Inspired Entertainment, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except share data) September 30, 2021 December 31, 2020 (Unaudited) Assets Cash $ 37.1 $ 47.1 Accounts receivable, net 33.3 27.5 Inventory, net 14.6 17.6 Prepaid expenses and other current assets 26.0 16.8 Total current assets 111.0 109.0 Property and equipment, net 52.6 65.5 Software development costs, net 36.2 42.4 Other acquired intangible assets subject to amortization, net 6.9 7.7 Goodwill 82.7 83.7 Right of use asset 9.9 12.5 Other assets 4.5 3.3 Total assets $ 303.8 $ 324.1 Liabilities and Stockholders’ Deficit Current liabilities Accounts payable $ 16.3 $ 17.9 Accrued expenses 43.5 31.4 Corporate tax and other current taxes payable 10.3 14.4 Deferred revenue, current 8.5 11.5 Operating lease liabilities 3.2 3.6 Other current liabilities 4.6 2.5 Warrant liability 9.0 13.0 Current portion of finance lease liabilities 0.9 0.6 Total current liabilities 96.3 94.9 Long-term debt 308.7 297.5 Finance lease liabilities, net of current portion 0.9 0.2 Deferred revenue, net of current portion 7.6 11.4 Derivative liability — 1.7 Operating lease liabilities 7.4 9.2 Other long-term liabilities 3.8 10.9 Total liabilities 424.7 425.8 Commitments and contingencies - - Stockholders’ deficit Preferred stock; $ 0.0001 par value; 1,000,000 shares authorized — — Common stock; $ 0.0001 par value; 49,000,000 shares authorized; 22,754,597 shares and 22,430,475 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively — — Additional paid in capital 331.2 324.6 Accumulated other comprehensive income 40.8 31.1 Accumulated deficit ( 492.9 ) ( 457.4 ) Total stockholders’ deficit ( 120.9 ) ( 101.7 ) Total liabilities and stockholders’ deficit $ 303.8 $ 324.1 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (in millions, except share and per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue: Service $ 68.7 $ 55.6 $ 123.3 $ 113.7 Product sales 8.9 4.5 18.6 14.3 Total revenue 77.6 60.1 141.9 128.0 Cost of sales, excluding depreciation and amortization: Cost of service ( 13.8 ) ( 10.8 ) ( 23.9 ) ( 21.8 ) Cost of product sales ( 4.7 ) ( 3.3 ) ( 10.6 ) ( 9.8 ) Selling, general and administrative expenses ( 33.0 ) ( 22.6 ) ( 76.7 ) ( 63.8 ) Acquisition and integration related transaction expenses — ( 1.2 ) ( 1.5 ) ( 5.6 ) Depreciation and amortization ( 11.2 ) ( 14.0 ) ( 36.2 ) ( 39.9 ) Net operating income (loss) 14.9 8.2 ( 7.0 ) ( 12.9 ) Other (expense) income Interest income 0.1 0.1 0.2 0.5 Interest expense ( 7.3 ) ( 8.3 ) ( 38.1 ) ( 22.5 ) Change in fair value of warrant liability 17.3 0.2 3.8 6.1 Loss from equity method investee — — — ( 0.5 ) Other finance income (expense) 0.3 0.3 5.5 ( 5.9 ) Total other income (expense), net 10.4 ( 7.7 ) ( 28.6 ) ( 22.3 ) Income (loss) before income taxes 25.3 0.5 ( 35.6 ) ( 35.2 ) Income tax (expense) benefit ( 0.3 ) — 0.1 ( 0.3 ) Net income (loss) 25.0 0.5 ( 35.5 ) ( 35.5 ) Other comprehensive (loss)/income: Foreign currency translation gain (loss) 3.2 ( 4.2 ) 2.2 ( 0.7 ) Change in fair value of hedging instrument — ( 0.4 ) 0.3 ( 2.7 ) Reclassification of loss on hedging instrument to comprehensive income 0.3 0.3 1.3 1.0 Actuarial gains (losses) on pension plan 0.4 ( 0.3 ) 5.9 ( 4.6 ) Other comprehensive income (loss) 3.9 ( 4.6 ) 9.7 ( 7.0 ) Comprehensive income (loss) $ 28.9 $ ( 4.1 ) $ ( 25.8 ) $ ( 42.5 ) Net income (loss) per common share – basic $ 1.10 $ 0.02 $ ( 1.57 ) $ ( 1.59 ) Net income (loss) per common share – diluted $ 0.30 $ 0.02 $ ( 1.57 ) $ ( 1.59 ) Weighted average number of shares outstanding during the period – basic 22,744,022 22,405,376 22,641,188 22,396,652 Weighted average number of shares outstanding during the period – diluted 25,763,351 23,344,402 22,641,188 22,396,652 Supplemental disclosure of stock-based compensation expense Stock-based compensation included in: Selling, general and administrative expenses $ ( 3.8 ) $ ( 1.1 ) $ ( 8.6 ) $ ( 3.1 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 2 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE PERIOD JANUARY 1, 2021 TO SEPTEMBER 30, 2021 (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, 2021 22,430,475 $ — $ 324.6 $ 31.1 $ ( 457.4 ) $ ( 101.7 ) Foreign currency translation adjustments — — — ( 1.1 ) — ( 1.1 ) Actuarial gains on pension plan — — — 4.6 — 4.6 Change in fair value of hedging instrument — — — 0.6 — 0.6 Reclassification of loss on hedging instrument to comprehensive income — — — 0.5 — 0.5 Stock-based compensation expense – ESPP Stock-based compensation expense – ESPP, shares Shares issued in net settlement of RSUs 163,732 — — — — — Stock-based compensation expense — — 1.4 — — 1.4 Net loss — — — — ( 16.7 ) ( 16.7 ) Balance as of March 31, 2021 22,594,207 $ — $ 326.0 $ 35.7 $ ( 474.1 ) $ ( 112.4 ) Foreign currency translation adjustments — — — 0.1 — 0.1 Actuarial gains on pension plan — — — 0.9 — 0.9 Change in fair value of hedging instrument — — — ( 0.3 ) — ( 0.3 ) Reclassification of loss on hedging instrument to comprehensive income — — — 0.5 — 0.5 Stock-based compensation expense — — 3.3 — — 3.3 Net loss — — — — ( 43.8 ) ( 43.8 ) Balance as of June 30, 2021 22,594,207 $ — $ 329.3 $ 36.9 $ ( 517.9 ) $ ( 151.7 ) Foreign currency translation adjustments — — — 3.2 — 3.2 Actuarial gains on pension plan — — — 0.4 — 0.4 Change in fair value of hedging instrument — — — — — — Reclassification of loss on hedging instrument to comprehensive income — — — 0.3 — 0.3 Shares issued in net settlement of RSUs 160,390 — ( 1.6 ) — — ( 1.6 ) Stock-based compensation expense — — 3.5 — — 3.5 Net income — — — — 25.0 25.0 Balance as of September 30, 2021 22,754,597 $ — $ 331.2 $ 40.8 $ ( 492.9 ) $ ( 120.9 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE PERIOD JANUARY 1, 2020 TO SEPTEMBER 30, 2020 (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, 2020 22,230,768 $ — $ 320.6 $ 45.1 $ ( 425.0 ) $ ( 59.3 ) Foreign currency translation adjustments — — — 3.1 — 3.1 Actuarial gains on pension plan — — — 4.4 — 4.4 Change in fair value of hedging instrument — — — ( 1.5 ) — ( 1.5 ) Reclassification of loss on hedging instrument to comprehensive income — — — 0.4 — 0.4 Shares issued in net settlement of RSUs 166,959 — — — — — Stock-based compensation expense — — 1.0 — — 1.0 Net loss — — — — ( 9.8 ) ( 9.8 ) Balance as of March 31, 2020 22,397,727 $ — $ 321.6 $ 51.5 $ ( 434.8 ) $ ( 61.7 ) Foreign currency translation adjustments — — — 0.4 — 0.4 Actuarial losses on pension plan — — — ( 8.7 ) — ( 8.7 ) Change in fair value of hedging instrument — — — ( 0.8 ) — ( 0.8 ) Reclassification of loss on hedging instrument to comprehensive income — — — 0.3 — 0.3 Stock-based compensation expense – ESPP 7,649 — — — — — Stock-based compensation expense — — 1.0 — — 1.0 Net loss — — — — ( 26.2 ) ( 26.2 ) Balance as of June 30, 2020 22,405,376 $ — $ 322.6 $ 42.7 $ ( 461.0 ) $ ( 95.7 ) Foreign currency translation adjustments — — — ( 4.2 ) — ( 4.2 ) Actuarial losses on pension plan — — — ( 0.3 ) — ( 0.3 ) Change in fair value of hedging instrument — — — ( 0.4 ) — ( 0.4 ) Reclassification of loss on hedging instrument to comprehensive income — — — 0.3 — 0.3 Stock-based compensation expense — — 1.1 — — 1.1 Net income — — — — 0.5 0.5 Net income (loss) — — — — 0.5 0.5 Balance as of September 30, 2020 22,405,376 $ — $ 323.7 $ 38.1 $ ( 460.5 ) $ ( 98.7 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 4 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (Unaudited) 2021 2020 Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 35.5 ) $ ( 35.5 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 36.2 39.9 Amortization of right of use asset 2.5 2.7 Stock-based compensation expense 8.6 3.1 Change in fair value of warrant liability ( 3.8 ) ( 6.1 ) Impairment of investment in equity method investee — 0.7 Foreign currency translation on senior