entered into a finance lease agreement for machine purchases with CSJ SPV, LLC, of which HG Vora Opportunistic Capital Master Fund II LP is the Managing Member for $21.0 million which will be repaid over six years by way of structured quarterly repayments inclusive of principal and interest.

 

15. 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.

 

11

 

 

16. Pension Plan

 

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

 

Defined Benefit Pension Scheme

 

The defined benefit scheme has been closed to new entrants since April 1, 1999 and closed to future accruals for services rendered to the Company for the entire financial statement periods presented. The latest actuarial valuation of the scheme (as at March 31, 2021), which was finalized in June 2022, determined that the statutory funding objective was not met, i.e., there were insufficient assets to cover the scheme’s technical provisions and there was a funding shortfall.

 

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

 

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

 Schedule of Net Periodic Pension Cost

		2023				2023
		Nine Months Ended September 30,
		2023				2023
		(in millions)
Components of net periodic pension cost (benefit):
Interest cost		$	2.7			$	2.5
Expected return on plan assets			(3.0	)			(2.8	)
Amortization of net loss			0.8				0.7
Net periodic cost (benefit)		$	0.5			$	0.4

 

17. Segment Reporting and Geographic Information

 

The Company operates its business along four operating segments, which are segregated on the basis of revenue stream: Gaming, Virtual Sports, Interactive and Leisure. The Company believes this method of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated.

 

The following tables present revenue, cost of sales, excluding depreciation and amortization, selling, general and administrative expenses, stock-based compensation expense and depreciation and amortization, operating income (loss) and total long-lived asset expenditures for the periods ended September 30, 2024 and September 30, 2023, respectively, by business segment. Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these costs are not allocable and to do so would not be practical. Corporate function costs consist primarily of selling, general and administrative expenses, depreciation and amortization and capital expenditures relating to corporate/shared functions.

 

Segment Information

 Schedule of Segment Reporting Information by Segment

Three Months Ended September 30, 2024

 

		Gaming				Virtual Sports				Interactive				Leisure				Corporate Functions				Total
		(in millions)
Revenue:
Service		$	19.9			$	11.2			$	10.2			$	32.5			$	—			$	73.8
Product sales			3.4				—				—				0.8				—				4.2
Total revenue			23.3				11.2				10.2				33.3				—				78.0
Cost of sales, excluding depreciation and amortization:
Cost of service			(4.8	)			(0.5	)			(0.5	)			(14.9	)			—				(20.7	)
Cost of product sales			(2.3	)			—				—				(0.4	)			—				(2.7	)
Cost of sales			(2.3	)			—				—				(0.4	)			—				(2.7	)
Selling, general and administrative expenses			(6.7	)			(1.9	)			(2.8	)			(7.8	)			(10.4	)			(29.6	)
Stock-based compensation expense			(0.1	)			(0.1	)			(0.1	)			(0.2	)			(1.3	)			(1.8	)
Depreciation and amortization			(5.0	)			(1.3	)			(1.3	)			(3.1	)			(0.6	)			(11.3	)
Segment operating income (loss)			4.4				7.4				5.5				6.9				(12.3	)			11.9
Net operating income																						$	11.9
Total capital and other long-lived intangible asset expenditures for the three months ended September 30, 2024		$	1.7			$	1.9			$	0.7			$	2.8			$	1.3			$	8.4

 

12

 

 

Three Months Ended September 30, 2023

 

		Gaming				Virtual Sports				Interactive				Leisure				Corporate Functions				Total
		(in millions)
Revenue:
Service		$	18.9			$	13.4			$	7.3			$	31.1			$	—			$	70.7
Product sales			26.2				—				—				0.6				—				26.8
Total revenue			45.1				13.4				7.3				31.7				—				97.5
Cost of sales, excluding depreciation and amortization:
Cost of service			(5.5	)			(0.2	)			(0.5	)			(15.2	)			—				(21.4	)
Cost of product sales			(26.2	)			—				—				(0.5	)			—				(26.7	)
Cost of sales			(26.2	)			—				—				(0.5	)			—				(26.7	)
Selling, general and administrative expenses			(5.1	)			(1.5	)			(2.1	)			(7.3	)			(7.6	)			(23.6	)
Stock-based compensation expense			(0.4	)			(0.2	)			(0.1	)			(0.2	)			(2.4	)			(3.3	)
Depreciation and amortization			(5.1	)			(0.7	)			(0.9	)			(3.0	)			(0.6	)			(10.3	)
Segment operating income (loss)			2.8				10.8				3.7				5.5				(10.6	)			12.2
Net operating income																						$	12.2
Total capital and other long-lived intangible asset expenditures for the three months ended September 30, 2023		$	12.8			$	1.6			$	0.7			$	1.6			$	0.1			$	16.8

 

Nine Months Ended September 30, 2024

 

		Gaming				Virtual Sports				Interactive				Leisure				Corporate Functions				Total
		(in millions)
Revenue:
Service		$	56.4			$	35.3			$	27.7			$	77.3			$	—			$	196.7
Product sales			18.0				—				—				2.0				—				20.0
Total revenue			74.4				35.3				27.7				79.3				—				216.7
Cost of sales, excluding depreciation and amortization:
Cost of service			(15.7	)			(1.0	)			(1.6	)			(37.3	)			—				(55.6	)
Cost of product sales			(12.2	)			—				—				(0.8	)			—				(13.0	)
Cost of sales			(12.2	)			—				—				(0.8	)			—				(13.0	)
Selling, general and administrative expenses			(19.7	)			(5.5	)			(8.7	)			(23.1	)			(33.7	)			(90.7	)
Stock-based compensation expense			(0.5	)			(0.3	)			(0.3	)			(0.4	)			(4.2	)			(5.7	)
Depreciation and amortization			(12.7	)			(4.7	)			(3.7	)			(9.1	)			(1.6	)			(31.8	)
Segment operating income (loss)			13.6				23.8				13.4				8.6				(39.5	)			19.9
Net operating income																						$	19.9
Total capital and other long-lived intangible asset expenditures for the nine months ended September 30, 2024		$	5.9			$	7.9			$	1.6			$	10.3			$	3.0			$	28.7

 

13

 

 

Nine Months Ended September 30, 2023

 

		Gaming				Virtual Sports				Interactive				Leisure				Corporate Functions				Total
		(in millions)
Revenue:
Service		$	58.9			$	43.3			$	19.9			$	73.6			$	—			$	195.7
Product sales			44.4				—				—				1.7				—				46.1
Total revenue			103.3				43.3				19.9				75.3				—				241.8
Cost of sales, excluding depreciation and amortization:
Cost of service			(17.9	)			(1.0	)			(1.2	)			(36.8	)			—				(56.9	)
Cost of product sales			(40.4	)			—				—				(1.4	)			—				(41.8	)
Cost of sales			(40.4	)			—				—				(1.4	)			—				(41.8	)
Selling, general and administrative expenses			(15.8	)			(4.8	)			(7.3	)			(21.0	)			(24.5	)			(73.4	)
Stock-based compensation expense			(1.1	)			(0.6	)			(0.4	)			(0.7	)			(6.5	)			(9.3	)
Depreciation and amortization			(14.2	)			(2.3	)			(2.5	)			(9.1	)			(1.7	)			(29.8	)
Segment operating income (loss)			13.9				34.6				8.5				6.3				(32.7	)			30.6
Net operating loss																						$	30.6
Total capital and other long-lived intangible asset expenditures for the nine months ended September 30, 2023		$	17.3			$	3.2			$	2.3			$	10.6			$	1.6			$	35.0

 

Geographic Information

 

Geographic information for revenue is set forth below:

 Schedule of Geographic Information

		2024				2023				2024				2023
		Three Months Ended September 30,								Nine Months Ended September 30,
		2024				2023				2024				2023
		(in millions)								(in millions)
Total revenue
UK		$	60.5			$	79.8			$	164.5			$	190.6
Greece			5.3				5.2				16.0				16.1
Rest of world			12.2				12.5				36.2				35.1
Total		$	78.0			$	97.5			$	216.7			$	241.8
Total revenue		$	78.0			$	97.5			$	216.7			$	241.8

 

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

 

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

 

		September 30, 2024				December 31, 2023
		(in millions)
UK		$	119.3			$	91.9
Greece			15.3				15.3
Rest of world			26.7				22.4
Total		$	161.3			$	129.6
Total non-current assets excluding goodwill		$	161.3			$	129.6

 

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

 

18. Customer Concentration

 

During the three months ended September 30, 2024, no customers represented at least 10% of the Company’s revenue.

 

During the three months ended September 30, 2023, one customer represented at least 10% of the Company’s revenue, accounting for 23% of the Company’s revenue. This customer was served by the Gaming, Virtual Sports and Interactive segments.

 

During the nine months ended September 30, 2024, no customers represented at least 10% of the Company’s revenue.

 

During the nine months ended September 30, 2023, two customers represented at least 10% of the Company’s revenue, accounting for 13% and 12% of the Company’s revenue, respectively. The customers were served by the Gaming, Virtual Sports and Interactive segments, and the Virtual Sports and Interactive segments, respectively.

 

At September 30, 2024, one customer represented at least 10% of the Company’s accounts receivable, accounting for approximately 13% of the Company’s accounts receivable. At December 31, 2023, one customer represented at least 10% of the Company’s accounts receivable, accounting for approximately 24% of the Company’s accounts receivable.

 

19. Subsequent Events

 

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

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual future results could differ materially from the historical results discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those referenced in the section titled “Risk Factors” included in our annual report on Form 10-K for our fiscal year ended December 31, 2023, filed with the SEC on April 15, 2024.

 

Forward-Looking Statements

 

We make forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. For definitions of the term Forward-Looking Statements, see the definitions provided in the Cautionary Note Regarding Forward-Looking Statements at the forepart of this report.

 

Seasonality

 

Our results of operations can fluctuate due to seasonal trends and other factors. Sales of our gaming machines can vary quarter on quarter due to both supply and demand factors. Player activity for our holiday parks is generally higher in the second and third quarters of the year, particularly during the summer months and slower during the first and fourth quarters of the year.

