Inspired Entertainment, Inc. 10-K/A

ITEM 7. 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 discussed in the section titled “Risk Factors” included elsewhere in this report. 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 start of this Annual Report on Form 10-K for the year ended December 31, 2022. 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. Historical seasonality has been impacted by COVID-19 business disruptions and could continue to be impacted in future periods. 37 COVID-19 Update During the twelve-month period ended December 31, 2021, all land-based operations were either subject to lockdown or had social distancing restriction in place. These social distancing measures continued throughout Greece and Italy until the second quarter of 2022, however, were no longer in place in the United Kingdom from July 2021, and therefore year on year comparisons may not be meaningful due to the COVID-19 impacts. Revenue We generate revenue in five principal ways: i) on a participation basis, ii) on a fixed rental fee basis, iii) through product sales, iv) through software license fees and v) managed service provision. 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 twelve months ended December 31, 2022, we derived approximately 74% of our revenue from the UK (including customers headquartered in the UK but whose revenue is generated globally), 8% from Greece, and the remaining 18% across the rest of the world. During the twelve months ended December 31, 2021, we derived approximately 72%, 9% and 19% of our revenue from those regions, respectively. As of December 31, 2022, our non-current assets (excluding goodwill) were attributable as follows: 79% to the UK, 6% to Greece and 15% cross 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 twelve months ended December 31, 2022, we derived approximately 26% of our revenue from sales to customers outside the UK, compared to 28% during the twelve months ended December 31, 2021. In the section “Results of Operations” below, currency impacts shown have been calculated as the current-period average GBP:USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP:USD rate. This is not a U.S. GAAP measure, but is one which management believes gives a clearer indication of results. In the tables below, variances in particular line items from period to period exclude currency translation movements, and currency translation impacts are shown independently. 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. 38 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 December 31, 2022 and December 31, 2021, the average GBP:USD rates were for the twelve-month period 1.23 and 1.37, 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 twelve-month period ended December 31, 2022, compared to the same period in 2021; 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 twelve-month periods ended December 31, 2022, compared to the same period in 2021, including KPI analysis. A discussion and analysis of the Company’s consolidated results of operation and results of operations for each of the Company’s segments for the twelve-month period ended December 31, 2021, compared to the same period in 2020, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2021 filed with the United States Securities and Exchange Commission (“SEC”) on March 31, 2022. With the exception of the goodwill impairment charge of $22.4 million that occurred during the year ended December 31, 2020, there were no significant changes in the trends, discussions and analyses included therein. Refer to Note 2, “Restatement of Previously Issued Consolidated Financial Statements,” of the accompanying audited financial statements for further details related to the Restatement and correction of errors and the impact on our consolidated financial statements and underlying financial data. In the discussion and analysis below, certain data may vary from the amounts presented in our consolidated financial statements due to rounding. Year-on-year comparisons may not be meaningful due to COVID-19 impacts in prior period, as noted above. 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. Restatement of Previously Issued Financial Statements On November 2, 2023, the Company, in concurrence with the Company’s audit committee, concluded that our 2023 and 2022 consolidated financial statements, included in our Annual Reports on Form 10-K as of December 31, 2022 and 2021 and for the fiscal years ended December 31, 2022, 2021, and 2020 (collectively the “Prior Period Financial Statements”), should no longer be relied upon due to misstatements that are described below, and that we would restate such financial statements to make the necessary accounting corrections. Details of the restated consolidated financial statements as of December 31, 2022 and 2021 and for the fiscal years ended December 31, 2022, 2021 and 2020 are more fully described in Note 2 of the notes to the financial statements included herein. The Company issued a revision for capitalized software and related amortization expense in the quarterly report on Form 10-Q filed on August 11, 2023 for the period ended June 30, 2023 to the numbers previously presented in the Form 10-K filed on March 16, 2023 for the year ended December 31, 2022 (the “Revision”). This revision related to certain completed software development projects were, but should not have been, delayed in the shift from work in progress to completed projects. Consequently, the commencement of amortization for certain projects was delayed and the reported amortization was lower than the actual amortization. This issue is distinct from the capitalized software restatements below. 39 Overall Company Results Twelve Months ended December 31, 2022, compared to Twelve Months ended December 31, 2021 For the Twelve-Month Variance Period ended 2022 vs 2021 (In millions) Dec 31, 2022 As Restated Dec 31, 2021 As Restated Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Revenue: Service $ 248.4 $ 180.2 $ (28.8 ) $ 97.0 53.8 % 37.8 % Product 33.2 25.6 (4.1 ) 11.7 45.7 % 29.7 % Total revenue 281.6 205.8 (32.9 ) 108.7 52.8 % 36.8 % Cost of Sales, excluding depreciation and amortization: Cost of Service (71.4 ) (51.8 ) 8.2 (27.8 ) 53.7 % 37.8 % Cost of Product (21.9 ) (17.8 ) 2.6 (6.7 ) 37.6 % 23.0 % Selling, general and administrative expenses (91.1 ) (77.3 ) 11.2 (25.0 ) 32.3 % 17.9 % Stock-based compensation (10.8 ) (13.0 ) 1.2 1.0 (7.7 %) (16.9 %) Acquisition and integration related transaction expenses (0.5 ) (1.6 ) 0.1 1.0 (62.5 %) (68.8 %) Depreciation and amortization (39.9 ) (48.8 ) 4.9 4.0 (8.2 %) (18.2 %) Net operating Income (Loss) 46.0 (4.5 ) (4.7 ) 55.2 (1226.7 %) (1122.2 %) Other income (expense) Interest expense, net (25.3 ) (44.3 ) 3.2 15.8 (35.7 %) (42.9 %) Change in fair value of warrant liability - 0.9 - (0.9 ) (100.0 %) (100.0 %) Profit on disposal of trade & assets 0.9 - 0.0 0.9 N/A N/A Other finance