bank debt ( 4.6 ) 6.6 Reclassification of loss on hedging instrument to comprehensive income 1.3 0.7 Non-cash interest expense relating to senior debt 16.7 2.2 Changes in assets and liabilities: Accounts receivable ( 7.0 ) ( 5.8 ) Inventory 4.1 1.1 Prepaid expenses and other assets ( 10.2 ) 2.8 Corporate tax and other current taxes payable ( 5.4 ) 5.2 Accounts payable ( 1.4 ) 4.1 Deferred revenues and customer prepayment ( 3.8 ) ( 4.7 ) Accrued expenses 12.6 16.3 Operating lease liabilities ( 2.0 ) ( 2.3 ) Other long-term liabilities ( 1.3 ) 0.5 Net cash provided by operating activities 7.0 31.5 Cash flows from investing activities: Purchases of property and equipment ( 8.5 ) ( 11.9 ) Disposals of property and equipment — Purchases of capital software ( 9.7 ) ( 10.1 ) Net cash used in investing activities ( 18.2 ) ( 22.0 ) Cash flows from financing activities: Proceeds from issuance of long-term debt 333.1 — Proceeds from issuance of revolver — 9.2 Repayments of long-term debt ( 320.6 ) — Cash paid in connection with terminated interest rate swaps ( 2.1 ) — Debt fees incurred ( 9.1 ) ( 3.1 ) Repayments of finance leases ( 0.4 ) ( 0.7 ) Net cash provided by financing activities 0.9 5.4 Effect of exchange rate changes on cash 0.3 ( 0.1 ) Net (decrease) increase in cash ( 10.0 ) 14.8 Cash, beginning of period 47.1 29.1 Cash, end of period $ 37.1 $ 43.9 Supplemental cash flow disclosures Cash paid during the period for interest $ 17.6 $ 0.6 Cash paid during the period for income taxes $ 1.2 $ 0.1 Cash paid during the period for operating leases $ 3.1 $ 2.4 Supplemental disclosure of non-cash investing and financing activities Property and equipment acquired through finance lease $ 1.3 $ 1.5 Property and equipment transferred to inventory $ 1.3 $ — Additional paid in capital from net settlement of RSUs $ ( 1.6 ) $ — Lease liabilities arising from obtaining right of use assets $ — $ ( 6.1 ) Adjustment to goodwill arising from adjustment to fair value of assets acquired $ — $ ( 0.2 ) Capitalized interest payments $ — $ 10.6 Assets arising from asset retirement obligations $ — $ 0.8 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 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 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, 2021, the Company’s cash on hand was $ 37.1 million, and the Company had working capital of $ 14.7 million. The Company recorded net income of $ 25.0 million and $ 0.5 million for the three months ended September 30, 2021 and 2020, respectively. Net income includes non-cash changes in fair value of warrant liability of $ 17.3 million income and $ 0.2 million income for the three months ended September 30, 2021 and 2020, respectively, and non-cash stock-based compensation of $ 3.8 million and $ 1.1 million for the three months ended September 30, 2021 and 2020, respectively. The Company recorded net losses of $ 35.5 million and $ 35.5 million for the nine months ended September 30, 2021 and 2020, respectively. Net losses include non-cash debt fees expensed as part of the repayment of Prior Financing (see Note 4) of $ 14.4 million and $ 0.0 million for the nine months ended September 30, 2021 and 2020, respectively, non-cash changes in fair value of warrant liability of $ 3.8 million income and $ 6.1 million income for the nine months ended September 30, 2021 and 2020, respectively, excess depreciation and amortization over capital expenditure of $ 18.0 million and $ 17.9 million for the nine months ended September 30, 2021, and 2020, respectively, and non-cash stock-based compensation of $ 8.6 million and $ 3.1 million for the nine months ended September 30, 2021 and 2020, respectively. Historically, the Company has generally had positive cash flows from operating activities and has relied on a combination of cash flows provided by operations and the incurrence of debt and/or the refinancing of existing debt to fund its obligations. Cash flows provided by operations amounted to $ 7.0 million and $ 31.5 million for the nine months ended September 30, 2021 and 2020, respectively with the change year on year due to higher debt interest payments made in the nine months ended September 30, 2021, as there was an agreement in place to defer and capitalize such payments in the nine months ended September 30, 2020. Working capital of $ 14.7 million includes a non-cash settled item of $ 8.5 million of deferred income, and an item not expected to be cash settled of $ 9.0 million comprising a warrant liability. Management currently believes that, absent any unanticipated COVID-19 impact (see below), the Company’s cash balances on hand, cash flows expected to be generated from operations, ability to control and defer capital projects and amounts available from the Company’s external borrowings will be sufficient to fund the Company’s net cash requirements through November 2022. Governments in all of the major jurisdictions in which our land-based customers operate have now reopened land-based venues. As of April 12, 2021, in the United Kingdom, licensed betting offices in England and Wales have reopened with certain restrictions including operating two of four gaming machines per venue, limited dwell time of 15 minutes, as well as a maximum of two visits per day per patron and an 8:00pm curfew. These restrictions remained in place until May 17, 2021. Gaming machines in pubs, holiday parks, motorway services, Scottish betting offices and adult gaming centers across the United Kingdom reopened on May 17, 2021, with social distancing restrictions in place. All social distancing restrictions were removed in England as of July 19, 2021. As of August 9, 2021, no restrictions remain in the United Kingdom. There remains an element of social distancing in venues in Greece and in Italy, and there are restrictions in place that state only fully vaccinated people can enter our venues which came into place in Italy on August 20, 2021, and in Greece on September 13, 2021. It remains uncertain as to whether and when further restrictions or closures could happen in each jurisdiction and how long they may last. We continue to protect our existing available liquidity by pro-actively managing capital expenditures and working capital as well as identifying both immediate and longer-term opportunities for cost savings. 6 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, 2020 and 2019. The financial information as of December 31, 2020 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2021 (the “Original 10-K”), as amended and filed on Form 10-K/A with the SEC on May 10, 2021 (the “10-K/A”). The interim results for the nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any future interim periods. Restatement of Previously Reported Information On May 7, 2021, the Company’s independent registered public accounting firm, the Company’s management and the audit committee of the Company’s Board of Directors concluded that it was appropriate to restate the Company’s previously issued audited financial statements as of December 31, 2020, and December 31, 2019, and for the years ended December 31, 2020, and December 31, 2019, which were included in the Original 10-K. The restatement related to the SEC’s public statement released on April 12, 2021, informing market participants that warrants issued by special purpose acquisition companies may require classification as a liability of the entity measured at fair value, with changes in fair value each period reported in earnings. The effect of the restatement on previously reported information for the three months ended September 30, 2020 is as follows: Schedule of Restatement As Previously Reported Adjustments As Restated (in millions, except per share data) Consolidated Statements of Stockholders’ Deficit as of July 1, 2020 Additional paid in capital $ 348.6 $ ( 26.0 ) $ 322.6 Accumulated deficit ( 483.1 ) 22.1 ( 461.0 ) Consolidated Statement of Operations and Comprehensive Loss for the three months ended September 30, 2020 Change in fair value of warrant liability $ — $ 0.2 $ 0.2 Net income 0.3 0.2 0.5 Comprehensive loss ( 4.3 ) 0.2 ( 4.1 ) Net income per common share – basic and diluted $ 0.01 $ 0.01 $ 0.02 Consolidated Statements of Stockholders’ Deficit as of September 30, 2020 Additional paid in capital $ 349.7 $ ( 26.0 ) $ 323.7 Accumulated deficit ( 482.8 ) 22.3 ( 460.5 ) 7 The effect of the restatement on previously reported information for the nine months ended September 30, 2020 is as follows: As Previously Reported Adjustments As Restated (in millions, except per share data) Consolidated Statements of Stockholders’ Deficit as of January 1, 2020 Additional paid in capital $ 346.6 $ ( 26.0 ) $ 320.6 Accumulated deficit ( 441.2 ) 16.2 ( 425.0 ) Consolidated Statement of Operations and Comprehensive Loss for the nine months ended September 30, 2020 Change in fair value of warrant liability $ — $ 6.1 $ 6.1 Net loss ( 41.6 ) 6.1 ( 35.5 ) Comprehensive loss ( 48.6 ) 6.1 ( 42.5 ) Net loss per common share – basic and diluted $ ( 1.86 ) $ 0.27 $ ( 1.59 ) Consolidated Statements of Stockholders’ Deficit as of September 30, 2020 Additional paid in capital $ 349.7 $ ( 26.0 ) $ 323.7 Accumulated deficit ( 482.8 ) 22.3 ( 460.5 ) Recharacterization of Previously Reported Information In prior periods, up to and including the interim period nine months ended September 30, 2020, the Company operated its business along three operating segments: Server Based Gaming, Virtual Sports (which included Interactive) and Acquired Businesses (which consisted of businesses acquired from Novomatic UK Ltd., a division of Novomatic Group, an international supplier of gaming equipment and solutions (the “NTG Acquisition”)). During the period subsequent to September 30, 2020, the Company completed the process of changing its internal structure, which had been ongoing since the NTG Acquisition, and as a result changed the composition of its operating segments. The Company now 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 now managed and the way the performance of each segment is now evaluated. As part of the recharacterization exercise, certain items of Revenue, Cost of Sales and Selling, General and Administrative Expenses have been recharacterized to ensure consistency with similar items across the Group. The revenue recharacterizations are to ensure spares and similar items are reflected with other items of hardware (Product Sales). The resulting impact on previously reported information for the three months ended September 30, 2020 is as follows: Service Revenue, previously reported $ 56.4 million, now $ 55.6 million; Product Sales Revenue, previously reported $ 3.7 million, now $ 4.5 million; Cost of Service, previously reported $ 11.2 million, now $ 10.8 million; Selling, General and Administrative Expenses (excluding Stock-based compensation), previously reported $ 21.9 million, now $ 21.5 million. 8 The resulting impact on previously reported information for the nine months ended September 30, 2020 is as follows: Service Revenue, previously reported $ 114.8 million, now $ 113.7 million; Product Sales Revenue, previously reported $ 13.2 million, now $ 14.3 million; Cost of Service, previously reported $ 20.9 million, now $ 21.8 million; Selling, General and Administrative Expenses (excluding Stock-based compensation), previously reported $ 61.6 million, now $ 60.7 million. The recharacterization has no impact on the previously reported Net Operating Loss, Net Loss or Net Comprehensive Loss for the three and nine months ended September 30, 2020. 2. Inventory Inventory consists of the following: Schedule of Inventory September 30, 2021 December 31, 2020 (in millions) Component parts $ 11.5 $ 12.1 Work in progress — 1.7 Finished goods 3.1 3.8 Total inventories $ 14.6 $ 17.6 Component parts include parts for gaming terminals. Included in inventory are reserves for excess and slow-moving inventory of $ 2.5 million and $ 1.5 million as of September 30, 2021 and December 31, 2020, respectively. Our finished goods inventory primarily consists of gaming terminals which are ready for sale. 3. Contract Liabilities and Other Disclosures The following table summarizes contract related balances: Schedule of Contract Related Balances Accounts Receivable Unbilled Accounts Receivable Deferred Income Customer Prepayments and Deposits (in millions) At September 30, 2021 $ 37.5 $ 19.7 $ ( 16.1 ) $ ( 4.6 ) At December 31, 2020 $ 30.4 $ 8.2 $ ( 22.9 ) $ ( 1.6 ) At December 31, 2019 $ 24.5 $ 15.3 $ ( 27.8 ) $ ( 1.9 ) Revenue recognized that was included in the deferred income balance at the beginning of the period amounted to $ 8.5 million and $ 10.3 million for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively. 4. Long Term and Other Debt Senior Secured Notes On May 20, 2021, Inspired Entertainment (Financing) PLC, a wholly owned subsidiary of the Company, issued £ 235.0 million ($ 316.9 million, as translated at September 30, 2021) aggregate principal amount of its 7.875 % senior secured notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of 7.875 % per annum and mature on June 1, 2026 . Interest is payable on the Senior Secured Notes on June 1 and December 1 of each year, commencing on December 1, 2021 The Senior Secured Notes and related guarantees were issued under an indenture (the “Indenture”), among Inspired Entertainment (Financing) PLC, as issuer, the Company and certain English and U.S. subsidiaries of the Company, as guarantors (collectively and together with the Company, the “Guarantors”), GLAS Trustees Limited, as trustee, GLAS Trust Corporation Limited, as security agent and GLAS Trust Company LLC as paying agent, transfer agent and registrar. The terms of the Senior Secured Notes and related guarantees are governed by the Indenture. The Company used proceeds from the offering of the Senior Secured Notes to repay its £ 145.8 million ($ 196.6 million) senior secured term loan facility and € 93.1 million ($ 107.9 million) senior secured term loan facility and accrued interest thereon (the “Prior Financing”), to close-out derivative contracts entered into in connection with the Prior Financing and to pay fees, commissions and expenses incurred in connection with the refinancing. 9 The Senior Secured Notes are fully and unconditionally guaranteed on a senior secured first-priority basis by the Guarantors on a joint and several basis. The Senior Secured Notes and related guarantees are secured, subject to certain permitted collateral liens, on a first-priority basis by substantially all assets of the Guarantors and all claims of the Inspired Entertainment (Financing) PLC under an intercompany loan to Gaming Acquisitions Limited, a private limited liability company incorporated under the laws of England and Wales and an indirect wholly-owned subsidiary of the Company (“GAL”), of the proceeds of the offering of the Senior Secured Notes. The Indenture contains incurrence covenants that limit the ability of the Company and the Company’s restricted subsidiaries to, among other things, (i) incur or guarantee additional debt and issue certain preferred stock of restricted subsidiaries; (ii) create or incur certain liens; (iii) make restricted payments, including dividends or distributions to the Company’s stockholders or repurchase the Company’s stock; (iv) prepay or redeem subordinated debt; (v) make certain investments, including participating joint ventures; (vi) create encumbrances or restrictions on the payment of dividends or other distributions by restricted subsidiaries; (vii) sell assets, or consolidate or merge with or into other companies; (viii) sell