 

Revenue

 

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

 

Geographic Range

 

Geographically, the majority of our revenue is derived from, and the majority of our non-current assets are attributable to, our UK operations. The remainder of our revenue is derived from, and non-current assets attributable to, Greece and the rest of the world (including North America).

 

For the three and nine-months ended September 30, 2024, we derived approximately 77% and 76% of our revenue from the UK (including customers headquartered in the UK but whose revenue is generated globally), respectively, 7% (in both periods) from Greece, and the remaining 16% and 17% respectively across the rest of the world. For the three and nine-months ended September 30, 2023, we derived approximately 82% and 79% of our revenue from the UK (including customers headquartered in the UK but whose revenue is generated globally), respectively, 5% and 7% from Greece, respectively, and the remaining 13% and 14% respectively across the rest of the world. The UK percentage was impacted by specific Hardware sales, which generally result in a lower margin (“Low Margin sales”), which contributed UK revenues for the three-month period by 39% and for the nine-month period by 16%.

 

As of September 30, 2024, our non-current assets (excluding goodwill) were attributable as follows: 74% to the UK, 9% to Greece and 17% across the rest of the world. As of September 30, 2023, our non-current assets (excluding goodwill) were attributable as follows: 71% to the UK, 11% to Greece and 18% across the rest of the world.

 

 

Foreign Exchange

 

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

 

During the three and nine-months ended September 30, 2024, we derived approximately 23% and 24% of our revenue from sales to customers outside the UK, respectively (see caveat above), compared to 18% and 21% during the three and six months ended September 30, 2023, respectively.

 

In the section “Results of Operations” below, currency impacts shown have been calculated as the current-period average GBP:USD rate less the equivalent average rate in the prior year period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP:USD rate. This is not a U.S. GAAP measure but is one which management believes gives a clearer indication of results. In the tables below, variances in particular line items from period to period exclude currency translation movements, and currency translation impacts are shown independently.

 

Non-GAAP Financial Measures

 

We use certain financial measures that are not compliant with U.S. GAAP (“Non-GAAP financial measures”), including EBITDA and adjusted EBITDA, to analyze our operating performance. In this discussion and analysis, we present certain non-GAAP financial measures, define and explain these measures and provide reconciliations to the most comparable U.S. GAAP measures. See “Non-GAAP Financial Measures” below.

 

Results of Operations

 

Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). During the periods ended September 30, 2024 and September 30, 2023, the average GBP:USD rates for the three-month period were 1.30 and 1.27, respectively, and for the nine-month period were 1.28 and 1.25, respectively.

 

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

 

	●	a discussion and analysis of the Company’s results of operations for the three and nine-month periods ended September 30, 2024, compared to the same period in 2023; and
	●	a discussion and analysis of the results of operations for each of the Company’s segments (Gaming, Virtual Sports, Interactive and Leisure) for the three and nine-month periods ended September 30, 2024, compared to the same period in 2023, including key performance indicator (“KPI”) analysis.

 

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

 

For all reported variances, refer to the overall company and segment tables shown below. All variances discussed in the overall company and segment results are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates.

 

Key Events for the Quarter

 

During the three-month period ended September 30, 2024 in the Gaming segment, OPAP in Greece ordered 4,000 new VLT’s, expected delivery in country is for 2,400 in H1 2025, with the final balance of 1,600 in Q4 2025.

 

During the three-month period ended September 30, 2024 we joined the Scientific Games Content Hub Partner Program, the global lottery industry’s premier content delivery platform, enabling Inspired to distribute to Scientific Games iLottery customers around the world.

 

During the three-month period ended September 30, 2024 the Interactive segment went live with seventeen new operators. The total number of customers at the end of the period increased by twelve overall due to the closure of several smaller-scale customers.

 

Key agreements made in the three-month period ended September 30, 2024 include a contract with Mecca Bingo for the provision of gaming machines, including the installation of 150 terminals with expected deployment in the fourth quarter of 2024 and a five-year machine supply agreement with Carlton Bingo, both in the Leisure segment.

 

 

Overall Company Results

 

Three and Nine-Months ended September 30, 2024, compared to Three and Nine-Months ended September 30, 2023

 

		For the Three-Month Period ended								Variance																For the Nine-Month Period ended								Variance
(In millions)		September 30,				September 30,				2024 vs 2023																September 30,				September 30,				2024 vs 2023
		2024				2023				Variance Attributable to Currency Movement				Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %				2024				2023				Variance Attributable to Currency Movement				Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %
Revenue:
Service		$	73.8			$	70.7			$		$1.9		$	1.2				2	%			4	%		$	196.7			$	195.7			$	5.0			$	(4.0	)			(2	)%			1	%
Product			4.2				26.8				0.1				(22.7				(85	)%			(84	)%			20.0				46.1				0.1				(26.2	)			(57	)%			(57	)%
Total revenue			78.0				97.5				2.0				(21.5	)			(22	)%			(20	)%			216.7				241.8				5.1				(30.2	)			(12	)%			(10	)%
Cost of Sales, excluding depreciation and amortization
Cost of Service			(20.7	)			(21.4	)			(0.8	)			1.5				(7	)%			(3	)%			(55.6	)			(56.9	)			(1.4	)			2.7				(5	)%			(2	)%
Cost of Product			(2.7	)			(26.7	)			(0.2	)			24.2				(91	)%			(90	)%			(13.0	)			(41.8	)			(0.1	)			28.9				(69	)%			(69	)%
Selling, general and administrative expenses			(29.6	)			(23.6	)			(0.5	)			(5.5	)			23	%			25	%			(90.7	)			(73.4	)			(2.2	)			(15.1	)			21	%			24	%
Stock-based compensation			(1.8	)			(3.3	)			(0.1	)			1.6				(48	)%			(45	)%			(5.7	)			(9.3	)			(0.2	)			3.8				(41	)%			(39	)%
Depreciation and amortization			(11.3	)			(10.3	)			(0.3	)			(0.7	)			7	%			10	%			(31.8	)			(29.8	)			(0.8	)			(1.2	)			4	%			7	%
Net operating Income			11.9				12.2				0.1				(0.4	)			(3	)%			(2	)%			19.9				30.6				0.4				(11.1	)			(36	)%			(35	)%
Other income (expense)
Interest expense, net			(7.6	)			(6.9	)			(0.4	)			(0.3	)			4	%			10	%			(20.9	)			(20.5	)			(0.9	)			0.5				(2	)%			2	%
Other finance income (expense)			0.1				0.1				-				-				N/A				N/A				0.3				0.3				-				-				N/A				N/A
Total other income (expense), net			(7.5	)			(6.8	)			(0.4	)			(0.3	)			4	%			10	%			(20.6	)			(20.2	)			(0.9	)			0.5				(2	)%			2	%
Net Income (loss)   from continuing operations before income taxes			4.4				5.4				(0.3	)			(0.7	)			(13	)%			(19	)%			(0.7	)			10.4				(0.5	)			(10.6	)			(102	)%			(107	)%
Income tax expense			(1.0	)			(2.0	)			(0.3	)			1.3				(65	)%			(50	)%			0.4				(2.8	)			(0.1	)			3.3				(118	)%			(114	)%
Net Income (Loss)		$	3.4			$	3.4			$	(0.6	)		$	0.6				18	%			0	%		$	(0.3	)		$	7.6			$	(0.6	)		$	(7.3	)			(96	)%			(104	)%
Exchange Rate - $ to £			1.30				1.27																				1.28				1.25

 

See “Segments Results” below for a more detailed explanation of the significant changes in our components of revenue within the individual segment results of operations.

 

 

Revenue (for the three and nine-months ended September 30, 2024, compared to the three and nine-months ended September 30, 2023)

 

Consolidated Reported Revenue by Segment

 

 

 

●	There were no Low Margin-related sales for the three and nine-months ended September 30, 2024. For the three and nine-months ended September 30, 2023 Low Margin-related sales were $22.7 million and $27.1 million, respectively.

 

For the three and nine-months ended September 30, 2024, revenue on a functional currency (at constant rate) basis decreased by $21.5 million and $30.2 million compared to the same period in 2023.

 

For the three-month period ended September 30, 2024, Gaming revenue declined by $22.4 million predominantly due to a decrease in product sales of $22.8 million, of which $22.7 million were Low Margin sales. Gaming service revenue grew by $0.4 million predominately due to growth in North America and a customer bonus included the UK. Virtual Sports revenue declined by $2.5 million, with $2.2 million of the reduction from Online. Interactive revenue grew by $2.7 million with growth driven in the UK and North American markets. Leisure revenue grew by $0.7 million, predominately driven by growth in the Holiday Parks and Motorway Service Area sectors.

 

For the nine-month period ended September 30, 2024, Gaming revenue declined by $30.6 million   predominantly due to a decrease in product sales of $26.5 million, of which $27.1 million were Low Margin sales. Gaming service revenue declined by $4.1 million, predominately due to declines in the UK, mainland Europe and Greece. Virtual Sports declined by $9.0 million, with $8.7 million of the reduction coming from Online. Interactive revenue grew by $7.2 million, which was driven by growth in the UK, mainland Europe and North America. Leisure grew by $2.2 million, predominantly driven by growth in the Holiday Parks and Pubs sectors.

 

 

Cost of Sales, excluding depreciation and amortization

 

Cost of sales, excluding depreciation and amortization, for the three and nine-months ended September 30, 2024, decreased by $25.7 million and $31.6 million, respectively, or 53% and 32% respectively. The decreases were driven by $24.2 million and $28.9 million decreases in cost of product, respectively, predominately driven by the decrease in low margin product sales.

 

Selling, general and administrative expenses

 

Selling, general and administrative (“SG&A”) expenses for the three and nine-months ended September 30, 2024 increased by $5.5 million and $15.1 million, respectively, or 23% and 21%, respectively.