income (expense) 1.1 5.7 (0.1 ) (4.5 ) (78.9 %) (80.7 %) Total other income (expense), net (23.3 ) (37.7 ) 3.1 11.3 (30.0 %) (38.2 %) Net Income (loss) from continuing operations before income taxes 22.7 (42.2 ) (1.6 ) 66.5 (157.6 %) (153.8 %) Income tax expense (2.1 ) 1.6 0.3 (4.0 ) (250.0 %) (231.3 %) Net Income (Loss) $ 20.6 $ (40.6 ) $ (1.3 ) $ 62.5 (153.9 %) (150.7 %) Exchange Rate - $ to £ 1.23 1.37 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 Consolidated Reported Revenue by Segment ● VAT-related revenue for the twelve-months ended December 31, 2022 was $1.0 million, and for the twelve-months ended December 31, 2021 was $3.1 million. “VAT-related revenue” are payments from UK customers related to our contractual revenue share of their value-added tax rebate. For the twelve months ended December 31, 2022, revenue on a functional currency (at constant rate) basis increased by $108.7 million, or 52.8%. For the twelve-month period, Leisure and Gaming service revenue grew by $38.5 million and $30.4 million, respectively, predominately due to COVID-19 related closures and restrictions in the first six months of the prior year. Virtual Sports and Interactive grew by $25.6 million and $2.5 million, respectively, with $22.6 million of the Virtuals Sports increase from Online and $3.1 million from Retail. 40 Cost of Sales, excluding depreciation and amortization Cost of sales, excluding depreciation and amortization, for the twelve months ended December 31, 2022, increased by $34.5 million, or 50% The increase was driven by Cost of Service of $27.8 million due to COVID-19 related closures in the prior period, and a $6.7 million increase in Cost of Product. Selling, general and administrative expenses Selling, general and administrative (“SG&A”) expenses for the twelve months ended December 31, 2022 increased by $25.0 million, or 32.3%. The increase was driven primarily by the increase in staff cost of $22.6 million, due to the return of furloughed staff and return to full pay for the current period as well as wage inflation particularly increases in the ‘UK’s national living wage’ of 6.6% (The National Living Wage is an obligatory minimum wage payable to workers in the United Kingdom). Stock-based compensation During the twelve months ended December 31, 2022, the Company recorded expenses of $10.8 million, compared to expenses of $13.0 million, for the twelve months ended December 31, 2021. All expenses related to outstanding awards, but the twelve months ended December 31, 2021, included $1.4 million of shares that fully vested on the date of grant. Acquisition and integration related transaction expenses During the twelve months ended December 31, 2022, the Company recorded an expense of $0.5 million, compared to an expense of $1.6 million, for the twelve months ended December 31, 2021. Expenses in both years related to integration costs for the Company’s acquisition of both Gaming Technology Group of Novomatic UK Ltd., and acquisition costs of Sportech Lotteries, LLC as well as costs relating to potential acquisitions. Depreciation and amortization Depreciation and amortization decreased for the twelve-month period by $4.0 million. This was mostly driven by Gaming and Leisure with reductions of $2.9 million and $0.9 million. The decrease in Gaming was due to a decrease in software amortization as software becomes fully amortized and machine depreciation as machines in Greece become fully depreciated. Net operating income/(loss) During the twelve-month period, net operating income was $46.0 million, an increase of $55.2 million. These increases were attributable primarily to the increases in revenue driven by the COVID-19 closures and restrictions in 2021, as well as growth in online revenue and the decrease in depreciation, partly offset by an increase in Cost of sales and SG&A expenses. Interest expense, net Interest expense, net decreased by $15.8 million in the twelve-month period ended December 31, 2022, which was due to the refinancing in the previous year with savings due to lower debt interest of $0.6 million, lower debt fee amortization of $0.9 million and the $14.1 million write-off of debt fees relating to the previous debt. Change in fair value of warrant liability With the expiration of the warrants on December 23, 2021, the liability and the requirement to restate to fair value ceased to exist. For the twelve months ended December 31, 2021, the change in fair value of the warrant liability resulted in a gain of $0.9 million. Gain on disposal of business For the twelve-months ended December 31, 2022, gain on disposal of business was $0.9 million due to the sale of part of our Italian Gaming operations (see Gaming key events for more information). Other finance income Other finance income for the twelve months ended December 31, 2022, was a $1.1 million gain. This compares to a $5.7 million gain inclusive of $4.5m FX retranslation of the principle balance of our senior debt facilities for the twelve months ended December 31, 2021. 41 Income tax expense Our effective tax rate for the twelve months ended December 31, 2022 was (9.2%), compared to 3.8% for the twelve months ended December 31, 2021. Deferred Tax We recorded a valuation allowance against all of our deferred tax assets as of both December 31, 2022, and December 31, 2021. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve. Net Income/ (loss) During the twelve-month period, net income was $20.6 million, an increase of $62.5 million year-over-year, primarily due to an increase in net operating income $55.3 million, a decrease in interest expense, net $11.1 million, a decrease in other finance income and an increase in income tax expense of ($4.0 million). Segment Results ( for the twelve months ended December 31, 2022, compared to the twelve months ended December 31, 2021) Gaming We generate revenue from our Gaming segment through the delivery of our gaming terminals preloaded with proprietary gaming software, server-based content, as well as services such as terminal repairs, maintenance, software updates and upgrades on an when and if available basis and content development. 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 Twelve-Month Period ended Variance 2022 vs 2021 Gaming Dec 31, 2022 As Restated Dec 31, 2021 As Restated % End of period installed base (# of terminals) (3) 34,903 31,891 3,012 9.4 % Total Gaming - Average installed base (# of terminals) (3) 34,681 31,894 2,787 8.7 % Participation - Average installed base (# of terminals) (3) 31,268 29,189 2,079 7.1 % Fixed Rental - Average installed base (# of terminals) 3,412 2,705 707 26.1 % Service Only - Average installed base (# of terminals) 16,854 21,563 (4,709 ) (21.8 )% Customer Gross Win per unit per day (1) (2) (3) £ 91.0 £ 50.7 £ 40.3 79.5 % Customer Net Win per unit per day (1) (2) (3) £ 66.5 £ 37.7 £ 28.8 76.4 % Inspired Blended Participation Rate 5.7 % 6.4 % (0.7 %) Inspired Fixed Rental Revenue per Gaming Machine per week (2) £ 48.5 £ 26.3 £ 22.2 84.4 % Inspired Service Rental Revenue per Gaming Machine per week (2) £ 4.7 £ 3.4 £ 1.3 38.2 % Gaming Long term license amortization (£’m) £ 4.3 £ 5.0 £ (0.7 ) (14.0 %) Number of Machine sales 3,027 3,372 (345 ) (10.2 )% Average selling price per terminal £ 7,843 £ 4,436 £ 3,407 76.8 % (1) Includes all SBG terminals in which the Company takes a participation revenue share across all territories. (2) Includes all days of the year, including the days during which the Gaming terminals were not operating due to COVID-19 closures. (3) Includes circa 2,500 of lottery terminals (zero in the prior year) 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. 