or transfer all or substantially all of the Company’s assets or those of the Company’s subsidiaries on a consolidated basis; (ix) engage in certain transactions with affiliates; and (x) create unrestricted subsidiaries. Certain of these covenants will be suspended if and for so long as the Senior Secured Notes have investment grade ratings from any two of Moody’s Investors Service, Inc., Standard & Poor’s Investors Ratings Services and Fitch Ratings, Inc. These covenants are subject to exceptions and qualifications as set forth in the Indenture. Inspired Entertainment (Financing) PLC may redeem the Senior Secured Notes, in whole or in part, at any time and from time to time prior to June 1, 2023, at a redemption price equal to 100% of the principal amount thereof, plus a “make-whole” premium as set forth in the Indenture and form of the Senior Secured Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Inspired Entertainment (Financing) PLC may also redeem the Senior Secured Notes, in whole or in part, at any time and from time to time on or after June 1, 2023, at the redemption prices set forth in the Indenture and form of the Senior Secured Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to June 1, 2023, Inspired Entertainment (Financing) PLC may redeem up to 40% of the original aggregate principal amount of the Senior Secured Notes with the net cash proceeds of one or more equity offerings, as described in the Indenture, at a redemption price equal to 107.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time prior to June 1, 2023, Inspired Entertainment (Financing) PLC may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes within each 12-month period at a redemption price equal to 103.000% of the aggregate principal amount of the Senior Secured Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Revolving Credit Facility In connection with the issuance of the Senior Secured Notes on May 20, 2021, the Company and certain of our direct and indirect wholly-owned subsidiaries, entered into a Super Senior Revolving Credit Facility Agreement (the “RCF Agreement”) with Global Loan Agency Services Limited, as agent, Barclays Bank plc (“Barclays”) and Macquarie Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK” and together with Barclays, the “Arrangers”) as arrangers and each lender party thereto (the “Lenders”), pursuant to which the Lenders agreed to provide, subject to certain conditions, a secured revolving facility loan in an original principal amount of £ 20 million ($ 27.0 million) under which certain of our subsidiaries are able to draw funds (the “RCF Loan”). The RCF Loans will terminate on November 20, 2025 . The funding of the RCF Loan is subject to customary conditions set forth in the RCF Agreement. The undrawn commitment of each Lender under the RCF Loan will automatically terminate, unless previously terminated by the Company, on October 20, 2025. The RCF Loans will bear interest at a rate per annum equal to (i) SONIA for borrowings in sterling, (ii) LIBOR (or, on and after December 31, 2021, SOFR) for borrowings in dollars, or (iii) EURIBOR for borrowings in Euro, as applicable, plus, in each case, a margin (based on the Company’s consolidated senior secured net leverage ratio) ranging from 4.25 % to 4.75 % per annum. With respect to the RCF Loan, a commitment fee of 30 % of the then applicable margin is payable at any time on any unutilized portion of the RCF Loan. The RCF Agreement contains various covenants (which include restrictions regarding the incurrence of liens, the incurrence of indebtedness by the Company’s subsidiaries and fundamental changes, subject in each case to certain exceptions), representations, warranties, limitations and events of default (which include non-payment, breach of obligations under the financing documents, cross-default, insolvency and litigation) customary for similar facilities for similarly rated borrowers and subject to customary carve-outs and grace periods. Following the occurrence of an event of default which has not been waived or remedied, the Lenders who represent more than 66.67 % of total commitments under the RCF may, subject to the terms of an intercreditor agreement (which governs the relationship between the Lenders and the holders of the Senior Secured Notes), instruct the agent to (i) accelerate the RCF Loans, (ii) instruct the security agent to enforce the transaction security and/or (iii) exercise any other remedies available to the Lenders. The RCF Agreement requires that the Company maintain a maximum consolidated senior secured net leverage ratio of 6.25x on the test date for the relevant period ending June 30, 2021, stepping down to 6.0x on March 31, 2022, 5.75x on March 31, 2023 and 5.50x from March 31, 2024 and thereafter (the “RCF Financial Covenant”). The RCF Financial Covenant is calculated as the ratio of consolidated senior secured net debt to consolidated pro forma EBITDA (defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense) for the 12-month period preceding the relevant quarterly testing date and is tested quarterly on a rolling basis, subject to the Initial Facility (as defined in the RCF Agreement) being drawn on the relevant test date. The RCF Agreement does not include a minimum interest coverage ratio or other financial covenants. The outstanding principal amount of each advance under the RCF Loans is payable on the last day of the interest period relating to such advance, unless such advance is rolled over on a cashless basis in accordance with customary rollover provisions contained in the RCF Agreement, with a final repayment on November 20, 2025. Termination of Prior Financing The Company’s previous debt consisted of two tranches of senior secured term loans in a principal amount of £ 145.8 million ($ 196.6 million) with a cash interest rate of 8.25 % plus 3-month LIBOR and € 93.1 million ($ 107.9 million) with a cash interest rate of 7.75 % plus 3-month EURIBOR, respectively and a secured revolving facility loan in a principal amount of £ 20.0 million ($ 27.0 million) with a cash interest rate on any utilization of 6.50 % plus 3-month LIBOR. In connection with the issuance of the Senior Secured Notes and the entry into the RCF Agreement, on May 20, 2021, the Prior Financing was repaid in full and the senior facilities agreement (dated September 27, 2019, as amended and restated on June 25, 2020) relating to the Prior Financing was terminated. No prepayment premium applied to the repayment (although customary break cost provisions applied). Debt fees of $ 14.4 million were expensed to the Consolidated Statements of Operations and Consolidated Loss within Interest Expense as part of the repayment. In addition, on May 19, 2021, we terminated the interest rate swaps relating to the Prior Financing and applicable termination fees were settled on May 20, 2021 (see Note 5). 