 

The increase during the three-month period ended September 30, 2024 was driven primarily by an increase in exceptional items of $4.0 million predominantly due to the costs of the restatement of our prior financial statements and the costs of group restructuring, along with increases in IT costs of $0.7 million and storage and distribution costs of $0.5 million

 

The increase during the nine-month period ended September 30, 2024 was driven primarily by the $10.6 million costs of the restatement of our prior financial statements, an increase in non-staff costs of $4.6 million, predominantly driven by increases in storage and distribution, IT and facility costs  

 

Stock-based compensation

 

During the three and nine-months ended September 30, 2024, the Company recorded expenses of $1.8 million and $5.7 million, respectively, compared to expenses of $3.3 million and $9.3 million for the three and nine-months ended September 30, 2023. All expenses were related to outstanding awards but the nine-months ended September 30, 2023, included $0.4 million related to award units that were fully vested on the date of grant and therefore were expensed immediately and also included $0.7 million related to the costs of the restatement of our prior financial statements.  

 

Depreciation and amortization

 

Depreciation and amortization for the three-month period ended September 30, 2024 increased by $0.7 million driven mainly by an increase in Virtual Sports of $0.5 million for increased software development

 

Depreciation and amortization for the nine-month period ended September 30, 2024 increased by $1.2 million driven by increases in Virtuals of $2.2 million and Interactive of $1.4 million for increased software development and intangible assets, offset by reductions in Gaming of $1.8 million and Leisure of $0.2 million as machine assets unwind.

 

 

Net operating income / Net income / (Loss)

 

During the three and nine-month period ended September 30,2024, net operating income was $11.9 million and $19.9 million, respectively, representing declines of $0.4 million and $11.1 million, respectively, compared to the prior year periods. For the three-month period ended September 30, 2024, the decrease was primarily driven by the increase in SG&A and depreciation and amortization, partially offset by increase in gross margin and reduction in stock-based compensation. For the nine-month period ended September 30, 2024, the decrease was primarily driven by the increase in SG&A and expenses partially offset by the increase in gross margin and reduction in stock-based compensation.

 

For the three and nine-months ended September 30, 2024, net income / (loss) was $3.4 million and $(0.3)   million, respectively, compared to net income of $3.4 million and $7.6 million, respectively, in the prior year periods.

 

For the three-month period ended September 30, 2024, the increase was primarily driven by the decrease in income   tax expense, partially offset by the decrease in net operating income and increase in interest expense.   

 

For the nine-month period ended September 30, 2024, the decrease was primarily driven by the decrease in net operating income, partially offset by decreases in interest expense and income tax expense.

 

Deferred Tax

 

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

 

Segment Results (for the three and nine-months ended September 30, 2024, compared to the three and nine-months ended September 30, 2023)

 

Gaming

 

We generate revenue from our Gaming segment through delivery of our gaming terminals preloaded with proprietary gaming software, server-based content, as well as services such as terminal repairs, maintenance, software upgrades and upgrades on a when and if available basis and content development. We receive rental fees for machines, typically in conjunction with long-term contracts, on both a participation and fixed fee basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and any relevant regulatory levies) from gaming terminals placed in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.

 

Revenue growth for our Gaming business is principally driven by changes in (i) the number of operator customers we have, (ii) the number of Gaming machines in operation, (iii) the net win performance of the machines and (iv) the net win percentage that we receive pursuant to our contracts with our customers.

 

 

Gaming, Key Performance Indicators

 

		For the Three-Month Period ended								Variance								For the Nine-Month Period ended								Variance
		September 30,				September 30,				2024 vs 2023								September 30,				September 30,				2024 vs 2023
Gaming		2024				2023								%				2024				2023								%
End of period installed base (# of terminals) (2)			34,875				34,096				779				2.3	%			34,875				34,096				779				2.3	%
Total Gaming - Average installed base (# of terminals) (2)			34,897				34,216				681				2.0	%			34,853				34,570				283				0.8	%
Participation - Average installed base (# of terminals) (2)			29,937				30,137				(200	)			(0.1	)%			29,896				30,484				(588	)			(1.9	)%
Fixed Rental - Average installed base (# of terminals)			4,960				4,080				880				21.6	%			4,957				4,086				871				21.3	%
Service Only - Average installed base (# of terminals)			4,942				10,208				(5,266	)			(51.6	)%			6,032				12,422				(6,390	)			(51.4	)%
Customer Gross Win per unit per day (1) (2)		£	95.2			£	91.9			£	3.3				3.6	%		£	96.7			£	94.8			£	1.9				2.0	%
Customer Net Win per unit per day (1) (2)		£	70.0			£	67.2			£	2.8				4.2	%		£	71.0			£	69.2			£	1.8				2.6	%
Inspired Blended Participation Rate			5.3	%			5.7	%			(0.4	%)			(7.0	)%			5.4	%			5.7	%			(0.3	)%			(5.3	)%
Inspired Fixed Rental Revenue per Gaming Machine per week		£	39.2			£	53.8			£	(14.6	)			(27.1	)%		£	40.1			£	50.6			£	(10.5	)			(20.8	)%
Inspired Service Rental Revenue per Gaming Machine per week		£	5.0			£	4.9			£	0.1				2.0	%		£	5.1			£	5.1			£	-				0	%
Gaming Long term license amortization (£’m)		£	0.5			£	0.6			£	(0.1	)			(16.7	)%		£	1.6			£	2.1			£	(0.5	)			(23.8	)%
Number of Machine sales			303				5,000				(4,697	)			(93.9	)%			1,597				7,211				(5,614	)			(77.9	)%
Average selling price per terminal		£	7,370			£	4,056			£	(3,314	)			(81.7	)%		£	7,846			£	4,764			£	3,082				64.7	%

 

(1)	Includes all SBG terminals in which the Company takes a participation revenue share across all territories.
(2)	Includes circa 2,500 of lottery terminals where the share is on handle instead of net win.

 

In the table above:

 

“End of Period Installed Base” is equal to the number of deployed Gaming terminals at the end of each period that have been placed on a participation or fixed rental basis. Gaming participation revenue, which comprises the majority of Gaming Service revenue, is directly related to the participation terminal installed base. This is the medium by which our customers generate revenue and distribute a revenue share to the Company. To the extent all other KPIs and certain other factors remain constant, the larger the installed base, the higher the Company’s revenue would be for a given period. Management gives careful consideration to this KPI in terms of driving growth across the segment. This does not include Service Only terminals.

 

 

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

 

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

 

“Total Gaming - Average Installed Base” is the average number of deployed Gaming terminals during the period consisting of both participation terminals and fixed rental terminals. Therefore, it is more closely aligned to revenue in the period. We believe this measure is particularly useful for assessing existing customers or markets to provide comparisons of historical size and performance. This does not include Service Only terminals.

 

“Participation - Average Installed Base” is the average number of deployed Gaming terminals that generated revenue on a participation basis.

 

“Fixed Rental - Average Installed Base” is the average number of deployed Gaming terminals that generated revenue on a fixed rental basis.

 

“Service Only - Average Installed Base” is the average number of terminals that generated revenue on a service only basis.

 

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

 

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

 

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

 

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

 

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

 

“Inspired Fixed Rental Revenue per Gaming Machine per week” is the Company’s average fixed rental amount across all fixed rental terminals where revenue is generated on a fixed fee basis, per unit per week.

 

“Inspired Service Rental Revenue per Gaming Machine per week” is the Company’s average service rental amount across all service only rental terminals where revenue is generated on a service only fixed fee basis, per unit per week.

 

“Gaming Long term license amortization” is the upfront license fee per terminal which is typically spread over the life of the terminal.

 

 

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

 

“Number of Machine sales” is the number of terminals sold during the period.

 

“Average selling price per terminal” is the total revenue in GBP of the Gaming terminals sold divided by the “number of Machine sales”.

 

Gaming, Recurring Revenue

 

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

 

		For the Three-Month Period ended								Variance								For the Nine-Month Period ended								Variance
		September 30,				September 30,				2024 vs 2023								September 30,				September 30,				2024 vs 2023
(In £ millions)		2024				2023								%				2024				2023								%
Gaming Recurring Revenue
Total Gaming Revenue		£	17.9			£	35.5			£	(17.6	)			(50	)%		£	58.3			£	82.6			£	(24.3	)			(29	)%
Gaming Participation Revenue		£	10.5			£	10.6			(£	0.1	)			(1	)%		£	31.2			£	33.0			£	(1.8	)			(5	)%
Gaming Other Fixed Fee Recurring Revenue		£	3.0			£	3.4			£	(0.4	)			(12	)%		£	9.2			£	10.4			£	(1.2	)			(12	)%
Gaming Project Recurring Revenue		£	0.1			£	0.1				-				N/A			£	0.7			£	0.5			£	0.2				40	%
Gaming Long-term license amortization		£	0.6			£	0.6			£	-				N/A			£	1.7			£	2.2			£	(0.5	)			(23	)%
Total Gaming Recurring Revenue *		£	14.2			£	14.7			(£	0.5	)			(3	)%		£	42.8			£	46.1			£	(3.3	)			(7	)%
Gaming Recurring Revenue as a % of Total Gaming Revenue †			79	%			41	%			38	%							73	%			56	%			17	%
Total Gaming excluding Low Margin Sales		£	17.9			£	17.5											£	58.3			£	61.1
Gaming Recurring Revenue as a % of Total Gaming Revenue (excluding Low Margin sales) *			79	%			84	%											73	%			75	%

 

*

Does not reflect Low Margin-related revenue.

†

Total Gaming Revenue for the three and nine-month period ended September 30, 2024 includes no Low Margin sales. Total Gaming Revenue for the three-month period ended September 30, 2023 includes £18.0 million of Low Margin sales and for the nine-month period ended September 30, 2023 includes £21.5 million of Low Margin sales. Excluding Low Margin sales, Gaming Recurring Revenue was 84% of Total Gaming Revenue for the three-month period and 75% for the nine-month period.

 

In the table above:

 

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

 

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

 

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

 

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

 

 

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

 

Gaming, Service Revenue by Region  

 

Set forth below is a breakdown of our Gaming service revenue by geographic region. Gaming Service revenue consists principally of Gaming participation revenue, Gaming other fixed fee revenue, Gaming long-term license amortization and Gaming other non-recurring revenue. See “Gaming Segment Revenue” below for a discussion of gaming service revenue between the periods under review.