42 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 split by Participation terminals and Fixed Rental terminals. Therefore, it is more closely aligned to revenue in the period. We believe this measure is particularly useful for assessing existing customers or markets to provide comparisons of historical size and performance. This does not include Service Only terminals. “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”. 43 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 Twelve-Month Period ended Variance 2022 vs 2021 (In £ millions) Dec 31, 2022 As Restated Dec 31, 2021 As Restated % Gaming Recurring Revenue Total Gaming Revenue £ 90.4 £ 59.4 £ 31.0 52.2 % Gaming Participation Revenue £ 43.5 £ 27.7 £ 15.8 57.0 % Gaming Other Fixed Fee Recurring Revenue £ 12.6 £ 6.9 £ 5.7 82.6 % Gaming Long-term license amortization £ 4.3 £ 5.2 £ (0.9 ) (17.3 %) Total Gaming Recurring Revenue * £ 60.4 £ 39.8 £ 20.6 51.8 % Gaming Recurring Revenue as a % of Total Gaming Revenue † 66.8 % 67.0 % (0.2 %) Total Gaming excluding VAT-related revenue £ 89.6 £ 57.1 Gaming Recurring Revenue as a % of Total Gaming Revenue (excluding VAT-related revenue) 67.4 % 69.7 % * Does not reflect VAT-related revenue. † Total Gaming Revenue for the twelve-month period ended December 31, 2022 and 2021, includes £0.8 million and £2.3 million, respectively of VAT-related revenue, which is not reflected in Gaming Recurring Revenue for that period. Excluding VAT-related revenue, Gaming Recurring Revenue was 67% and 70%, respectively of Total Gaming Revenue for such period. Note – For the twelve-months ending December 31, 2022, there has been some recharacterization between Gaming Participation Revenue and Other Fixed fee revenue to ensure consistency with similar items across the Group. No changes to prior year. 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 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. 44 For the Twelve-Month Period ended Variance (In millions) Dec 31, 2022 Dec 31, 2021 2022 vs 2021 Total Functional Currency % Service Revenue: UK LBO $ 40.7 $ 30.3 $ 10.4 34.3 % 46.0 % UK VAT - Related Income 1.0 3.1 $ (2.1 ) (67.7 %) (65.5 %) UK Other 12.1 7.9 4.2 53.2 % 81.3 % Italy 2.7 2.2 0.5 22.7 % 37.7 % Greece 18.1 14.9 3.2 21.5 % 35.1 % Rest of the World 0.7 0.4 0.3 75.0 % 114.0 % Lotteries 5.1 - 5.1 NA NA Total Service revenue $ 80.4 $ 58.8 $ 21.6 36.7 % 51.7 % Exchange Rate - $ to £ 1.23 1.37 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, key events Total Gaming Customer Gross Win per unit per day (in our functional currency, GBP) for the twelve-months ended December 31, 2022, increased by £40.3, or 80%, to £91.0. Much of the increase is driven by retail venues being closed during the first quarter of 2021 and part of the second quarter as a result of COVID-19 restrictions. Another factor was our first year recognizing the newly acquired Lottery business, which includes just under 2,500 lottery terminals (zero in the prior year) where the share is on handle instead of net win and achieves Gross Win per unit per day figures above the average of the remaining Gaming sector. The overall participation rate for our installed base decreased from 6.4% for the twelve months ended December 31, 2021, to 5.7% in 2022. The decrease was due mainly to the new Lottery business, which delivers high gross win values at lower participation terms than the average of the remaining Gaming sector. The Lottery business operates close to 2,500 terminals in various locations in the Dominican Republic and has an agreement for the supply of these terminals until March 9, 2035. The twelve months of trading delivered $5.1 million of participation revenue. Inspired rolled out new content across the UK LBO estate during the months of April and May 2022, which resulted in Gaming Customer Gross Win per unit per day increasing by 4.8% from the second half of 2021 to the second half of 2022 (This comparison is used rather than full year to help separate the impact of Covid closure in the first half of 2021). 45 During the twelve-months ended December 31, 2022, Inspired recognized contractual performance bonuses of $2.0 million within UK LBO segment. The bonus payments were triggered by strong year-on-year growth in Gaming Customer Gross Win per shop. At the end of the second quarter of 2022, Inspired secured a five-year contract extension for service and content fees with one of its largest UK LBO customers. Over 400 “Vantage” terminals will go on trial during the first quarter of 2023 with the full roll out plan expected to commence in the fourth quarter of 2023, expecting to be complete by the end of first quarter of 2024. During the fourth quarter of 2022, Inspired’s two other major UK LBO customers signed up for new five-year and four-year contracts respectively. Both customers will refresh their estate with the new “Vantage” terminal on their own capital expenditure, all installations are expected to be complete by the end of 2023. During the twelve-month period, Inspired upgraded its Non-LBO UK gaming estate with the installation of 460 “Flex” and 700 “Prismatic” terminals through a combination of outright sales and lease agreements. In the Dutch gaming market, Inspired continued its strong relationship with a major customer, delivering outright sales of over 360 digital terminals, which included 100 in the third quarter and 160 in the fourth quarter. In the UK Casino market, Inspired installed 183 “Sabre Hydra” terminals into venues which completed the full machine order of over 200 machines with a major customer. In the North America market, Inspired sold 186 “Valor” terminals across a number of customers in Illinois. The total sales since launch in December 2019 are now over 880 terminals. Inspired delivered its second machine order to Western Canada Lottery Corporation (WCLC), our second jurisdiction in North America. Inspired completed the outright sale of 820 “Valor Clamshell” terminals in the fourth quarter 2022 which represents the highest single machine order. As part of the agreement, Inspired will take back the original 100 “Valor” terminals in the second quarter of 2023, these terminals will either redeployed in North America