10 Outstanding Debt and Finance Leases The following reflects outstanding debt and finance leases as of the dates indicated below: Schedule of Outstanding Debt and Capital Leases Principal Unamortized deferred financing charge Book value, September 30, 2021 (in millions) Senior debt $ 316.9 $ ( 8.2 ) $ 308.7 Finance lease liabilities 1.8 — 1.8 Total long-term debt outstanding 318.7 ( 8.2 ) 310.5 Less: current portion of long-term debt ( 0.9 ) — ( 0.9 ) Long-term debt, excluding current portion $ 317.8 $ ( 8.2 ) $ 309.6 Principal Unamortized deferred financing charge Book value, December 31, 2020 (in millions) Senior debt $ 313.3 $ ( 15.8 ) $ 297.5 Finance lease liabilities 0.8 — 0.8 Total long-term debt outstanding 314.1 ( 15.8 ) 298.3 Less: current portion of long-term debt ( 0.6 ) — ( 0.6 ) Long-term debt, excluding current portion $ 313.5 $ ( 15.8 ) $ 297.7 The Company is in compliance with all relevant financial covenants and the long-term debt portion is correctly classified as such in line with the underlying agreements. Long term debt as of September 30, 2021 matures as follows: Schedule of Maturities of Long-term Debt Fiscal period: Senior bank debt Finance leases Total (in millions) 2021 $ — $ 0.6 $ 0.6 2022 — 0.4 0.4 2023 — 0.3 0.3 2024 — 0.5 0.5 2025 — — — 2026 316.9 — 316.9 Total $ 316.9 $ 1.8 $ 318.7 5. Derivatives and Hedging Activities The Company was party to two interest rate swaps with UBS AG designed to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a portion of the previous floating rate debt facilities. The swaps fixed the variable interest rate of the debt facilities and provided protection over potential interest rate increases by providing a fixed rate of interest payment in return. The interest rate swaps were for £ 95 million ($ 128.1 million) at a fixed rate of 0.9255 % based on the 6-month LIBOR rate and for € 60 million ($ 69.5 million) at a fixed rate of 0.102 % based on the 6-month EURIBOR rate. In connection with the issuance of the Senior Secured Notes and the entry into the RCF Agreement, on May 19, 2021, the Company terminated its two interest rate swaps. The termination fees were settled on May 20, 2021, for £ 1.3 million ($ 1.9 million) and € 0.1 million ($ 0.2 million), respectively. Hedges of Multiple Risks The Company’s objectives in using interest rate derivatives were to add stability to interest and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily used interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense over the life of the original instruments. During the next twelve months, the Company estimates that an additional $ 0.7 million will be reclassified as an increase to interest expense. As of September 30, 2021, the company did not have any derivatives. As of December 31, 2020, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk: Schedule of Outstanding Derivatives Designated as Cash Flow Hedges Interest Rate Derivative Number of Instruments Notional Interest rate swaps 2 £ 95 million ($ 128.1 million) at a fixed rate of 0.9255 % based on the 6-month LIBOR rate and € 60 million ($ 69.5 million) at a fixed rate of 0.102 % based on the 6-month EURIBOR rate 11 The Company did not have any derivative financial instruments as of September 30, 2021. The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheet as of December 31, 2020. Schedule of Fair Value of Derivative Financial Instruments Balance Sheet Classification Asset Derivatives Fair Value Balance Sheet Classification Liability Derivatives Fair Value (in millions) (in millions) Derivatives designated as hedging instruments: Interest Rate Products Fair Value of Hedging Instruments $ — Other Current Liabilities and Long Term Derivative Liability $ ( 2.6 ) Total derivatives designated as hedging instruments $ — $ ( 2.6 ) The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income for the nine months ended September 30, 2021. Schedule of Accumulated Other Comprehensive Income Amount of Gain/(Loss) Recognized in Other Comprehensive Income on Derivative Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Income (in millions) (in millions) Interest Rate Products $ 0.3 Interest Expense $ ( 1.3 ) Total $ 0.3 $ ( 1.3 ) The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income for the nine months ended September 30, 2020. Amount of Gain/(Loss) Recognized in Other Comprehensive Income on Derivative Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Income (in millions) (in millions) Interest Rate Products $ ( 2.7 ) Interest Expense $ ( 1.0 ) Total $ ( 2.7 ) $ ( 1.0 ) The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the nine months ended September 30, 2021. Schedule of Consolidated Income Statements Interest Expense (in millions) Total amounts of income and expense line items presented in the statement of operations and comprehensive loss in which the effects of fair value or cash flow hedges are recorded $ 38.2 Gain/(loss) on cash flow hedging relationships in Subtopic 815-20 $ ( 1.3 ) 12 The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the nine months ended September 30, 2020. Interest Expense (in millions) Total amounts of income and expense line items presented in the statement of operations and comprehensive loss in which the effects of fair value or cash flow hedges are recorded $ 22.5 Gain/(loss) on cash flow hedging relationships in Subtopic 815-20 $ ( 1.0 ) The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of December 31, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheet. The ISDA Master Agreement between Gaming Acquisitions Limited, a wholly-owned subsidiary of the Company, and UBS AG was documented using the 2002 Form and the ISDA standard set-off provision in Section 6(f) of the ISDA Master Agreement applied to both parties and was only modified to include Affiliates of the Payee. There was no CSA and thus there was no collateral posting. Schedule of Offsetting of Derivative Assets and Liabilities Offsetting of Derivative Assets December 31, 2020 Gross Amounts Gross Amounts Offset in the Statement Net Amounts of Assets presented in the Statement Gross Amounts Not Offset in the Statement of Financial Position of Recognized Assets of Financial Position of Financial Position Financial Instruments Cash Collateral Received Net Amount (in millions) Fair value of hedging instrument $ — $ — $ — $ — $ — $ — Offsetting of Derivative Liabilities December 31, 2020 Gross Amounts Gross Amounts Offset in the Statement Net Amounts of Assets presented in the Statement Gross Amounts Not Offset in the Statement of Financial Position of Recognized Assets of Financial Position of Financial Position Financial Instruments Cash Collateral Received Net Amount (in millions) Fair value of hedging instrument $ 2.6 $ — $ 2.6 $ — $ — $ — 13 6. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of our assets and liabilities utilizing an established three-level hierarchy. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions. Level 3: Unobservable inputs that are supported by little or no market activity that are significant to the fair value of the asset or liability. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that are unable to be corroborated with observable market data. The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments approximates their recorded values. For each period, derivative financial instrument assets and liabilities measured at fair value on a recurring basis are included in the financial statements as per the table below. Schedule of Derivative Financial Instrument Assets and Liabilities Measured at Fair Value on Recurring Basis September 30, December 31, Level 2021 2020 (in millions) Public Warrants (included in warrant liability) 1 $ ( 3.5 ) $ ( 3.2 ) Long term receivable (included in other assets) 2 $ 3.8 $ 1.4 Private Placement Warrants (included in warrant liability) 2 $ ( 5.5 ) $ ( 9.8 ) Derivative liability (see Note 5) 2 $ — $ ( 2.6 ) The fair value of our long-term senior debt as of September 30, 2021, was $ 323.2 million, based upon quoted prices in the marketplace, which are considered Level 2 inputs. Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s principal financial officer, who reports to the principal executive officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Principal Financial Officer and approved by the Principal Executive Officer. At September 30, 2021 and December 31, 2020, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy. 7. Stock-Based Compensation The Company’s stock-based compensation plans authorize awards of restricted stock units (“RSUs”), stock options and other equity-related awards. The Company’s 2021 Omnibus Incentive Plan (“2021 Plan”) was adopted by the Company’s Board of Directors on April 12, 2021 and approved by our stockholders on May 11, 2021. The 2021 Plan succeeds the Company’s 2018 Omnibus Incentive Plan (the “2018 Plan”) such that shares subject to the 2018 Plan’s unused reserve (e.g., as a result of termination or forfeiture of awards) are instead rolled over to the 2021 Plan. The Company has two other predecessor plans, the 2016 Long-Term Incentive Plan and the Second Long-Term Incentive Plan (collectively, the “Prior Plans”), whose available balances were terminated in connection with approval of the 2018 Plan. Although outstanding awards under the Prior Plans remain governed by the terms of the Prior Plans, no new awards may be granted or become available for grant under the Prior Plans. 14 As of September 30, 2021, there were (i) 1,628,467 shares subject to outstanding awards under the 2021 Plan, including 514,220 shares subject to performance-based target awards, 232,500 shares subject to market-price vesting conditions and 165,000 shares subject to awards as to which the applicable vesting conditions have been met which remain subject to deferred settlement ; (ii) 1,464,440 shares subject to outstanding awards under the 2018 Plan, including 75,000 shares subject to performance-based target awards, 254,121 shares subject to awards that were previously subject to performance criteria that were determined to have been met for the applicable performance year which awards continue to remain subject to a time-based vesting schedule and 87,613 shares subject to awards as to which the applicable vesting conditions have been met which remain subject to deferred settlement; and (iii) 2,411,319 shares subject to outstanding awards under the Prior Plans, including 1,092,633 shares subject to market-price vesting conditions that have a satisfaction deadline of December 23, 2021 and 1,318,686 shares subject to awards as to which the applicable vesting conditions have been met which remain subject to deferred settlement. As of September 30, 2021, there were 1,521,434 shares available for new awards under the 2021 Plan (which includes shares rolled over from the 2018 Plan) and no shares available for new awards under the Prior Plans. All awards consist of RSUs and Restricted Stock. The Company also has an employee stock purchase plan (“ESPP”) that authorizes the issuance of up to an aggregate of 500,000 shares of common stock pursuant to purchases thereunder by employees. The ESPP, which was approved by stockholders in July 2017, is administered by the Compensation Committee which has discretion to designate the length of offering periods and other terms subject to the requirements of the ESPP. As of September 30, 2021, a total of 467,751 shares remain available for purchase under the ESPP. A summary of the Company’s RSU activity during the nine months ended September 30, 2021 is as follows: Schedule of Restricted Stock Unit Activity Number of Shares Unvested Outstanding at January 1, 2021 2,149,118 Granted 1,692,486 Forfeited ( 46,609 ) Vested ( 486,184 ) Unvested Outstanding at September 30, 2021 3,308,811 The Company issued a total of 324,122 shares during the nine months ended September 30, 2021, 160,390 in connection with the net settlement of RSUs that vested on June 30, 2021 and 163,732 in connection with the net settlement of RSUs that vested on December 31, 2020. Stock-based compensation is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. For performance awards that are contingent upon the Company achieving certain pre-determined financial performance targets, compensation expense is calculated based on the number of shares expected to vest after assessing the probability that the performance criteria will be met. Determining the probability of achieving a performance target requires estimates and judgment. For market-based awards that are contingent upon the Company’s stock achieving certain pre-determined price targets, compensation expense is calculated based upon the determination of the fair value of the awards as derived through multiple running of the Monte Carlo valuation model, with the fair value recognized on a straight-line basis over the requisite service period. The Company recognized stock-based compensation expense amounting to $ 3.8 million and $ 1.1 million for the three months ended September 30, 2021 and 2020, respectively, and $ 8.6 million and $ 3.1 million for the nine months ended September 30, 2021 and 2020, respectively. Total unrecognized compensation expense related to unvested stock awards and unvested RSUs at September 30, 2021 amounts to $ 14.6 million and is expected to be recognized over a weighted average period of 1.7 years . 15 8. 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, 2021 $ ( 71.1 ) $ 2.8 $ 37.2 $ ( 31.1 ) Change during the period 1.1 ( 1.1 ) ( 4.6 ) ( 4.6 ) Balance at March 31, 2021 ( 70.0 ) 1.7 32.6 ( 35.7 ) Change during the period ( 0.1 ) ( 0.2 ) ( 0.9 ) ( 1.2 ) Balance at June 30, 2021 ( 70.1 ) 1.5 31.7 ( 36.9 ) Change during the period ( 3.2 ) ( 0.3 ) ( 0.4 ) ( 3.9 ) Balance at September 30, 2021 $ ( 73.3 ) $ 1.2 $ 31.3 $ ( 40.8 ) Foreign Currency Translation Adjustments Change in Fair Value of Hedging Instrument Unrecognized Pension Benefit Costs Accumulated Other Comprehensive (Income) (in millions) Balance at January 1, 2020 $ ( 76.5 ) $ 1.4 $ 30.0 $ ( 45.1 ) Change during the period ( 3.1 ) 1.1 ( 4.4 ) ( 6.4 ) Balance at March 31, 2020 ( 79.6 ) 2.5 25.6 ( 51.5 ) Change during the period ( 0.4 ) 0.5 8.7 8.8 Balance at June 30, 2020 ( 80.0 ) 3.0 34.3 ( 42.7 ) Change during the period 4.2 0.1 0.3 4.6 Balance at September 30, 2020 $ ( 75.8 ) $ 3.1 $ 34.6 $ ( 38.1 ) Included within accumulated other comprehensive income is an amount of $ 1.2 million relating to the change in fair value of discontinued hedging instruments. This amount will be amortized as a charge to income over the life of the original instruments, in accordance with US GAAP. 9. Net Income (Loss) per Share Basic income (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period, including stock options, restricted stock, RSUs and warrants, using the treasury stock method, and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive. The computation of diluted EPS excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive: Schedule of Anti-dilutive Securities Excluded from Computation of Earnings per Share 2021 2020 2021 2020 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 RSUs 938,517 — 4,880,110 3,714,268 Unvested Restricted Stock 624,116 624,116 624,116 624,116 Stock Warrants — 9,539,565 9,539,565 9,539,565 Number of antidilutive securities excluded from computation of earnings per share 1,562,633 10,163,681 15,043,791 13,877,949 10. Other Finance Income (Expense) Other finance income (expense) consisted of the following for the three and nine months ended September 30, 2021 and 2020: Schedule of Other Finance Income (Costs) 2021 2020 2021 2020 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) (in millions) Pension interest cost $ ( 0.4 ) $ ( 0.5 ) $ ( 1.2 ) $ ( 1.6 ) Expected return on pension plan assets 0.7 0.8 2.1 2.3 Foreign currency translation on senior debt — — 4.6 ( 6.6 ) Other finance income (Costs) $ 0.3 $ 0.3 $ 5.5 $ ( 5.9 ) 16 11. Income Taxes The effective income tax rate for the three months ended September 30, 2021 and 2020 was 1.1 % and 0.0 %, respectively, resulting in a $ 0.3 million and a $ 0.0 million income tax expense, respectively. The effective income tax rate for the nine months ended September 30, 2021 and 2020 was 0.3 % and 0.7 %, respectively, resulting in a $ 0.1 million income tax benefit and a $ 0.3 million income tax expense, respectively. The Company’s effective income tax rate has fluctuated primarily as a result of the income mix between jurisdictions. The income tax expense for the three and nine