 

		For the Three-Month Period ended																				For the Nine-Month Period ended
		September 30,				September 30,				Variance												September 30,				September 30,				Variance
(In millions)		2024				2023				2024 vs 2023								Total Functional Currency %				2024				2023				2024 vs 2023								Total Functional Currency %
Service Revenue:
UK LBO		$	10.1			$	9.1			$	1.0				11	%			6	%		$	28.3			$	28.8			$	(0.5	)			(2	)%			(5	)%
UK Other			3.4				3.8				(0.4	)			(11	)%			(13	)%			10.3				10.5				(0.2	)			(2	)%			(6	)%
Italy			0.4				0.6				(0.2	)			(33	)%			(50	)%			1.2				2.1				(0.9	)			(43	)%			(51	)%
Greece			3.8				3.9				(0.1	)			(3	)%			(8	)%			11.3				12.1				(0.8	)			(7	)%			(9	)%
Rest of the World			0.8				0.2				0.6				300	%			250	%			1.2				1.4				(0.2	)			(14	)%			(14	)%
Lotteries			1.4				1.3				0.1				8	%			8	%			4.1				4.0				0.1				3	%			0	%
Total Service revenue		$	19.9			$	18.9			$	1.0				5	%			0	%		$	56.4			$	58.9			$	(2.5	)			(4	)%			(8	)%
Exchange Rate - $ to £			1.31				1.25																1.28				1.25

 

Note: Exchange rate in the table is calculated by dividing the USD total service revenue by the GBP total service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.

 

 

Gaming, Results of Operations

 

		For the Three-Month Period ended								Variance																For the Nine-Month Period ended								Variance
(In millions)		September 30,				September 30,				2024 vs 2023																September 30,				September 30,				2024 vs 2023
		2024				2023				Variance Attributable to Currency Movement				Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %				2024				2023				Variance Attributable to Currency Movement				Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %
Revenue:
Service		$	19.9			$	18.9			$	0.6			$	0.4				2	%			5	%		$	56.4			$	58.9			$	1.6			$	(4.1	)			(7	)%			(4	)%
Product			3.4				26.2				-				(22.8	)			(87	)%			(87	)%			18.0				44.4				0.1				(26.5	)			(60	)%			(59	)%
Total revenue			23.3				45.1				0.6				(22.4	)			(50	)%			(48	)%			74.4				103.3				1.7				(30.6	)			(30	)%			(28	)%
Cost of Sales excluding depreciation and amortization:
Cost of Service			(4.8	)			(5.5	)			(0.1	)			0.8				(15	)%			(13	)%			(15.7	)			(17.9	)			(0.4	)			2.6				(15	)%			(12	)%
Cost of Product			(2.3	)			(26.2	)			(0.2	)			24.1				(92	)%			(91	)%			(12.2	)			(40.4	)			(0.1	)			28.3				(70	)%			(70	)%
Total cost of sales			(7.1	)			(31.7	)			(0.3	)			24.9				(79	)%			(78	)%			(27.9	)			(58.3	)			(0.5	)			30.9				(53	)%			(52	)%
Selling, general and administrative expenses			(6.7	)			(5.1	)			(0.1	)			(1.5	)			29	%			31	%			(19.7	)			(15.8	)			(0.4	)			(3.5	)			22	%			25	%
Stock-based compensation			(0.1	)			(0.4	)			-				0.3				(75	)%			(75	)%			(0.5	)			(1.1	)			-				0.6				(55	)%			(55	)%
Depreciation and amortization			(5.0	)			(5.1	)			(0.2	)			0.3				6	%			2	%			(12.7	)			(14.2	)			(0.3	)			1.8				(13	)%			(11	)%
Net operating Income		$	4.4			$	2.8			$	-			$	1.6				57	%			57	%		$	13.6			$	13.9			$	0.5			$	(0.8	)			(5.8	)%			2	%
Exchange Rate - $ to £			1.30				1.27																				1.28				1.23

 

Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.

 

All variances discussed in the Gaming results below are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates.

 

Gaming Revenue

 

During the three and nine-month periods ended September 30, 2024, Gaming revenue decreased by $22.4 million and $30.6 million, respectively. This was driven by decreases in Product revenue of $22.8 million and $26.5 million, respectively. Gaming service revenue increased by $0.4 million and decreased by $4.1 million, respectively.

 

For the three-month period ended September 30, 2024 the increase in Gaming Service revenue was driven by higher revenue from North America of $0.7 million due to increased game pack subscriptions and UK LBO of $0.5 million as the current year period included a customer bonus not included in the prior year period.

 

For the nine-month period ended September 30, 2024 the decrease in Gaming Service revenue was driven by decreases of $2.1 million in the UK market inclusive of shop closures in UK LBO and $ 1.1 million in the Greek market, primarily due to the reduction in Gross Win per day and expiry of historical amortized license revenues.

 

For the three-month period ended September 30, 2024 the decrease in Gaming Product revenue was primarily driven by lower UK Product sales of $22.8 million, of which $22.7 million were Low Margin sales.

 

For the nine-month period ended September 30, 2024 the decrease in Gaming Product revenue was primarily driven by lower UK Product sales of $26.5 million, of which $27.1 million were Low Margin sales.

 

 

Gaming Operating Income

 

Net income for the three and nine-month periods ended September 30, 2024 increased by $1.6 million and decreased by $0.8 million respectively.

 

The three-month ended September 30, 2024 increase was primarily due to higher gross margin (as the $22.4 million revenue decrease was offset by a $24.9 million decrease in total cost of sales mainly driven by the decrease in Low Margin sales in the current period).

 

The decrease during the nine-months ended September 30, 2024 was primarily due to a decrease in depreciation and amortization of $1.8 million    due to unwind of machine assets and stock-based compensation of $0.6 million, offset by an increase in SG&A costs of $3.5 million driven by increased staff cost, reduced overhead recoveries along with the cost of group restructuring not incurred in the prior year period.

 

Virtual Sports

 

We generate revenue from our Virtual Sports segment through the on-premise solution and hosting of our products. We primarily receive fees on a participation basis. Our participation contracts are typically structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and other promotional costs and any relevant regulatory levies) from Virtual Sports content placed on our customers’ websites or in our customers’ facilities. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.

 

Revenue growth for our Virtual Sports segment is principally driven by the number of customers we have, the net win performance of the games and the net win percentage that we receive pursuant to our contracts with our customers.

 

Virtual Sports, Key Performance Indicators

 

		For the Three-Month Period ended								Variance								For the Nine-Month Period ended								Variance
		September 30,				September 30,				2024 vs 2023								September 30,				September 30,				2024 vs 2023
		2024				2023								%				2024				2023								%
Virtuals
No. of Live Customers at the end of the period			57				58				(1	)			(1.7	)%			57				58				(1	)			(1.7	)%
Average No. of Live Customers			56				58				(2	)			(3.4	)%			56				58				(2	)			(3.4	)%
Total Revenue (£’m)		£	8.6			£	10.6			£	(2.0	)			(18.9	)%		£	27.7			£	34.9			£	(7.2	)			(20.6	)%
Total Revenue £’m - Retail		£	2.3			£	2.4			£	(0.1	)			(4.2	)%		£	7.1			£	7.6			£	(0.5	)			(6.6	)%
Total Revenue £’m - Online Virtuals		£	6.3			£	8.2			£	(1.9	)			(23.2	)%		£	20.6			£	27.3			£	(6.7	)			(24.5	)%

 

In the table above:

 

“No. of Live Customers at the end of the period” and “Average No. of Live Customers” represent the number of customers from which there is Virtual Sports revenue at the end of the period and the average number of customers from which there is Virtual Sports revenue during the period, respectively.

 

“Total Revenue (£m)” represents total revenue for the Virtual Sports segment, including recurring and upfront service revenue. Total revenue is also divided between “Total Revenue (£m) – Retail,” which consists of revenue earned through players wagering at Virtual Sports venues, “Total Revenue (£m) – Online Virtuals,” which consists of revenue earned through players wagering on Virtual Sports online.

 

 

Virtual Sports, Recurring Revenue

 

Set forth below is a breakdown of our Virtual Sports recurring revenue, which consists of Retail Virtuals and Online Virtuals recurring revenue as well as long-term license amortization. See “Virtual Sports Segment Revenue” below for a discussion of Virtual Sports Service revenue between the periods under review.

 

		For the Three-Month Period ended								Variance								For the Nine-Month Period ended								Variance
		September 30,				September 30,				2024 vs 2023								September 30,				September 30,				2024 vs 2023
(In £ millions)		2024				2023								%				2024				2023								%
Virtual Sports Recurring Revenue
Total Virtual Sports Revenue		£	8.6			£	10.6			£	(2.0	)			(19	)%		£	27.7			£	34.9			£	(7.2	)			(21	)%
Recurring Revenue - Retail Virtuals		£	2.2			£	2.4			£	(0.2	)			(8	)%		£	7.0			£	7.4			£	(0.4	)			(5	)%
Recurring Revenue - Online Virtuals		£	6.3			£	8.1			£	(1.8	)			(22	)%		£	20.1			£	27.1			£	(7.0	)			(26	)%
Total Virtual Sports Long-term license amortization		£	-			£	-				-				N/A			£	0.1			£	0.1			£	-				0	%
Total Virtual Sports Recurring Revenue		£	8.5			£	10.5			£	(2.0	)			(19	)%		£	27.2			£	34.6			£	(7.4	)			(21	)%
Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue			99	%			99	%			(0	)%							98	%			99	%			(1	)%

 

“Recurring Revenue” includes our share of revenue generated from (i) our Virtual Sports products placed with operators; (ii) licensing our game content and intellectual property to third parties; and (iii) our games on third-party online gaming platforms that are interoperable with our game servers.

 

“Virtual Sports Long term license amortization” is the upfront license fee which is typically spread over the life of the contract.