or converted for another market. During 2022, Inspired delivered the final 308 “Valor” terminals of a total 500-terminal award to OPAP (Greece) which include an upfront license fee, this takes Inspired’s contracted volumes to 9,440. Inspired rolled out new content during the third quarter, which has resulted in double-digit growth in Gaming Customer Gross Win per unit per day when compared to the second quarter. In the Italian market, Inspired has transitioned to a content and platform supplier only model beginning January 1, 2022, driving significant operating expense savings. Inspired sold a large portion of its business to a major machine operator, including customer contracts and “in country” staff. Gaming, Results of Operations For the Twelve-Month Period ended Variance 2022 vs 2021 (In millions) Dec 31, 2022 As Restated Dec 31, 2021 As Restated Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Revenue: Service $ 80.4 $ 58.8 $ (8.8 ) $ 30.4 51.7 % 36.7 % Product 30.9 22.6 $ (3.9 ) 12.2 54.0 % 36.7 % Total revenue 111.3 81.4 (12.7 ) 42.6 52.3 % 36.7 % Cost of Sales, excluding depreciation and amortization: Cost of Service (23.7 ) (17.3 ) $ 2.7 (9.1 ) 52.6 % 37.0 % Cost of Product (20.4 ) (15.0 ) $ 2.4 (7.8 ) 52.0 % 36.0 % Total cost of sales (44.1 ) (32.3 ) 5.1 (16.9 ) 52.3 % 36.5 % Selling, general and administrative expenses (23.8 ) (22.4 ) $ 3.0 (4.4 ) 19.6 % 6.3 % Stock-based compensation (1.6 ) (1.8 ) $ 0.2 0.0 (0.0 )% (11.1 )% Depreciation and amortization (19.6 ) (24.6 ) $ 2.1 2.9 (11.8 )% (20.3 )% Net operating Income (Loss) $ 22.2 $ 0.3 $ (2.3 ) $ 24.2 8067 % 7300 % Profit on disposal of trade & assets 0.9 - - 0.9 N/A N/A Net Income (Loss) $ 23.1 $ 0.3 $ (2.3 ) $ 25.1 8366 % 7600 % Exchange Rate - $ to £ 1.23 1.37 46 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 twelve-month period, Gaming revenue increased by $42.6 million, or 52%, this was driven by a $30.4 million increase in Service revenue and $12.2 million increase in Product revenue. The increase in Gaming Service revenue was driven by $20.4 million from the UK market, $5.2 million from the Greek market and $0.9 million from the Italian market, as all venues were open for the entire period compared to the prior period when the majority of the UK estate, all Greece retail venues and all Italy retail venues were shut for some of the period and had restrictions for the remaining. $5.6 million of the increase was due to the addition of the new Lotteries market and $0.4 million from the rest of the world. This was offset by lower VAT-related revenue of $2.1 million. Product revenue increase was primarily driven by higher Product sales of $9.3 million in North America, $3.3 million of UK sales and $1.6 million of higher spare sales , partly offset by lower sales of $2.1 million in Italy. Gaming Operating Income Operating income increased for the twelve-month period by $24.2 million. This increase was primarily due to the increase in revenues of $42.6 million and decrease in depreciation of $2.9 million, primarily due to the decrease in software amortization as software became fully amortized and due to a decrease in machine depreciation, as machines in Greece become fully depreciated. This was partially offset by an increase in Cost of sales of $16.9 million related to higher revenues and increase of $4.4 million in SG&A, as staff returned from furlough or to full salary. Gaming Net Income For the twelve-month period, Net income increased by $25.1 million, from an income of $0.3 million to an income of $23.1 million. This was due to the increase in Operating income and a $0.9 million profit from the disposal of trade and assets from the sale of part of the Italian VLT operations (see Gaming key events for more information). Virtual Sports We generate revenue from our Virtual Sports segment through the on premise licensing 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. 47 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 Twelve-Month Period ended Variance 2022 vs 2021 Dec 31, 2022 As Restated Dec 31, 2021 As Restated % Virtuals No. of Live Customers at the end of the period 66 61 5 8.2 % Average No. of Live Customers 65 60 5 8.3 % Total Revenue (£’m) £ 44.1 £ 25.4 £ 18.7 73.6 % Total Revenue £’m - Retail £ 9.0 £ 6.6 £ 2.4 36.4 % Total Revenue £’m - Online Virtuals £ 35.2 £ 18.8 £ 16.4 87.2 % 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 Twelve-Month Period ended Variance 2022 vs 2021 (In £ millions) Dec 31, 2022 As Restated Dec 31, 2021 As Restated % Virtual Sports Recurring Revenue Total Virtual Sports Revenue £ 44.1 £ 25.4 £ 18.7 73.6 % Recurring Revenue - Retail Virtuals £ 8.7 £ 6.6 £ 2.1 31.8 % Recurring Revenue - Online Virtuals £ 35.1 £ 18.1 £ 17.0 93.9 % Total Virtual Sports Long-term license amortization £ - £ 0.3 £ (0.3 ) (100 %) Total Virtual Sports Recurring Revenue £ 43.8 £ 25.0 £ 18.8 75.2 % Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue 99.3 % 98.4 % 0.9 48 “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, key events During the period, we launched Virtual Horse racing with the DC Lottery into their lottery locations. New contracts were signed with Scientific Games for Virtual Sports content to be sold to Netherlands Lottery (NLO), Goldbet covering the provision of Virtual Sports into both their retail and online channels in Italy and a contract for Class 4 VLT games in Ladbrokes Belgium retail. We signed a long-term extension to our contract with Betfred covering the provision of Virtual Sports into their retail LBO estate in the UK. In addition, we signed contract term extensions with Bet Victor, Sisal (Italy), Niké, spol. s r.o (Slovakia) and additional territories were added to our contract with Kaizen Gaming. A new Virtuals Plug and Play contract was signed with Morocco Lottery and launched, plus an extension to the retail contract. We launched Virtuals Women’s Soccer to coincide with UEFA Women’s Euro 2022. We also launched Matchday multi-stream with one of our biggest online customers and Matchday Ultra 2 and Soccer Ultra 2 with SNAI (Italy) retail and online, and optimized OPAP retail schedule increasing the frequency of events and added product enhancements. We also signed a long-term extension to our contract with 49’s . Virtual Sports, Results of Operations For the Twelve-Month Period ended Variance 2022 vs 2021 (In millions) Dec 31, 2022 As Restated Dec 31, 2021 As Restated Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Service Revenue $ 54.2 $ 35.0 $ (6.4 ) $ 25.6 73.1 % 54.9 % Cost of Service (1.8 ) (1.2 ) 0.2 (0.8 ) 66.7 % 50.0 % Selling, general and administrative expenses (8.0 ) (7.7 ) 1.0 (1.3 ) 16.9 % (3.9 %) Stock-based compensation (0.7 ) (0.8 ) 0.1 0.0 0.0 % (12.5 )% Depreciation and amortization (2.7 ) (3.8 ) 0.3 0.8 (21.1 %) (28.9 )% Net operating Income (Loss) $ 41.0 $ 21.5 $ (4.8 ) $ 24.3 113.0 % 90.7 % Exchange Rate - $ to £ 1.23 1.37 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 twelve-month period, revenue increased by $25.6 million, or 73%. This increase was driven by $23.3 million increase in Online Virtuals, primarily driven by the growth from our existing online customers along with expanding jurisdictions, as well as increases in Retail Virtuals of $2.6 million, due to retail venues being open for the whole of the period compared to the prior period. Virtual Sports operating income Operating income increased by $24.3 million in the twelve-month period. This increase was primarily due to the increase in revenue of $25.6 million and a decrease in depreciation and amortization of $0.8 million, partly offset by an increase of $0.8 million of cost of sales. Interactive We generate revenue from our Interactive segment through various games content made available via third party aggregation platforms integrated with Inspired’s remote gaming server or directly on the Company’s remote gaming servers 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. 