months ended September 30, 2021 and 2020 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to pre-tax losses for which no tax benefit can be recorded, and foreign earnings being taxed at rates different than the US statutory rate. 12. Related Parties HG Vora Special Opportunities Master Fund Limited (“HG Vora”) (a purchaser of our Senior Secured Notes issued on May 20, 2021) was the beneficial owner of approximately 13.04 % of our common stock as of September 30, 2021, including 400,000 shares underlying warrants to purchase common stock, and such ownership level declined to below 5 % during the quarter ending December 31, 2021. The portion of the Company’s aggregate senior debt of $ 316.9 million at September 30, 2021, and $ 313.3 million at December 31, 2020, held by HG Vora at September 30, 2021 and December 31, 2020 was $ 53.9 million and $ 0.0 million, respectively. Interest expense payable to HG Vora for the three months ended September 30, 2021 and 2020 amounted to $ 1.1 million and $ 0.0 million, respectively, and for the nine months ended September 30, 2021 and 2020 amounted to $ 1.6 million and $ 0.0 million, respectively. In addition, $ 1.5 million and $ 0.0 million of accrued interest payable was due to HG Vora at September 30, 2021 and December 31, 2020, respectively. HG Vora was also an investor in Leisure Acquisition Corp., a special purpose acquisition company affiliated with two members of our management which completed its business combination on June 30, 2021. 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 16.51 % of our common stock as of September 30, 2021, including 1,000,000 shares underlying warrants to purchase common stock. Macquarie UK was also one of the lending parties with respect to our previous senior secured term loans and revolving credit facility under our prior senior facilities agreement. The portion of the Company’s aggregate senior debt of $ 316.9 million at September 30, 2021, and $ 313.3 million at December 31, 2020 held by Macquarie UK at September 30, 2021 and December 31, 2020 was $ 0.0 million and $ 30.7 million, respectively. Interest expense payable to Macquarie UK for the three months ended September 30, 2021 and 2020 amounted to $ 0.0 million and $ 0.6 million, respectively, and for the nine months ended September 30, 2021 and 2020 amounted to $ 0.9 million and $ 1.7 million, respectively. In addition, $ 0.0 million and $ 0.6 million of accrued interest payable was due to Macquarie UK at September 30, 2021 and December 31, 2020, respectively. 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. We incurred certain offering expenses in connection with an underwritten public offering of shares held by a significant stockholder, the Landgame Trust, which closed on June 1, 2021, as to which our expenses were reimbursed by the stockholder. For the nine months ended September 30, 2021, the aggregate amount invoiced for reimbursement was $ 0.2 million. The selling stockholder sold an aggregate of 6,217,628 shares in the offering (including 810,995 shares subject to an over-allotment option that was exercised in full) at an offering price of $ 9.25 per share, less underwriting discounts and commissions of $ 0.4625 per share. One of the participating underwriters in the offering was Macquarie Capital (USA) Inc., an affiliate of MIHI LLC (see paragraph above), pursuant to which it purchased 870,468 of the shares including 113,539 shares subject to the over-allotment option. 13. Leases The Company is party to leases with third parties with respect to various gaming machines. Gaming machine leases typically include a lease (of the machine) and a non-lease (provision of software services) component. The components of lease income were as follows: Schedule of Lease Income 2021 2020 2021 2020 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) (in millions) Interest receivable from sales type leases $ — $ 0.1 $ — $ 0.1 Operating lease income 1.3 0.9 1.8 1.9 Variable income from sales type leases — 0.3 0.1 0.5 Total $ 1.3 $ 1.3 $ 1.9 $ 2.5 14. Commitments and Contingencies 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. 17 15. Pension Plan We operate a defined contribution plan in the US, and both defined benefit and defined contribution pension schemes in the UK. The defined contribution scheme assets are held separately from those of the Company in independently administered funds. Defined Benefit Pension Scheme The defined benefit scheme has been closed to new entrants since April 1, 1999 and closed to future accruals for services rendered to the Company for the entire financial statement periods presented. On March 15, 2019, it was agreed that no further deficit reduction contributions would be made to the scheme, except in the event that the scheme funding level does not progress as expected, in which case contingent contributions would be made subject to an agreed maximum amount. In January 2021, the funding level of the scheme was tested against the expected position at December 31, 2020 and it was determined that further contingent contributions of $ 1.2 million and expense contributions of $ 0.4 million will be payable during the year ending December 31, 2021. The funding level of the scheme will next be tested against the expected position at December 31, 2021 to determine whether further contingent contributions are payable during the year ending December 31, 2022. The total amount of employer contributions paid during the nine months ended September 30, 2021 amounted to $ 1.1 million relating to the nine months ended September 30, 2021, and $ 0.4 million of contributions relating to the year ending December 31, 2020 agreed with the trustees of the scheme to be deferred into the year ending December 31, 2021. The following table presents the components of our net periodic pension benefit cost: Schedule of Defined Benefit Plans 2021 2020 Nine Months Ended September 30, 2021 2020 (in millions) Components of net periodic pension benefit cost: Interest cost $ 1.2 $ 1.6 Expected return on plan assets ( 2.1 ) ( 2.3 ) Net periodic benefit $ ( 0.9 ) $ ( 0.7 ) The following table sets forth the estimate of the combined funded status of the pension plans and their reconciliation to the related amounts recognized in our consolidated financial statements at the respective measurement dates: Schedule of Pension Plans and their Reconciliation September 30, 2021 December 31, 2020 (in millions) Change in benefit obligation: Benefit obligation at beginning of period $ 127.8 $ 110.4 Interest cost 1.2 2.2 Actuarial (gain) loss ( 7.3 ) 14.5 Benefits paid ( 1.9 ) ( 4.1 ) Foreign currency translation adjustments ( 1.4 ) 4.8 Benefit obligation at end of period $ 118.4 $ 127.8 Change in plan assets: Fair value of plan assets at beginning of period $ 118.7 $ 107.3 Actual gain on plan assets — 9.8 Employer contributions 1.1 1.6 Benefits paid ( 1.9 ) ( 4.1 ) Foreign currency translation adjustments ( 1.6 ) 4.1 Fair value of assets at end of period $ 116.3 $ 118.7 Amount recognized in the consolidated balance sheets: Unfunded status (non-current) $ ( 2.1 ) $ ( 9.1 ) Net amount recognized $ ( 2.1 ) $ ( 9.1 ) 18 16. Segment Reporting and Geographic Information The Company operates its business along four operating segments, which are segregated on the basis of revenue stream: Gaming, Virtual Sports, Interactive and Leisure. The Company believes this method of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated. In prior periods, up to and including the interim period nine months ended September 30, 2020, the Company operated its business along three operating segments: Server Based Gaming, Virtual Sports (which included Interactive) and Acquired Businesses (which consisted of the businesses acquired from the NTG Acquisition). During the period subsequent to September 30, 2020, the Company completed the process of changing its internal structure, which had been ongoing since the NTG Acquisition, and as a result changed the composition of its operating segments. The following tables present revenue, cost of sales, excluding depreciation and amortization, selling, general and administrative expenses, depreciation and amortization, stock-based compensation expense and acquisition related transaction expenses, operating profit/(loss), total assets and total capital expenditures for the periods ended September 30, 2021 and September 30, 2020, respectively, by business segment. Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these costs are not allocable and to do so would not be practical. Corporate function costs consist primarily of selling, general and administrative expenses, depreciation and amortization, capital expenditures, right of use assets, cash, prepaid expenses and property and equipment and software development costs relating to corporate/shared functions. All acquisition and integration related transaction expenses are allocated as corporate function costs. Amounts previously disclosed for the three and nine months ended September 30, 2020 have been recharacterized in line with the current operating segments and categories. The tables also reflect the recharacterization of previously reported information as described in Note 1. Segment Information Schedule of Segment Reporting Information By Segment Three Months Ended September 30, 2021 1 2 3 4 5 6 Gaming Virtual Sports Interactive Leisure Corporate Functions Total (in millions) Revenue: Service $ 19.7 $ 10.5 $ 6.1 $ 32.4 $ — $ 68.7 Product sales 7.9 — — 1.0 — 8.9 Total revenue 27.6 10.5 6.1 33.4 — 77.6 Cost of sales, excluding depreciation and amortization: Cost of service ( 4.1 ) ( 0.5 ) ( 1.0 ) ( 8.2 ) — ( 13.8 ) Cost of product sales ( 4.2 ) — — ( 0.5 ) — ( 4.7 ) Selling, general and administrative expenses ( 8.4 ) ( 1.4 ) ( 1.7 ) ( 11.7 ) ( 6.0 ) ( 29.2 ) Stock-based compensation expense ( 0.5 ) ( 0.3 ) ( 0.2 ) ( 0.1 ) ( 2.7 ) ( 3.8 ) Acquisition and integration related transaction expenses — — — — — Depreciation and amortization ( 5.3 ) ( 0.7 ) ( 0.9 ) ( 3.9 ) ( 0.4 ) ( 11.2 ) Segment operating income (loss) 5.1 7.6 2.3 9.0 ( 9.1 ) 14.9 Net operating income $ 14.9 Total assets at September 30, 2021 $ 82.0 $ 61.0 $ 13.1 $ 94.0 $ 53.7 $ 303.8 Total goodwill at September 30, 2021 $ 1.4 $ 47.4 $ 0.4 $ 33.5 $ — $ 82.7 Total capital expenditures for the three months ended September 30, 2021 $ 2.4 $ 0.6 $ 0.9 $ 1.5 $ 0.3 $ 5.7 19 Three Months Ended September 30, 2020 1 2 3 4 5 6 Gaming Virtual Sports Interactive Leisure Corporate Functions Total (in millions) Revenue: Service $ 27.2 $ 8.3 $ 3.5 $ 16.6 $ — $ 55.6 Product sales 3.7 — — 0.8 — 4.5 Total revenue 30.9 8.3 3.5 17.4 — 60.1 Cost of sales, excluding depreciation and amortization: Cost of service ( 5.8 ) ( 0.7 ) ( 0.4 ) ( 3.9 ) — ( 10.8 ) Cost of product sales ( 2.7 ) — — ( 0.6 ) — ( 3.3 ) Selling, general and administrative expenses ( 6.0 ) ( 0.8 ) ( 0.9 ) ( 9.6 ) ( 4.2 ) ( 21.5 ) Stock-based compensation expense ( 0.2 ) ( 0.1 ) ( 0.1 ) — ( 0.7 ) ( 1.1 ) Acquisition and integration related transaction expenses — — — — ( 1.2 ) ( 1.2 ) Depreciation and amortization ( 6.6 ) ( 1.0 ) ( 0.5 ) ( 5.4 ) ( 0.5 ) ( 14.0 ) Segment operating income (loss) 9.6 5.7 1.6 ( 2.1 ) ( 6.6 ) 8.2 Net operating income $ 8.2 Total assets at December 31, 2020 $ 93.9 $ 64.4 $ 8.5 $ 87.0 $ 70.3 $ 324.1 Total goodwill at December 31, 2020 $ 1.4 $ 48.0 $ 0.4 $ 33.9 $ — $ 83.7 Total capital expenditures for the three months ended September 30, 2020 $ 2.1 $ 1.2 $ 0.6 $ 1.1 $ 1.4 $ 6.4 Nine Months Ended September 30, 2021 1 2 3 4 5 6 Gaming Virtual Sports Interactive Leisure Corporate Functions Total (in millions) Revenue: Service $ 38.1 $ 25.0 $ 17.1 $ 43.1 $ — $ 123.3 Product sales 16.5 — — 2.1 — 18.6 Total revenue 54.6 25.0 17.1 45.2 — 141.9 Cost of sales, excluding depreciation and amortization: Cost of service ( 8.3 ) ( 1.3 ) ( 2.7 ) ( 11.6 ) — ( 23.9 ) Cost of product sales ( 9.5 ) — — ( 1.1 ) — ( 10.6 ) Selling, general and administrative expenses ( 19.2 ) ( 5.2 ) ( 4.0 ) ( 23.1 ) ( 16.6 ) ( 68.1 ) Stock-based compensation expense ( 1.1 ) ( 0.5 ) ( 0.4 ) ( 0.3 ) ( 6.3 ) ( 8.6 ) Acquisition and integration related transaction expenses — — — — ( 1.5 ) ( 1.5 ) Depreciation and amortization ( 17.7 ) ( 2.5 ) ( 2.5 ) ( 12.2 ) ( 1.3 ) ( 36.2 ) Segment operating income (loss) ( 1.2 ) 15.5 7.5 ( 3.1 ) ( 25.7 ) ( 7.0 ) Net operating loss $ ( 7.0 ) Total capital expenditures for the nine months ended September 30, 2021 $ 6.6 $ 2.5 $ 2.7 $ 6.3 $ 1.1 $ 19.2 Nine Months Ended September 30, 2020 1 2 3 4 5 6 Gaming Virtual Sports Interactive Leisure Corporate Functions Total (in millions) Revenue: Service $ 47.9 $ 23.7 $ 9.0 $ 33.1 $ — $ 113.7 Product sales 12.1 — — 2.2 — 14.3 Total revenue 60.0 23.7 9.0 35.3 — 128.0 Cost of sales, excluding depreciation and amortization: Cost of service ( 11.1 ) ( 2.2 ) ( 1.0 ) ( 7.5 ) — ( 21.8 ) Cost of product sales ( 8.3 ) — — ( 1.5 ) — ( 9.8 ) Selling, general and administrative expenses ( 17.9 ) ( 2.7 ) ( 2.7 ) ( 23.2 ) ( 14.2 ) ( 60.7 ) Stock-based compensation expense ( 0.4 ) ( 0.3 ) ( 0.2 ) — ( 2.2 ) ( 3.1 ) Acquisition and integration related transaction expenses — — — — ( 5.6 ) ( 5.6 ) Depreciation and amortization ( 21.0 ) ( 2.7 ) ( 1.7 ) ( 13.2 ) ( 1.3 ) ( 39.9 ) Segment operating income (loss) 1.3 15.8 3.4 ( 10.1 ) ( 23.3 ) ( 12.9 ) Net operating loss $ ( 12.9 ) Total capital expenditures for the nine months ended September 30, 2020 $ 5.4 $ 3.6 $ 1.8 $ 6.6 $ 4.4 $ 21.8 20 Geographic Information Schedule of Geographic Information Geographic information for revenue is set forth below: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) (in millions) Total revenue UK $ 58.6 $ 47.8 $ 99.4 $ 95.4 Greece 6.2 5.7 12.4 13.1 Rest of world 12.8 6.6 30.1 19.5 Total $ 77.6 $ 60.1 $ 141.9 $ 128.0 Geographic information of our non-current assets excluding goodwill is set forth below: September 30, 2021 December 31, 2020 (in millions) UK $ 88.6 $ 101.8 Greece 11.6 18.2 Rest of world 9.9 11.4 Total $ 110.1 $ 131.4 Software development costs are included as attributable to the market in which they are utilized. 17. Customer Concentration During the three months ended September 30, 2021, no customers represented at least 10% of the Company’s revenues. During the three months ended September 30, 2020, one customer represented at least 10% of revenues, accounting for 21 % of the Company’s revenues. This customer was served by the Gaming, Virtual Sports and Interactive segments. During the nine months ended September 30, 2021, no customers represented at least 10% of the Company’s revenues. During the nine months ended September 30, 2020, two customers represented at least 10% of revenues, accounting for 12 % and 10 % of the Company’s revenues. These customers were served by the Gaming, Virtual Sports and Interactive segments, and the Gaming and Virtual Sports segments, respectively. At September 30, 2021 and December 31, 2020, there were no customers that represented at least 10 % of accounts receivable. 18. Subsequent Events The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued. Other than as described below, which would not result in adjustment or disclosure in the consolidated financial statements, the Company did not identify subsequent events that would have required adjustment or disclosure in the consolidated financial statements. Subsequent to the balance sheet date, holders of the Company’s public warrants exercised 109,346 warrants for a total exercise price of $ 0.6 million, resulting in the issue of 54,673 common shares. As of November 9, 2021, there were 23,433,386 shares of the Company’s common stock outstanding. 21