 

 

Virtual Sports, Results of Operations

 

		For the Three-Month Period ended								Variance																				For the Nine-Month Period ended								Variance
(In millions)		September 30,				September 30,				2024 vs 2023																				September 30,				September 30,				2024 vs 2023
		2024				2023				Variance Attributable to Currency Movement								Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %				2024				2023				Variance Attributable to Currency Movement				Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %
Service Revenue		$	11.2			$	13.4			$	0.3							$	(2.5	)			(19	)%			(16	)%		$	35.3			$	43.3			$	0.9			$	(8.9	)			(21	)%			(18	)%
Cost of Service			(0.5	)			(0.2	)							-				(0.3	)			150	%			150	%			(1.0	)			(1.0	)			(0.1	)			0.1				(10	)%			0	%
Selling, general and administrative expenses			(1.9	)			(1.5	)			(0.2				)				(0.2	)			13	%			27	%			(5.5	)			(4.8	)			(0.3	)			(0.4	)			8	%			15	%
Stock-based compensation			(0.1	)			(0.2	)			-								0.1				(50	)%			(50	)%			(0.3	)			(0.6	)			0.1				0.2				(33	)%			(50	)%
Depreciation and amortization			(1.3	)			(0.7	)			(0.1	)							(0.5	)			71	%			86	%			(4.7	)			(2.3	)			(0.2	)			(2.2	)			96	%			104	%
Net operating Income		$	7.4			$	10.8			$	-							$	(3.4	)			(31	)%			(31	)%		$	23.8			$	34.6			$	0.4			$	(11.2	)			(32	)%			(31	)%
Exchange Rate - $ to £			1.30				1.26																								1.28				1.24

 

Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.

 

All variances discussed in the Virtual Sports results below are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates.

 

Virtual Sports revenue

 

During the three and nine-month periods ended September 30, 2024 revenue decreased by $2.5 million and $8.9 million, or 19% and 21%, respectively. These decreases were driven by $2.2 million and $8.7 million declines in Online Virtuals, respectively, primarily driven by a major customer optimizing their customer base.  

 

Virtual Sports operating income

 

During the three and nine-month periods ended September 30, 2024 net operating income decreased by $3.4 million and $11.2 million, respectively. These decreases were driven by the declines in revenue and increases in depreciation and amortization of $0.5 million and $ 2.2 million, respectively.

 

Interactive

 

We generate revenue from our Interactive segment through the various games and content made available via third party aggregation platforms with Inspired’s remote gaming server or directly on the Customers remote gaming server platform, and services such as customer support, platform maintenance, updates and upgrades. Typically, we receive fees on a participation basis. Our participation contracts are usually structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays and other promotional costs and any relevant regulatory levies) from Interactive content placed on our customers’ websites. Typically, we recognize revenue from these arrangements on a daily basis over the term of the contract.

 

Revenue growth for our Interactive segment is principally driven by the number of customers we have, the number of live games, the net win performance of the games and the net win percentage that we receive pursuant to our contracts with our customers.

 

 

Interactive, Key Performance Indicators

 

		For the Three-Month Period ended								Variance								For the Nine-Month Period ended								Variance
		September 30,				September 30,				2024 vs 2023								September 30,				September 30,				2024 vs 2023
		2024				2023								%				2024				2023								%
Interactive
No. of Live Customers at the end of the period			172				146				26				17.8	%			172				146				26				17.8	%
Average No. of Live Customers			169				144				25				17.4	%			161				140				21				15.0	%
No. of Games available at the end of the period			315				286				29				10.1	%			315				286				29				10.1	%
Average No. of Games available			311				282				29				10.3	%			303				277				26				9.4	%
No. of Live Games at the end of the period			298				267				31				11.6	%			298				267				31				11.6	%
Average No. of Live Games			294				263				31				11.8	%			285				255				30				11.8	%
Total Revenue (£’m)		£	7.8			£	5.7			£	2.1				36.8	%		£	21.7			£	15.9			£	5.8				36.5	%

 

In the table above:

 

“No. of Live Customers at the end of the period” and “Average No. of Live Customers” represent the number of customers from which there is Interactive revenue at the end of the period and the average number of customers from which there is Interactive revenue during the period, respectively.

 

“No. of Games available at the end of the period” and “Average No. of Games available” represents the number of games that are available for operators to deploy at the end of the period (including inactive legacy games still available and inactive new games that are available but have not yet gone live with any operators) and the average number of games that are available for operators to deploy during the period, respectively. This incorporates both live games and inactive games.

 

“No. of Live Games at the end of the period” and “Average No. of Live Games” represents the number of games from which there is Interactive revenue at the end of the period and the average number of games from which there is Interactive revenue during the period, respectively.

 

“Total Revenue (£m)” represents total revenue for the Interactive segment, including recurring and upfront service revenue.

 

 

Interactive, Results of Operations

 

		For the Three-Month Period ended								Variance																For the Nine-Month Period ended								Variance
(In millions)		September 30,				September 30,				2024 vs 2023																September 30,				September 30,				2024 vs 2023
		2024				2023				Variance Attributable to Currency Movement				Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %				2024				2023				Variance Attributable to Currency Movement				Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %
Service Revenue		$	10.2			$	7.3			$	0.2			$	2.7				37	%			40	%		$	27.7			$	19.9			$	0.6			$	7.2				36	%			39	%
Cost of Service			(0.5	)			(0.5	)			0.1				(0.1	)			20	%			0	%			(1.6	)			(1.2	)			-				(0.4	)			33	%			33	%
Selling, general and administrative expenses			(2.8	)			(2.1	)			(0.1	)			(0.6	)			29	%			33	%			(8.7	)			(7.3	)			(0.2	)			(1.2	)			16	%			19	%
Stock-based compensation			(0.1	)			(0.1	)			-				-				0	%			0	%			(0.3	)			(0.4	)			-				0.1				(25	)%			(25	)%
Depreciation and amortization			(1.3	)			(0.9	)			(0.1	)			(0.3	)			33	%			44	%			(3.7	)			(2.5	)			0.2				(1.4	)			56	%			48	%
Net operating Income		$	5.5			$	3.7			$	0.1			$	1.7				46	%			49	%		$	13.4			$	8.5			$	0.6			$	4.3				51	%			58	%
Exchange Rate - $ to £			1.30				1.27																				1.28				1.25

 

Note: Exchange rate in the table is calculated by dividing the USD service revenue by the GBP service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.

 

All variances discussed in the Interactive results below are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates.

 

Interactive revenue

 

During the three and nine-month periods ended September 30, 2024, revenue increased by $2.7 million and $7.2 million, or 37% and 36%, respectively, primarily driven by revenue growth in the UK, North America and mainland Europe due to new customer launches, the consistent launch of new content across the estate and increased promotional activity through exclusive deals with tier-one customers.

 

Interactive operating income

 

Operating income for the three and nine-month periods ended September 30, 2024 increased by $1.7 million and $4.3 million, respectively. This increase was primarily driven by the increase in gross margin, partially offset by increases in SG&A expenses, driven by increased IT costs, lower labor capitalization and higher depreciation and amortization.

 

 

Leisure

 

We typically generate revenue from our Leisure segment through the supply of our gaming and amusement machines. We receive rental fees for machines, typically on a long-term contract basis, on both a participation and fixed fee basis. Our participation contracts are usually structured to pay us a percentage of net win (defined as net revenue to our operator customers, after deducting player winnings, free bets or plays, any relevant regulatory levies and minimum fixed incomes where applicable) from machines placed in our customers’ facilities. We generally recognize revenue from these arrangements on a daily basis over the term of the contract.

 

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

 

Leisure, Key Performance Indicators

 

		For the Three-Month Period ended								Variance								For the Nine-Month Period ended								Variance
		September 30,				September 30,				2024 vs 2023								September 30,				September 30,				2024 vs 2023
		2024				2023								%				2024				2023								%
Leisure
End of period installed base Gaming machines (# of terminals)			10,021				10,739				(718	)			(6.7	)%			10,021				10,739				(718	)			(6.7	)%
Average installed base Gaming machines (# of terminals)			10,131				10,757				(626	)			(5.8	)%			10,469				10,763				(294	)			(2.7	)%
End of period installed base Other (# of terminals)			3,796				4,303				(507	)			(11.8	)%			3,796				4,303				(507	)			(11.8	)%
Average installed base Other (# of terminals)			3,813				4,327				(514	)			(11.9	)%			3,969				4,409				(440	)			(10.0	)%
Pub Digital Gaming Machines - Average installed base (# of terminals)			6,129				6,239				(110	)			(1.8	)%			6,230				6,128				102				1.7	%
Pub Analogue Gaming Machines - Average installed base (# of terminals)			111				318				(207	)			(65.1	)%			134				413				(279	)			(67.6	)%
MSA and Bingo Gaming Machines - Average installed base (# of terminals)(1)			2,865				3,037				(172	)			(5.7	)%			2,978				3,046				(68	)			(2.2	)%
Inspired Leisure Revenue per Gaming Machine per week		£	74.5			£	67.8			£	6.7				9.9	%		£	71.4			£	67.2			£	4.2				6.3	%
Inspired Pub Digital Revenue per Gaming Machine per week		£	74.4			£	68.9			£	5.5				8.0	%		£	73.7			£	69.9			£	3.8				5.4	%
Inspired Pub Analogue Revenue per Gaming Machine per week		£	30.7			£	31.9			£	(1.2	)			(3.8	)%		£	31.6			£	35.7			£	(4.1	)			(11.5	)%
Inspired MSA and Bingo Revenue per Gaming Machine per week		£	103.4			£	90.7			£	12.7				14.0	%		£	96.5			£	92.8			£	3.7				4.0	%
Inspired Other Revenue per Machine per week		£	25.0			£	23.7			£	1.3				5.5	%		£	24.2			£	21.1			£	3.1				14.7	%
Total Holiday Parks Revenue (Gaming and Non Gaming) (£’m)		£	13.9			£	13.8			£	0.1				0.7	%		£	27.5			£	26.5			£	1.0				3.8	%

 

(1)	Motorway Service Area machines

 

 

In the table above:

 

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

 

“End of period installed base Other” and “Average installed base Other” represent the number of all other category machines installed (excluding Holiday Park machines) from which there is participation or rental revenue at the end of the period or as an average over the period.