49 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 Twelve-Month Period ended Variance 2022 vs 2021 Interactive Dec 31, 2022 Dec 31, 2021 % No. of Live Customers at the end of the period 130 109 21 19.3 % Average No. of Live Customers 125 100 25 25.0 % No. of Live Games at the end of the period 270 232 38 16.4 % Average No. of Live Games 254 216 38 17.6 % Total Revenue (£’m) £ 16.7 £ 15.0 £ 1.7 11.3 % 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 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, Recurring Revenue All Interactive revenue in both years was recurring. Interactive, key events During the period ended December 31, 2022, we undertook 49 new brand launches, 24 during the first half of 2022 and 25 during the second half of 2022. We expanded territories with Bet365, BetMGM and Gamesys in Ontario, along with DraftKings in New Jersey, Connecticut and Pennsylvania and Rush Street Interactive in Michigan and Pennsylvania. We also expanded into Pennsylvania with BetMGM. We deployed 34 new games in the year, 20 new games in the first half of the year, including Big Egyptian Fortune TM and Big Wheel Bonus TM and 14 new games in the second half, including Cops N Robbers Big Money TM and Santa Linking TM . Loto-Quebec launched our first iLottery title with Pharaon Reaction TM in the first half of 2022 and followed up with a second title in the second half of 2022. 50 Interactive, Results of Operations For the Twelve-Month Period ended Variance 2022 vs 2021 (In millions) Dec 31, 2022 As Restated Dec 31, 2021 As Restated Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Service Revenue $ 20.6 $ 20.7 $ (2.6 ) $ 2.5 12.1 % 0.5 % Cost of Service (1.3 ) (1.8 ) 0.2 0.3 16.7 % (27.8 %) Selling, general and administrative expenses (8.0 ) (6.8 ) 0.9 (2.1 ) 30.9 % 17.6 % Stock-based compensation (0.7 ) (0.6 ) 0.1 (0.2 ) 33.3 % 16.7 % Depreciation and amortization (2.0 ) (2.7 ) 0.2 0.5 (18.5 %) (25.9 %) Net operating Income (Loss) $ 8.6 $ 8.8 $ (1.2 ) $ 1.0 11.4 % 2.3 % Exchange Rate - $ to £ 1.22 1.37 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 twelve-month period, revenue increased by $2.5 million, primarily driven by recurring revenue growth due to the consistent launch of new content across the estate, growth in the customer base in new, emerging and core markets and increased promotional activity through exclusive deals with tier-one customers. Interactive operating income Operating income for the twelve-month period increased by $1.0 million. This increase was driven by the increase in revenue, partially offset by a $2.1 million increase in SG&A expenses driven by the investment in the segment to help drive revenues and for staff returning from furlough and to full pay. 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. 51 Leisure, Key Performance Indicators For the Twelve-Month Period ended Variance 2022 vs 2021 Leisure Dec 31, 2022 Dec 31, 2021 % End of period installed base Gaming machines (# of terminals) 11,008 11,418 (410 ) (3.6 )% Average installed base Gaming machines (# of terminals) 10,960 11,576 (616 ) (5.3 )% End of period installed base Other (# of terminals) 4,646 6,838 (2,192 ) (32.1 )% Average installed base Other (# of terminals) 5,306 7,080 (1,774 ) (25.1 )% Pub Digital Gaming Machines - Average installed base (# of terminals) 6,102 6,087 15 0.2 % Pub Analogue Gaming Machines - Average installed base (# of terminals) 1,334 2,092 (758 ) (36.2 )% MSA and Bingo Gaming Machines - Average installed base (# of terminals) (1) 3,216 3,204 12 0.4 % Inspired Leisure Revenue per Gaming Machine per week £ 64.3 £ 36.9 £ 27.4 74.3 % Inspired Pub Digital Revenue per Gaming Machine per week £ 68.6 £ 36.2 £ 32.4 89.5 % Inspired Pub Analogue Revenue per Gaming Machine per week £ 38.3 £ 22.5 £ 15.8 70.2 % Inspired MSA and Bingo Revenue per Gaming Machine per week £ 91.0 £ 50.3 £ 40.7 80.9 % Inspired Other Revenue per Machine per week £ 19.7 £ 11.0 £ 8.7 79.1 % Total Holiday Parks Revenue (Gaming and Non Gaming) (£’m) £ 30.0 £ 21.1 £ 8.9 42 % (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, 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, Recurring Revenue Set forth below is a breakdown of our Leisure recurring revenue which consists principally of Leisure participation revenue and Leisure other fixed fee revenue. See “Leisure Segment Revenue” below for a discussion of leisure service revenue between the periods under review. For the Twelve-Month Period ended Variance 2022 vs 2021 (In £ millions) Dec 31, 2022 As Restated Dec 31, 2021 As Restated % Leisure Recurring Revenue Total Leisure Revenue £ 77.7 £ 50.0 £ 27.7 55.4 % Total Leisure Recurring Revenue £ 75.4 £ 47.9 £ 27.5 57.4 % Leisure Recurring Revenue as a Percentage of Total Leisure Revenue 97.0 % 95.8 % 1.2 52 Leisure, key events During the twelve-month period ended December 31, 2022 the holiday parks business delivered record sales and we successfully contracted another Butlins site, which started earning income in January 2023 making Inspired the sole supplier of amusement and gaming machines for Butlins for the next seven years, and we secured a new five-year deal with Haven. In the Pubs sector we successfully renewed our contract with Greene King for a further three years and increased our share of the estate from 36% to 42%. We signed a three-year extension with Mitchells and Butler and were reappointed as a supplier to Marstons for a further four years. We also divested our prize vend assets in the estate to allow focus on core gaming products with increased margins, which is the reason for the decline in Other installed base year on year. During the year we have deployed several new titles across the pubs estate, including ‘Cops n Robbers Bank Buster’, Space Invaders, ‘Centurion’ ‘Gold Cash Freespins’ and “Party Time Pub Addition’ demonstrating our commitment to leveraging Inspired’s successful game portfolio for the pub sector. Leisure, Results of Operations