 

“Revenue per machine unit per week” represents the average weekly participation or rental revenue recognized during the period.

 

Leisure, Results of Operations

 

All amounts included herein relating to the prior year have been rounded except where otherwise stated. As prior-year figures are rounded, numbers presented as such throughout this document may not add up precisely to the totals we provide.

 

		For the Three-Month Period ended								Variance																For the Nine-Month Period ended								Variance
(In millions)		September 30,				September 30,				2024 vs 2023																September 30,				September 30,				2024 vs 2023
		2024				2023				Variance Attributable to Currency Movement				Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %				2024				2023				Variance Attributable to Currency Movement				Variance on a Functional currency basis				Total Functional Currency Variance %				Total Reported Variance %
Revenue:
Service		$	32.5			$	31.1			$	0.8			$	0.6				2	%			5	%		$	77.3			$	73.6			$	1.7			$	2.0				3	%			5	%
Product			0.8				0.6				0.1				0.1				17	%			33	%			2.0				1.7				0.1				0.2				12	%			18	%
Total revenue			33.3				31.7				0.9				0.7				2	%			5	%			79.3				75.3				1.8				2.2				3	%			5	%
Cost of Sales, excluding depreciation and amortization:
Cost of Service			(14.9	)			(15.2	)			(0.6	)			0.9				(6	)%			(2	)%			(37.3	)			(36.8	)			(1.1	)			0.6				(2	)%			1	%
Cost of Product			(0.4	)			(0.5	)			(0.1	)			0.2				(40	)%			(20	)%			(0.8	)			(1.4	)			-				0.6				(43	)%			(43	)%
Total cost of sales			(15.3	)			(15.7	)			(0.7	)			1.1				(7	)%			(3	)%			(38.1	)			(38.2	)			(1.1	)			1.2				(3	)%			(0	)%
Selling, general and administrative expenses			(7.8	)			(7.3	)			(0.1	)			(0.4	)			5	%			7	%			(23.1	)			(21.0	)			(0.6	)			(1.5	)			7	%			10	%
Stock-based compensation			(0.2	)			(0.2	)			-				-				0	%			0	%			(0.4	)			(0.7	)			-				0.3				(43	)%			(43	)%
Depreciation and amortization			(3.1	)			(3.0	)			(0.1	)			-				0	%			3	%			(9.1	)			(9.1	)			(0.2	)			0.2				(2	)%			0	%
Net operating Income		$	6.9			$	5.5			$	-			$	1.4				25	%			25	%		$	8.6			$	6.3			$	(0.1	)		$	2.4				38	%			37	%
Exchange Rate - $ to £			1.30				1.27																				1.28				1.25

 

Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions.

 

All variances discussed in the Leisure results below are on a functional currency (at constant rate) basis, which excludes the impact of any changes in foreign currency exchange rates.

 

 

Leisure Revenue

 

For the three and nine-month periods ended September 30, 2024 revenue increased by $0.7 million and $2.2 million or 2% and 3%, respectively. These increases were primarily due to increased service revenue of $ 0.6 million and $2.0 million, respectively, predominately due to the increase in Holiday Parks of $0.2 million and $1.3 million driven by the addition of a new site as well as growth in existing sites, along with growth in MSA of $0.3 million and $0.3 million, respectively.

 

Leisure Operating Income

 

Operating income for the three and nine-month periods ended September 30, 2024 increased by $1.4 million and $2.4 million, respectively. This was primarily due to the increases in gross margin, partially offset by increases in SG&A expenses of $0.4 million and $1.5 million, respectively, driven by the increase in seasonal staff, the increase in national living wage and salary increases, along with increases in facility costs.

 

Non-GAAP Financial Measures

 

We use certain non-GAAP financial measures, including EBITDA, to analyze our operating performance. We use these financial measures to manage our business on a day-to-day basis. We believe that these measures are also commonly used in our industry to measure performance. For these reasons, we believe that these non-GAAP financial measures provide expanded insight into our business, in addition to standard U.S. GAAP financial measures. There are no specific rules or regulations for defining and using non-GAAP financial measures, and as a result the measures we use may not be comparable to measures used by other companies, even if they have similar labels. The presentation of non-GAAP financial information should not be considered in isolation from, or as a substitute for, or superior to, financial information prepared and presented in accordance with U.S. GAAP. You should consider our non-GAAP financial measures in conjunction with our U.S. GAAP financial measures.

 

We define our non-GAAP financial measures as follows:

 

EBITDA is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense.

 

Adjusted EBITDA is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense, and other additional exclusions and adjustments (see Adjusted EBITDA reconciliation table). Such additional excluded amounts include stock-based compensation U.S. GAAP charges where the associated liability is expected to be settled in stock, and changes in the value of earnout liabilities and income and expenditure in relation to legacy portions of the business (being those portions where trading no longer occurs) including closed defined benefit pension schemes. Additional adjustments are made for items considered outside the normal course of business, including but not limited to (1) restructuring costs, which include charges attributable to employee severance, impairments, management changes, restructuring, dual running costs, costs related to facility closures and integration costs, (2) merger and acquisition costs and (3) gains or losses not in the ordinary course of business.

 

We believe Adjusted EBITDA, when considered along with other performance measures, is a particularly useful performance measure, because it focuses on certain operating drivers of the business, including sales growth, operating costs, selling and administrative expense and other operating income and expense. We believe Adjusted EBITDA can provide a more complete understanding of our operating results and the trends to which we are subject, and an enhanced overall understanding of our financial performance and prospects for the future. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income or loss, because it does not take into account certain aspects of our operating performance (for example, it excludes non-recurring gains and losses which are not deemed to be a normal part of underlying business activities). Our use of Adjusted EBITDA may not be comparable to the use by other companies of similarly termed measures. Management compensates for these limitations by using Adjusted EBITDA as only one of several measures for evaluating our operating performance. In addition, capital expenditures, which affect depreciation and amortization, interest expense, and income tax benefit (expense), are evaluated separately by management.

 

 

Adjusted Revenue (Revenue Excluding Low Margin Gaming Hardware Sales) is defined as revenue excluding Gaming hardware sales that are sold at Low Margin with the intention of securing longer term recurring revenue streams.

 

Functional Currency at Constant rate. Currency impacts discussed have been calculated as the current-period average GBP: USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP: USD rate, as a proxy for functional currency at constant rate movement.

 

Currency Movement represents the difference between the results in our reporting currency (USD) and the results on a functional currency (at constant rate) basis.

 

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

 

Reconciliation to Adjusted EBITDA by segment for the Three and Nine-Months ended September 30, 2024

 

		For the Three-Month Period ended																								For the Nine-Month Period ended
		September 30,																								September 30,
(In millions)		2024																								2024
		Total				Gaming				Virtual Sports				Interactive				Leisure				Corporate				Total				Gaming				Virtual Sports				Interactive				Leisure				Corporate
Net Income/ (loss)		$	3.4			$	4.4			$	7.4			$	5.5			$	6.9			$	(20.8	)		$	(0.3	)		$	13.6			$	23.8			$	13.4			$	8.6			$	(59.7	)
Items Relating to Legacy Activities:
Pension charges (1)			0.3																				0.3				0.9																				0.9
Items outside the normal course of business:
Costs of group restructure (2)			1.9				1.2																0.7				2.8				1.5																1.3
Costs of group restatement (3)			2.9																				2.9				10.7																				10.7
Stock-based compensation expense (4)			1.8				0.1				0.1				0.1				0.2				1.3				5.7				0.5				0.3				0.3				0.4				4.2
Depreciation and amortization (4)			11.3				5.0				1.3				1.3				3.1				0.6				31.8				12.7				4.7				3.7				9.1				1.6
Interest expense net (4)			7.6																				7.6				20.9																				20.9
Other finance expenses / (income) (4)			(0.1	)																			(0.1	)			(0.3	)																			(0.3	)
Income tax (4)			1.0																				1.0				(0.4	)																			(0.4	)
Adjusted EBITDA		$	30.1			$	10.7			$	8.8			$	6.9			$	10.2			$	(6.5	)		$	71.8			$	28.3			$	28.8			$	17.4			$	18.1			$	(20.8	)
Adjusted EBITDA		£	23.1			£	8.1			£	6.8			£	5.3			£	7.9			£	(5.0	)		£	56.0			£	21.7			£	22.4			£	13.4			£	14.1			£	(15.6	)
Exchange Rate - $ to £ (5)			1.30																								1.28

 

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

 

 

Reconciliation to Adjusted EBITDA by segment for the Three and Nine-Months ended September 30, 2023

 

		For the Three-Month Period ended																								For the Nine-Month Period ended
		September 30,																								September 30,
(In millions)		2023																								2023
		Total				Gaming				Virtual Sports				Interactive				Leisure				Corporate				Total				Gaming				Virtual Sports				Interactive				Leisure				Corporate
Net Income/ (loss)		$	3.4			$	2.8			$	10.8			$	3.7			$	5.5			$	(19.4	)		$	7.6			$	13.9			$	34.6			$	8.5			$	6.3			$	(55.7	)
Items Relating to Legacy Activities:
Pension charges (1)			0.2																				0.2				0.6																				0.6
Items outside the normal course of business:
Cost of Group Restructure (2)			0.7																				0.7				3.7																				3.7
Stock-based compensation expense (4)			3.3				0.4				0.2				0.1				0.2				2.4				9.3				1.1				0.6				0.4				0.7				6.5
Depreciation and amortization (4)			10.3				5.1				0.7				0.9				3.0				0.6				29.8				14.2				2.3				2.5				9.1				1.7
Interest expense net (4)			6.9																				6.9				20.5																				20.5
Other finance expenses / (income) (4)			(0.1	)																			(0.1	)			(0.3	)																			(0.3	)
Income tax (4)			2.0																				2.0				2.8																				2.8
Adjusted EBITDA		$	26.7			$	8.3			$	11.7			$	4.7			$	8.7			$	(6.7	)		$	74.0			$	29.2			$	37.5			$	11.4			$	16.1			$	(20.2	)
Adjusted EBITDA		£	21.1			£	6.8			£	9.2			£	3.7			£	6.7			£	(5.3	)		£	59.4			£	23.7			£	30.1			£	9.1			£	12.6			£	(16.1	)
Exchange Rate - $ to £ (5)			1.27																								1.24

 

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

 

Notes to Adjusted EBITDA reconciliation tables above:

 

(1)	“Pension charges” are profit and loss charges included within selling, general and administrative expenses, relating to a defined benefit scheme which was closed to new entrants in 1999 and to future accrual in 2010. As well as the amortization of net loss, the figure also includes charges relating to the Pension Protection Fund (which were historically borne by the pension scheme) and a small amount of associated professional services expenses. These costs are included within Corporate Functions.
(2)	“Costs of Group Restructure” includes redundancy costs, Payments In Lieu of Notice costs and any associated employer taxes. To qualify as being an adjusting item, costs must be part of a large restructuring project, which will net save ongoing future costs or be in relation to the exit of an Executive.
(3)	“Costs of group Restatement” includes accounting advice associated with the restatement of the 2020, 2021 and 2022 annual accounts and the 2023 Q1 and Q2 interim accounts. To qualify as being an adjusting item, costs must be specific to the event and be neither normal nor recurring in nature.
(4)	Stock-based compensation expense, Depreciation and amortization, Total other expense, net and Income tax are described above in the Results of Operations line item discussions. Total expense, net includes interest income, interest expense, change in fair value of earnout liability, change in fair value of derivative liability and other finance income.
(5)	Exchange rate in the table is calculated by dividing the USD Adjusted EBITDA by the GBP Adjusted EBITDA, therefore this could be slightly different from the average rate during the period depending on timing of transactions.

 

(6)	“Profit on disposal of trade & assets” — In January 2022, the Company sold its Italian VLT business, including all terminals and other assets, staff costs and facilities and contracts to a non-connected party, recognizing a profit on this disposal.

 

 

Reconciliation to Adjusted Revenue

 

We believe that accounting for low margin hardware sales in conformance with U.S. GAAP can result in a distorted presentation of our revenue and growth. Therefore, we use Revenue Excluding Low Margin Sales, or Adjusted Revenue, to internally analyze our operating performance. A reconciliation from revenue, as shown in our Consolidated Statements of Operations and Comprehensive Loss included elsewhere in this report, to Adjusted Revenue is shown below.

 

		For the Three-Month Period ended								For the Nine-Month Period ended
		September 30,				September 30,				September 30,				September 30,
(In millions)		2024				2023				2024				2023
Net revenues		$	78.0			$	97.5			$	216.7			$	241.8
Less Low Margin Gaming Sales			-				(22.7	)			-				(27.1	)
Adjusted Revenue		$	78.0			$	74.8			$	216.7			$	214.7
Adjusted Revenue		£	60.0			£	58.9			£	169.5			£	172.3
Exchange Rate - $ to £			1.30				1.27				1.28				1.25

 

Liquidity and Capital Resources

 

Nine Months ended September 30, 2024, compared to Nine Months ended September 30, 2023

 

All amounts included herein relating to the prior year have been rounded except where otherwise stated. As prior-year figures are rounded, numbers presented as such throughout this document may not add up precisely to the totals we provide.

 

		Nine Months ended								Variance
(in millions)		September 30,				September 30,
		2024				2023				2024 to 2023
Net (loss)/profit		$	(0.3	)		$	7.6			$	(7.9	)
Amortization of debt fees			0.7				1.0				(0.3	)
Change in fair value of derivative liabilities and stock-based compensation expense			5.7				9.8				(4.1	)
Depreciation and amortization (incl RoU assets)			35.1				32.6				2.5
Other net cash utilized by operating activities			(16.4	)			(8.0	)			(8.4	)
Net cash provided by operating activities			24.8				43.0				(18.2	)
Net cash used in investing activities			(29.5	)			(39.4	)			9.9
Net cash used by financing activities			(0.4	)			(2.6	)			2.2
Effect of exchange rates on cash			1.6				0.4				1.2
Net (decrease)/increase in cash and cash equivalents		$	(3.5	)		$	1.4			$	(4.9	)

 

Net cash provided by operating activities

 

For the nine months ended September 30, 2024, net cash inflow provided by operating activities was $24.8 million, compared to a $43.0 million inflow for the nine months ended September 30, 2023, representing a $18.2 million decrease in cash generation from operating activities. The decrease was driven primarily due to trading levels and working capital timing.

 

Change in fair value of derivative liabilities and stock-based compensation expense decreased by $4.1 million to $5.7 million due to a $3.6 million reduction in the stock-based compensation expense and a $0.5 million reduction in the recycling of the terminated currency swaps which ended on September 30, 2023.

 

Depreciation and amortization increased by $2.5 million, to $35.1 million, with increases of $1.4 million for intangible assets and $1.1 million for contract costs.

 

Other net cash utilized by operating activities increased by $8.4 million, to a $16.4 million outflow. The relative movements between the nine months ended September 30, 2024 and the nine months ended September 30, 2023 resulted in adverse movements in accounts payable and accruals of $12.5 million and accounts receivable of $16.1 million, both figures impacted by timing of deals and the relative levels of manufacturing activity. These were partly offset by favorable movements in inventory $11.7 million, payroll and business taxes $5.5 million and prepayments $2.0 million.

 

 

Net cash used in investing activities

 

Net cash utilized in investing activities decreased by $9.9 million, to $29.5 million during the nine months ended September 30, 2024. This was driven by an $8.4 million decrease in plant, property and equipment, a $1.9 million decrease in capitalized software spend and a $0.9 million increase in contract cost additions. The prior period also included the acquisition of Lot.to for $0.6 million.

 

Net cash used by financing activities

 

During the nine months ended September 30, 2024, net cash used by financing activities was $0.4 million relating to finance lease spend. During the nine months ended September 30, 2023, net cash utilized by financing activities was $2.6 million, with $1.0 million of finance lease spend and $1.6 million on share repurchases.

 

Funding Needs and Sources

 

To fund our obligations, we have historically relied on a combination of cash flows provided by operations and the incurrence of additional debt or the refinancing of existing debt. As of September 30, 2024, we had liquidity consisting of $36.5 million in cash and cash equivalents and a further $6.7 million of undrawn revolver facility. This compares to $26.4 million of cash and cash equivalents as of September 30, 2023, with a further $24.4 million of revolver facilities undrawn. We had a working capital outflow of $16.4 million for the nine months ended September 30, 2024, compared to an $8.0 million outflow for the nine months ended September 30, 2023.

 

The level of our working capital surplus or deficit varies with the level of machine production and procurement we are undertaking and our capitalization as well as the seasonality evident in some of the businesses. In periods with minimal machine volumes and capital spend, our working capital is typically more stable. In periods where significant numbers of machines are being produced or procured, the levels of inventory and creditors are typically higher and there is a natural timing difference between converting the stock into sellable or capitalized plant and settling payments to suppliers. These factors, along with movements in trading activity levels can result in significant working capital volatility. In periods of low activity, our working capital volatility is reduced. Working capital is reviewed and managed with the aim of ensuring that current liabilities are covered by the level of cash held and the expected level of short-term receipts.

 

Some of our business operations require cash to be held within the machines. As of September 30, 2024, $6.7 million of our $36.5 million of cash and cash equivalents were held as operational floats within the machines. At September 30, 2023, $6.0 million of our $26.4 million of cash and cash equivalents were held as operational floats within the machines

 

Management currently believes that the Company’s cash balances on hand, cash flows expected to be generated from operations, and the ability to control and defer capital projects will be sufficient to fund the Company’s net cash requirements through November 2025.

 

Long Term and Other Debt

 

(In millions)		September 30, 2024								September 30, 2023
Cash held		£	26.6			$	35.7			£	21.6			$	26.4
Revolver drawn			(15.0	)			(20.1	)			-				-
Original principal senior debt			(235.0	)			(315.2	)			(235.0	)			(286.9	)
Cash interest accrued			(6.6	)			(8.9	)			(6.1	)			(7.5	)
Finance lease creditors			(18.2	)			(24.4	)			(2.0	)			(2.5	)
Total		£	(248.2	)		$	(332.9	)		£	(221.5	)		$	(270.4	)

 

Debt Covenants

 

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

 

The Indenture contains covenants and certain reporting requirements including the requirement to provide the Lender, within 60 days after the close of the quarter, unaudited quarterly financial statements with footnote disclosures. The Company was unable to comply with this requirement as of September 30, 2023 due to the requirement to restate previously reported financial statements as reported in a Current Report on Form 8-K filed with the SEC on November 8, 2023. The debt agreement allows the Company a 30-day grace period to provide such financial information once they receive any notice of non-compliance. No such notice was received and concurrent with the filing of the September 30,2023 10Q with the SEC on February 27, 2024, the reporting requirement was met. There were no other breaches of the debt covenants in the periods.

 

There were no other breaches of the debt covenants in the periods ended September 30, 2024 or September 30, 2023.

 

 

Liens and Encumbrances

 

As of September 30, 2024, our senior bank debt was secured by the imposition of a fixed and floating charge in favor of the lender over all the assets of the Company and certain of the Company’s subsidiaries.

 

Share Repurchases

 

The Board of Directors has authorized that the Company may use up to $25.0 million to repurchase Inspired shares of common stock, subject to repurchases being effected on or before May 10, 2025. Management has discretion as to whether to repurchase shares of the Company. During the nine months ended September 30, 2024 no shares were repurchased meaning the previous figure of an aggregate total spend of $12.0 million in repurchasing our shares of common stock remains unchanged.

 

Contractual Obligations

 

As of September 30, 2024, our contractual obligations were as follows:

 

						Less than												More than
Contractual Obligations (in millions)		Total				1 yr				1-2 years				3-5 years				5 yrs
Operating activities
Interest on long term debt		$	49.6			$	24.8			$	24.8			$	-			$	-
Purchase of Vantage machines			6.2				6.2				-				-				-
Financing activities
Revolver repayment			21.1				21.1				-				-				-
Senior bank debt - principal repayment			315.2				-				315.2				-				-
Finance lease payments			24.4				7.8				4.8				11.8				-
Operating lease payments			18.7				5.3				4.5				5.1				3.8
Interest on non-utilisation fees			0.4				0.3				0.1				-				-
Total		$	435.6			$	65.5			$	349.4			$	16.9			$	3.8

 

Off-Balance Sheet Arrangements

 

As of September 30, 2024, there were no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, promulgated by the U.S. Securities and Exchange Commission.