For the Twelve-Month Period ended Variance 2022 vs 2021 (In millions) Dec 31, 2022 As Restated Dec 31, 2021 As Restated Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Revenue: Service $ 93.2 $ 65.7 $ (11.0 ) $ 38.5 58.6 % 41.8 % Product 2.3 3.0 (0.2 ) (0.5 ) (16.7 %) (23.3 %) Total revenue 95.5 68.7 (11.2 ) 38.0 55.3 % 39.0 % Cost of Sales, excluding depreciation and amortization: Cost of Service (44.6 ) (31.5 ) 4.9 (18.0 ) 57.1 % 41.6 % Cost of Product (1.5 ) (2.8 ) 0.0 1.3 (46.4 %) (46.4 %) Total cost of sales (46.1 ) (34.3 ) 4.9 (16.7 ) 48.7 % 34.4 % Selling, general and administrative expenses (25.4 ) (19.5 ) 3.2 (9.1 ) 46.7 % 30.3 % Stock-based compensation (0.6 ) (0.6 ) 0.1 (0.1 ) 16.7 % 0.0 % Depreciation and amortization (13.5 ) (15.9 ) 1.5 0.9 (5.7 %) (15.1 %) Net operating Income (Loss) 9.9 (1.6 ) $ (1.5 ) $ 13.0 (812.5 %) (718.8 %) Exchange Rate - $ to £ 1.23 1.37 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 twelve-month period, revenue increased by $38.0 million, or 55%, respectively, as our business benefitted from no COVID-19 closures and fewer social distancing restrictions and growth in Service revenue. Service revenue increased by $38.5 million, driven by all markets being open for the whole of the period, particularly Pubs ($14.1 million), Holiday parks ($12.3 million), Motorway service areas ($8.1 million) and Bingo Halls ($2.3 million). Leisure Operating Income/ (Loss) Operating income for the twelve-month period improved by $13.0 million, from a loss of $1.6 million to income of $9.9 million. This was primarily due to the increase in revenue as venues reopened and COVID-19 restrictions were removed, as well as a reduction in depreciation and amortization of $0.9 million. This was partially offset by increases in Cost of sales ($16.7 million) and SG&A expenses ($9.1 million), due to staff returning from furlough and to full pay and in the later months from the increase in the UK national living wage. 53 Non-GAAP Financial Measures We use certain non-GAAP financial measures, including EBITDA and Adjusted 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. This does not include any adjustments related to COVID-19. 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. 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. 54 Reconciliations from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Income (Loss), to Adjusted EBITDA are shown below. Reconciliation to Adjusted EBITDA by segment for the Twelve Months ended December 31, 2022 For the Twelve-Month Period ended Dec 31, 2022 As Restated (In millions) Statutory Heading Total Gaming Virtual Sports Interactive Leisure Corporate Net Income/ (loss) Net Income $ 20.6 $ 23.1 $ 41.0 $ 8.6 $ 9.9 $ (62.0 ) Items Relating to Legacy Activities: Pension charges (1) SG&A $ 0.7 0.7 Items outside the normal course of business: Acquisition and integration related transaction expenses (2) SG&A $ 0.5 - 0.5 Acquisition and integration related transaction expenses (2) Cost of Sale $ 0.6 0.3 0.3 - Litigation Settlement (3) SG&A $ 0.5 0.5 - Stock-based compensation expense (4) Stock-based compensation expense $ 10.8 1.6 0.7 0.7 0.6 7.2 Depreciation and amortization (4) Depreciation and amortization $ 39.9 19.6 2.7 2.0 13.5 2.1 Interest expense net (4) Interest expense net $ 25.3 25.3 Profit on disposal of trade & assets (5) Profit on disposal of trade & assets $ (0.9 ) (0.9 ) - Other finance expenses / (income) (4) Other finance expenses / (income) $ (1.1 ) (1.1 ) Income tax (4) Income tax $ 2.1 2.1 Adjusted EBITDA $ 99.0 $ 43.7 $ 44.9 $ 11.3 $ 24.3 $ (25.2 ) Adjusted EBITDA £ 80.3 £ 35.3 £ 36.5 £ 9.1 £ 19.7 £ (20.3 ) Exchange Rate - $ to £ (6) 1.23 Note: Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these costs are not allocable and to do so would not be practical; these are shown in the Corporate category. 55 Reconciliation to Adjusted EBITDA by segment for the Twelve Months ended December 31, 2021 For the Twelve-Month Period ended Dec 31,2021 As Restated (In millions) Statutory Heading Total Gaming Virtual Sports Interactive Leisure Corporate Net Income/ (loss) $ (40.6 ) $ 0.3 $ 21.5 $ 8.8 $ (1.6 ) $ (69.6 ) Items Relating to Legacy Activities: Pension charges (1) SG&A 0.8 0.8 Items outside the normal course of business: Acquisition and integration related transaction expenses (2) SG&A 1.6 1.6 Refinancing of Company Debt (7) SG&A 0.8 0.8 Italian tax related costs relating to prior years (8) SG&A 1.4 1.4 - Stock-based compensation expense (4) Stock-based compensation expense 13.0 1.8 0.8 0.6 0.6 9.2 Depreciation and amortization (4) Depreciation and amortization 48.8 24.6 3.8 2.7 15.9 1.8 Interest expense net (4) Interest expense net 44.3 44.3 Change in fair value of warrant liability (4) Change in fair value of warrant liability (0.9 ) (0.9 ) Other finance expenses / (income) (4) Other finance expenses / (income) (5.7 ) (5.7 ) Income tax (4) Income tax (1.6 ) (1.6 ) Adjusted EBITDA $ 61.9 $ 26.7 $ 27.5 $ 12.1 $ 14.9 $ (19.3 ) Adjusted EBITDA £ 45.1 £ 19.6 £ 20.0 £ 8.7 £ 10.8 £ (14.0 ) Exchange Rate - $ to £ (6) 1.37 Note: Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these costs are not allocable and to do so would not be practical; these are shown in the Corporate category. 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) Acquisition and integration related transaction expenses, are as described above in the Results of Operations line item discussions. For 2022 this includes a write-off of inventory items related to the integration of Gaming Technology Group of Novomatic UK Ltd. (3) “Litigation Settlement” refers to full and final settlement of a contractual dispute relating to a Development Services and Management Agreement. 56 (4) Stock-based compensation expense, Depreciation and amortization, Total other expense, net and Income tax are as 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) “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. (6) 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. (7) In May 2021, the Company refinanced its debt. These are outside of the write off of old debt fees recognized in the interest line. (8) “Italian tax related costs relating to prior years invoicing” relate to a settlement with the Italian Tax Authorities in respect of an audit for the period 2015-2017 in respect of the historic VAT treatment of supplies. Liquidity and Capital Resources Twelve Months ended December 31, 2022, compared to Twelve Months ended December 31, 2021 Cash Flow Summary - A Two Year Comparative Twelve Months ended Variance (in millions) Dec 31, Dec 31, 2022, As Restated 2021, As Restated 2022 to 2021 Net profit/(loss) $ 20.6 ($ 40.6 ) $ 61.2 Amortization of debt fees 1.8 17.2 (15.4 ) Change in fair value of derivative and warrant liabilities and stock-based compensation expense 11.5 13.6 (2.1 ) Foreign currency translation on senior bank debt and cross currency swaps 0.0 (4.7 ) 4.7 Depreciation and amortization (incl RoU assets) 43.4 53.3 (9.9 ) Gain on disposal of business (0.9 ) 0.0 (0.9 ) Contract cost additions (7.2 ) (6.3 ) (0.9 ) Other net cash utilized by operating activities (44.5 ) (30.1 ) (14.4 ) Net cash provided by operating activities 24.7 2.4 22.3 Net cash used in investing activities (32.6 ) (32.4 ) (0.2 ) Net cash (used)/generated by financing activities (11.0 ) 31.2 (42.2 ) Effect of exchange rates on cash (3.9 ) (0.5 ) (3.4 ) Net decrease in cash and cash equivalents ($ 22.8 ) $ 0.7 ($ 23.5 ) Net cash provided by operating activities For the twelve months ended December 31, 2022, net cash inflow provided by operating activities was $24.7 million, compared to a $2.4 million inflow for the twelve months ended December 31, 2021, representing a $22.3 million increase in cash generation. This increase was driven primarily by trading levels through increases in our online businesses and the worldwide trading restrictions in the previous year resulting from the COVID-19 pandemic. Amortization of debt fees decreased by $15.4 million, to $1.8 million, due to the reduction in the level of capitalized debt fees after May 2021 following the Company’s refinancing of its debt and the $14.4 million write off of the remaining debt fees from the previous financing arrangement. Change in the fair value of derivative and warrant liabilities and stock-based compensation expense decreased by $2.1 million, from $13.6 million to $11.5 million. A lower stock-based compensation expense ($2.2 million) and a lower gain relating to terminated cross currency swaps ($0.8 million) was partly offset by movements in the fair value of warrant liabilities in the prior year ($0.9 million). Following the refinancing in May 2021, there has been no foreign currency translation on senior bank debt and cross currency swaps. In the twelve months ended December 31, 2021, the foreign currency translation on senior bank debt and cross currency swaps resulted in a loss of $4.7 million as a result of the movement in exchange rates during the period. Depreciation and amortization decreased by $9.9 million, to $43.4 million, with reductions of $4.5 million in machine depreciation, $4.5 million in amortization of intangible assets and $1.0 million in amortization of right of use assets. For the twelve-months ended December 31, 2022, gain on disposal of business was $0.9 million due to the sale of part of our Italian Gaming operations (see Gaming key events for more information). Contract cost additions increased by $0.9 million to $7.2 million in the twelve months ended December 31, 2022. Other net cash utilized by operating activities increased by $14.4 million, to a $44.5 million outflow. The relative movements between the twelve months ended December 31, 2022 and the twelve months ended December 31, 2021 resulted in a $19.9 million outflow through increased inventory holding as Inspired made the strategic decision to secure components and protect sales in a challenging global supply chain market and a $7.3 million increase in receivables due to timing of sales. These were offset by relative favorable movements between the twelve months ended December 31, 2022 and the twelve months ended December 31, 2021 for prepayments and accrued income of $8.2 million due to lower trading levels at the start of the previous year and interest accruals of $5.0 million following the debt refinancing in May 2021. 57 Net cash used in investing activities Net cash utilized in investing activities increased by $0.2 million, to $32.6 million in the twelve months ended December 31, 2022. This was driven by higher spend on plant, property and equipment (a $10.9 million increase compared to 2021) and capitalized software (a $2.5 million increase compared to 2021) due to spending in the previous year being low as a result of the pandemic. These were largely offset by the $12.5 million acquisition of Sportech Lotteries, LLC on December 31, 2021 for which the twelve months ended December 31, 2022 included the final payment of $0.6 million. Net cash (used)/generated by financing activities During the twelve months ended December 31, 2022, net cash utilized by financing activities was $11.0 million, $10.5 million of which related to the Company’s repurchase of its common shares under the Share Repurchase Program and $0.5 million of which related to finance lease spend. During the twelve months ended December 31, 2021, financing activities generated $31.2 million of cash following the receipt of $30.5 million proceeds from the warrant exercise and a net $1.3 million from the refinancing in May 2021 after payment of associated fees less a spend of $0.6 million on finance leases. Funding Needs and Sources To fund our obligations, historically we have relied on a combination of cash flows provided by operations and the incurrence of additional debt or the refinancing of existing debt. As of December 31, 2022, we had liquidity consisting of $25.0 million in cash and cash equivalents and a further $24.1 million of undrawn revolver facility. This compares to $47.8 million of cash and cash equivalents as of December 31, 2021, with a further $27.0 million of revolver facilities undrawn. We had a working capital outflow of $44.5 million for the twelve months ended December 31, 2022, compared to a $30.1 million outflow for the twelve months ended December 31, 2021. The level of our working capital surplus or deficit varies with the level of machine production 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, 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 which were seen during 2021 following the COVID-19 closures, 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 December 31, 2022, $2.5 million of our $25.0 million of cash and cash equivalents were held as operational floats within the machines. At December 31, 2021, $2.7 million of our $47.8 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 March 2024. 58 Long Term and Other Debt (In millions) December 31, 2022 December 31, 2021 Cash held £ 20.8 $ 25.0 £ 35.4 $ 47.8 Original principal senior debt (235.0 ) (282.9 ) (235.0 ) (316.7 ) Cash interest accrued (1.5 ) (1.8 ) (1.6 ) (2.1 ) Finance lease creditors (1.8 ) (2.2 ) (2.1 ) (2.8 ) Total £ (217.5 ) $ (261.9 ) £ (203.3 ) $ (273.8 ) Debt Covenants Under our debt facilities in place as of December 31, 2022, 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 6.25x 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 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 December 31, 2022 showed covenant compliance. There were no breaches of the debt covenants in the periods ended December 31, 2022 or December 31, 2021. Liens and Encumbrances As of December 31, 2022, 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 and as of December 31, 2022, an aggregate of $10.5 million of our shares of common stock had been repurchased. Contractual Obligations As of December 31, 2022, our contractual obligations were as follows: Less than More than Contractual Obligations (in millions) Total 1 year 1-2 years 3-5 years 5 years Operating activities Interest on long term debt $ 77.9 $ 22.2 $ 44.6 $ 11.1 $ - Financing activities Senior bank debt - principal repayment 282.9 - - 282.9 - Finance lease payments 2.2 1.0 1.2 - - Operating lease payments 16.3 3.9 6.1 2.8 3.4 Interest on non-utilization fees 1.0 0.3 0.7 - - Total $ 380.3 $ 27.4 $ 52.6 $ 296.9 $ 3.4 59 Off-Balance Sheet Arrangements As of December 31, 2022, 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 accounting principles generally accepted in the United States (“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.     For a discussion of other recently issued accounting standards, and assessments as to their impacts on the Company, see 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. 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 revenues of $248.4 million and $33.2 million, respectively, for the year ended December 31,2022. 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. 60 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 December 31, 2022, total goodwill with the Virtual Sports, Leisure, and two Gaming reporting units is $42.3 million, $1.7 million, $8.8 million, and $2.8 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, 2022, 2021, and 2020 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. During the first quarter of 2020, as a result of the COVID-19 pandemic and all venues offering land-based gaming, including our products, were closed for an indeterminate period of time in the jurisdictions in which we operate through governmental mandate, the Company concluded these triggering events could indicate possible impairment of its goodwill in the Server Based Gaming (“SBG”) and Acquired Businesses (“ACB”) reporting units. The Company performed a quantitative and qualitative impairment analysis and determined that goodwill within the Acquired Businesses reporting unit was fully impaired. The Company performed an income approach on all reporting units in order to reconcile the fair values of the aggregate reporting units to the Company’s market capitalization, implying a control premium ranging from 10.6% on a total invested capital basis (30 day prior average) to 18.5% on a total invested capital basis (as of March 31, 2020). The Virtual Sports and Interactive reporting units had headroom significantly in excess of 100%, and no triggering event occurred for these businesses. For the remaining two reporting units, there were triggering events and significant assumptions existed in the impairment analyses. For the Server Based Gaming reporting unit, the headroom was 15% and therefore no impairment existed. For the Acquired Businesses reporting unit, there was no headroom and a full impairment of $20.7M was recorded in the consolidated statement of earnings (loss) for the year ended December 31, 2020 on a pre-tax basis. 61 Significant assumptions utilized in the impairment analyses for SPG were projected revenue, projected EBITDA margin, and discount rate. Projected revenue based on a 6-year CAGR was .2% for SBG. A 1.0% decrease in the annual projected revenue growth rate would have resulted in a reduction in headroom for SBG to 7.2%. A 1.0% decline in the projected EBITDA margin would have resulted in a reduction in headroom for SBG to 4.4%. The discount rates utilized in the discounted cash flow analyses was 13.5% and a resulting. A 1.0% increase in the discount rate for SBG would have resulted in an impairment implying a 1.0% Fair Value deficit to SBG’s carrying value. An increase in projected revenue or EBITDA margin growth or a decrease in discount rate would have increased the headroom in SPG. Management utilized their best estimates in the SPG analysis, Significant assumptions utilized in the analysis for ACB were: projected revenue, projected EBITDA margin, and discount rate. Projected revenue based on a 6-year CAGR was 2.9% for ACB,. A 1.0% increase in the annual projected revenue growth would have resulted in a 9.7% decline in the goodwill impairment recorded for ACB. A 1.0% increase in the projected EBITDA margin would have resulted in a 22.8% decline in the goodwill impairment recorded for ACB. The discount rates utilized in the discounted cash flow analyses were 16.5%. A 1.0% decrease in the discount rate for ACB would have resulted in a 9.7% decline in the goodwill impairment recorded to ACB. Given the full impairment of ACB, a decrease in projected revenue or EBITDA margin or an increase in discount rate would have no change in the level of goodwill impairment taken. Management utilized their best estimates in the ACB analysis, Information regarding our 2020 impairment analyses can be found under the caption “Note 9 “Intangible Assets and Goodwill” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. 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. During the first quarter of 2020, as a result of the COVID-19 pandemic and all venues offering land-based gaming, including our products, were closed for an indeterminate period of time in the jurisdictions in which we operate through governmental mandate, the Company concluded these triggering events could indicate possible impairment of its long-lived tangible and intangible assets in the asset groups within the Server Based Gaming and Acquired Businesses reporting units. The Company performed a quantitative and qualitative impairment analysis and determined that all its asset groups within Server Based Gaming and Acquired businesses had a triggering event. As a result, the Company performed a recoverability test and determined all asset groups were recoverable under the undiscounted cash flow recoverability test other than Playnation, for which the intangible assets were fully impaired but tangible long-lived assets had no impairments.. As such, step 2 was performed and resulted in a $1.3 million and $0.5 million impairment for customer relationships and trademarks intangible assets, respectively, on a pre-tax basis and the Company recorded the total impacts of the impairments on its consolidated statement of earnings (loss) for the year ended December 31, 2020. While evaluating the significance of and sensitizing various assumptions, Management determined that there were no individual assumptions that, within a reasonable range, would have altered the asset group impairment results. Management determined that there were no new indicators of impairment for the years ended December 31, 2022 and 2021 and the Company concluded that there was no impairment of the Company’s intangible and long-lived assets as of December 31, 2022 and 2021. 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 Information regarding our 2020 impairment analyses can be found under the caption “Note 9 “Intangible Assets and Goodwill” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. 62