 

Critical Accounting Policies and Accounting Estimates

 

The preparation of our audited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenue and expenses, and our disclosure of commitments and contingencies at the date of the consolidated financial statements. On an on-going basis, we evaluate our estimates and judgments. We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business and industry and current and expected economic conditions, that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.

 

 

Revenue

 

Application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. The Company often enters into contracts with customers that consist of a combination of services and products that are accounted for as one or more distinct performance obligations. Management applies judgment in evaluating the contractual terms and conditions that impact the identification of performance obligations and the pattern of revenue recognition. For these arrangements that contain multiple promises, judgement is also required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions, size of the customer, geography and other observable inputs or, as necessary, unobservable considerations such as historical experience, knowledge of our business and industry and our current or expected selling practices.

 

Revenue recognition is also impacted by our ability to estimate variable consideration, including, for example, rebates, service-level penalties, and other incentive payments. We consider various factors when making these judgments, including a review of specific transactions, historical experience and market and economic conditions. Evaluations are conducted each quarter to assess the adequacy of the estimates.

 

Other significant judgments include determining whether the Company is acting as the principal or the agent in a transaction.

 

The Company recognized service and product revenue of $196.7 million and $20.0 million, respectively, for the nine months ended September 30, 2024. The Company’s revenue recognition policy, which requires significant judgments and estimates, is fully described in Note 1 “Nature of Operations, Management’s Plans and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

 

Goodwill Impairment Assessment

 

In accordance with ASC 350, Intangibles—Goodwill and Other, we allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on at least an annual basis and, if necessary, reassign goodwill upon reorganization using a relative fair value allocation approach. We determined that we have five reporting units: Virtual Sports, Interactive, Leisure, and two reporting units within our Gaming segment. As of September 30, 2024, total goodwill with the Virtual Sports, Interactive, and two Gaming reporting units is $47.1 million, $1.9 million, $9.8 million, and $3.1 million, respectively. There is no remaining goodwill within the Leisure reporting unit. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) annually on the last day of our fiscal period or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

 

Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative one-step process. If we perform a qualitative assessment and determine that the fair value of a reporting unit more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the quantitative test, we are required to compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, we recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s estimated fair value.

 

 

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Performance of the qualitative goodwill assessment requires judgment in identifying and considering the significance of relevant key factors, events and circumstances that affect the fair value or carrying amount of the reporting units. Such events and circumstances that we have considered include macroeconomic conditions, industry specific and market considerations, and reporting unit-specific factors such as overall actual and projected financial performance, among other factors. We also considered the results from the most recent date that a fair value measurement was performed as a part of a quantitative goodwill assessment and specifically the cushion between each reporting unit’s fair value and carrying value. The estimates used to calculate the fair value of a reporting unit as a part of a quantitative goodwill assessment change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment, if any, for each reporting unit.

 

We performed our annual goodwill impairment test as of December 31, 2023 using a qualitative assessment for all of our reporting units. Based on the results of our qualitative impairment assessments, we concluded that it is more likely than not that the fair values of each of our reporting units substantially exceeded their respective carrying values and there were no reporting units requiring further assessment.

 

Long-lived Assets and Finite-lived Intangible Assets

 

We evaluate the recoverability of intangible assets and other long-lived assets with finite useful lives by comparing the carrying value of the asset group to the estimated undiscounted future cash flows that we expect the asset to generate if events or changes in circumstances indicate that these assets are not recoverable. If the asset group fails the recoverability test, an impairment loss is measured as the amount by which the carrying amount of the asset group exceeds its fair value. The fair value is determined using a discounted cash flow approach where projections of future cash flows generated by those assets are discounted using an estimated discount rate. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. We also make judgments about the remaining useful lives of intangible assets and other long-lived assets that have finite lives. While we believe our estimates of future operating results and projected cash flows are reasonable, any significant adverse changes in key assumptions (i.e., adverse change in the extent or manner in which an asset or asset group is being used or expectation that, more likely than not, an asset or asset group will be sold or otherwise disposed of before the end of its useful life) or adverse changes in economic and market conditions may cause a change in our evaluation of recoverability or our estimation of fair value and could result in an impairment charge that could be material to our financial statements. Any impairment loss shall be allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value.

 

Management determined that there were no new indicators of impairment for the nine months ended September 30, 2024 and 2023 and the Company concluded that there was no impairment of the Company’s intangible and long-lived assets as of September 30, 2024 and 2023.

 

Software Development Costs

 

Software development costs represent costs incurred to develop internal-use software, including software developed to deliver our cloud-based offerings to customers, as well as external-use software to be used in the products we sell, lease or license to customers. Such costs primarily consist of salaries and payroll related costs for employees and external contractors directly involved in the corresponding software development efforts. We determine the appropriate guidance to apply to software development costs on a project-by-project basis, based on the nature of the underlying software.

 

 

Certain direct costs incurred to develop new internal-use software, as well as certain software enhancements that provide new functionality, are capitalized once the project has been approved by management and is in the application development stage.

 

Costs incurred in the preliminary planning stage and the post implementation operational stage are expensed as incurred. Costs incurred in developing external-use software are expensed as incurred until technological feasibility has been established, after which costs are capitalized up to the date the software is available for general release to customers. Technological feasibility is established upon completion of a detailed program design or, in its absence, upon completion of a working model.

 

The Company must apply judgement in determining the amount of software development costs that should be capitalized. Specifically, we must evaluate, on a project-by-project basis, whether the resultant product or platform will be completed and generate ongoing economic benefits, principally through revenue from our customers, which is subject to uncertainties.

 

Once the software is substantially complete or available for general release, capitalized internal-use and external-use software costs are amortized on a straight-line basis over the estimated economic useful life of the software, which ranges from two to five years. There is judgement involved in estimating the useful life of developed software and the two-to-five-year period was determined based on factors such as the continuous development in the technology, obsolescence, and anticipated life of the service offering before significant upgrades. Management evaluates the useful lives of these assets on a recurring basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

Our principal market risks are our exposure to changes in foreign currency exchange rates.

 

Interest Rate Risk

 

Following the Company’s refinancing of its debt in May 2021, the external borrowings of £235.0 million ($315.2 million) are provided at a fixed rate. Therefore, movements in rates such as LIBOR do not impact on the current borrowings and the only fluctuation that is expected to be reported will be that solely caused by movements in the exchange rates between the Company’s functional currency and its reporting currency.

 

Foreign Currency Exchange Rate Risk

 

Our operations are conducted in various countries around the world, and we receive revenue and pay expenses from these operations in a number of different currencies. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in (i) currencies other than GBP, which is our functional currency, or (ii) the functional currencies of our subsidiaries, which is not necessarily GBP. To estimate our foreign currency exchange rate risk, we identify material Euro and US Dollar trading and balance sheet amounts and recalculate the result using a 10% movement in the GBP:US Dollar exchange rate. For the trading figures the 10% movement is based on the average exchange rate throughout the reported period and for the balance sheet figures the 10% movement is based on the exchange rate used at September 30, 2024.

 

Excluding intercompany balances, our Euro and US Dollar functional currency net assets total approximately $25.7 million and $13.0 million respectively. We use a sensitivity analysis model to measure the impact of a 10% adverse movement of foreign currency exchange rates against the US Dollar. A hypothetical 10% adverse change in the value of the Euro and the US Dollar relative to GBP as of September 30, 2024, would result in favorable translation adjustments of approximately $2.3 million and $1.3 million respectively, recorded in other comprehensive loss.

 

Included within our trading results are earnings outside of our functional currency. Retained gains from Euro based entities earned in Euros and retained losses from USD based entities earned in US Dollars in the nine months ended September 30, 2024, were €9.6 million and $14.4 million, respectively. A hypothetical 10% adverse change in the value of the Euro and the US Dollar relative to GBP as of September 30, 2024, would result in translation adjustments of approximately $0.9 million favorable and $1.3 million unfavorable, respectively, recorded in trading operations.

 

 

The majority of the Company’s trading is in GBP, the functional currency, although the reporting currency of the Company is the US Dollar. As such, changes in the GBP:USD exchange rate have an effect on the Company’s results. A 10% weakening of GBP against the US Dollar would change the trading operational results unfavorably by approximately $0.3 million and would result in unfavorable translation adjustments of approximately $11.9 million, recorded in other comprehensive loss.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer (together, the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2024, due to the material weaknesses described in Item 9A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 15, 2024. Management is redesigning and implementing existing and additional controls to remediate these material weaknesses.

 

Notwithstanding the identified material weaknesses and management’s assessment that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2024, management believes that the interim consolidated financial statements and footnote disclosures included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations, cash flows and disclosures as of and for the periods presented in accordance with generally accepted accounting principles.

 

Changes in Internal Control over Financial Reporting

 

Other than the control changes to remediate the identified material weaknesses, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There are no new legal proceedings, or new updates to prior disclosures to report.

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a high degree of risk. You should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for our fiscal year ended December 31, 2023, filed with the SEC on April 15, 2024. 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.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q:

 

Exhibit Number		Description
31.1*		Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2*		Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1**		Certification of Principal Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
32.2**		Certification of Principal Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
101.INS*		Inline XBRL Instance Document
101.SCH*		Inline XBRL Taxonomy Extension Schema
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Filed herewith

** Furnished herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	INSPIRED ENTERTAINMENT, INC.
Date: November 7, 2024		/s/ A. Lorne Weil
	Name:	A. Lorne Weil
	Title:	Executive Chairman
		(Principal Executive Officer)
Date: November 7, 2024		/s/ Marilyn Jentzen
	Name:	Marilyn Jentzen
	Title:	Interim Chief Financial Officer
		(Principal Financial and Accounting Officer)