Inspired Entertainment, Inc. 10-K

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 twelve month period ended December 31, 2023. 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. 38 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, 2023, we derived approximately 78% of our revenue from the UK (including customers headquartered in the UK but whose revenue is generated globally), 8% from Greece, and the remaining 14% across the rest of the world. The UK percentage was impacted by specific Hardware sales, which generally result in a lower margin (“Low Margin sales”), this increased UK revenue for the twelve-month period by 13%. During the twelve months ended December 31, 2022, we derived approximately 74%, 8% and 18% of our revenue from those regions, respectively. As of December 31, 2023, our non-current assets (excluding goodwill) were attributable as follows: 71% to the UK, 12% to Greece and 17% across the rest of the world. As of as of December 31, 2022, our non-current assets (excluding goodwill) were attributable as follows: 79% to the UK, 6% to Greece and 15% across the rest of the world. Foreign Exchange Our results are affected by changes in foreign currency exchange rates because 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 GBP is 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, 2023, we derived approximately 22% of our revenue from sales to customers outside the UK, compared to 26% during the twelve months ended December 31, 2022. 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 measure used in generally accepted accounting principles in the United States (“U.S. GAAP” or “GAAP”), 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. Key Events During the twelve-month period in the Gaming segment, we completed the full rollout of 6,300 “Vantage” terminals into two major customers, the majority of which are “Low Margin sales” resulting in $30.6m of revenue in the year, in addition to refreshing the Greek estate with the delivery of 2,000 new “Valor” and 500 new “Vantage” terminals. Inspired announced the launch of a new VLT system for Codere in partnership with Cristaltec and went live with a third North American territory with the commencement of a six-month trial of “Valor” terminals. The Virtual Sports segment announced a new partnership with Aristocrat Gaming™ to bring a new virtual sports experience to football fans worldwide through their global licensing agreement with the NFL. The Interactive segment went live with thirty new operators including 32Red, AGLC, the Score, PlanetWin 365 (Italy), ATG (Sweden), Crowd Entertainment, Hard Rock, Holland Casino and ESPN. The Leisure segment commenced operations at a new Holiday Park location with operator Butlins and successfully concluded the technical trial of our new “Vantage” Category C cabinet with the commercial trial commencing in the final quarter. Agreements signed in the year include a new four-year agreement with BoyleSports (Gaming Segment). Long-term contract extensions with SNAITech and bet365 and a new contract, which resulted in the live launch with Mozzartbet for V-Play Plug & Play™ in three new African territories (Virtual Sports segment). A new four-year agreement with Stonegate Group, one of the largest UK operators of Pubs in the managed, leased and tenanted sectors, a three-year agreement with Whitbread and a five-year contract renewal with JD Wetherspoon for the supply of over 2,000 Category C gaming machines (for use in Pubs and other Alcohol licensed venues, plus Bingo halls) strengthening our position in the Pubs sector with a new agreement signed with Verdant and a contract extension with Center Parcs (Leisure segment). 39 Non-GAAP Financial Measures We use certain financial measures that are not compliant with U.S. GAAP (“Non-GAAP financial measures”), including EBITDA and Adjusted EBITDA, to analyze our operating performance. In this discussion and analysis, we present certain non-GAAP financial measures, define and explain these measures and provide reconciliations to the most comparable U.S. GAAP measures. See “Non-GAAP Financial Measures” below. Results of Operations Our results are affected by changes in foreign currency exchange rates, primarily between our functional currency (GBP) and our reporting currency (USD). During the periods ended December 31, 2023 and December 31, 2022, the average GBP:USD rates were for the twelve-month period 1.25 and 1.23, 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, 2023, compared to the same period in 2022; 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, 2023, compared to the same period in 2022, 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, 2022, compared to the same period in 2021, 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/A for the fiscal year ended December 31, 2022 filed with the SEC on February 27, 2024. 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. 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. 40 Overall Company Results Twelve Months ended December 31, 2023, compared to Twelve Months ended December 31, 2022 For the Twelve-Month Variance Period ended December 31, 2023 vs December 31, 2022 (In millions) December 31, 2023 December 31, 2022 Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Revenue: Service $ 261.2 $ 248.4 $ 3.0 $ 9.8 4 % 5 % Product 61.8 33.2 1.5 27.1 82 % 86 % Total revenue 323.0 281.6 4.5 36.9 13 % 15 % Cost of Sales, excluding depreciation and amortization: Cost of Service (75.1 ) (71.4 ) (1.3 ) (2.4 ) 3 % 5 % Cost of Product (52.6 ) (21.9 ) (1.0 ) (29.7 ) 136 % 140 % Selling, general and administrative expenses (104.3 ) (91.1 ) (0.7 ) (12.5 ) 14 % 14 % Stock-based compensation (11.2 ) (10.8 ) (0.1 ) (0.3 ) 3 % 4 % Acquisition and integration related transaction expenses - (0.5 ) - 0.5 (100 )% (100 )% Depreciation and amortization (39.9 ) (39.9 ) (0.5 ) 0.5 (1 )% 0 % Net operating Income (Loss) 39.9 46.0 0.9 (7.0 ) (15 )% (13 )% Other income (expense) Interest expense, net (27.7 ) (25.3 ) (0.4 ) (2.0 ) 8 % 9 % Profit on disposal of trade & assets - 0.9 (0.1 ) (0.8 ) (89 )% (100 )% Other finance income (expense) 0.4 1.1 - (0.7 ) (64 )% (64 )% Total other income (expense), net (27.3 ) (23.3 ) (0.5 ) (3.5 ) 15 % 17 % Income (loss) before income taxes 12.6 22.7 0.3 (10.4 ) (46 )% (44 )% Income tax expense (5.0 ) (2.1 ) (0.1 ) (2.8 ) 133 % 138 % Net Income (Loss) $ 7.6 $ 20.6 $ 0.2 $ (13.2 ) (64 )% (63 )% Exchange Rate - $ to £ 1.24 1.23 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 ● There were no Low Margin sales for the twelve-month period ended December 31, 2022. For the twelve-month period ended December 31, 2023 Low margin-related revenue was $30.6 million. For the twelve month period ended December 31, 2022, revenue on a functional currency (at constant rate) basis increased by $36.9 million, or 13.1%. For the twelve-month period ended December 31, 2023 Leisure revenue reduced by $0.5 million, Gaming service revenue grew by $2.0 million, Virtual Sports grew by $1.5 million mainly due to Retail and Interactive grew by $1.5 million. 41 Cost of Sales, excluding depreciation and amortization Cost of sales, excluding depreciation and amortization, for the twelve-month period ended December 31, 2023, increased by $32.1 million, or 34% over the twelve-month period ended December 31, 2022. The increase was driven by Cost of Service of $2.4 million and a $29.7 million increase in Cost of Product inclusive of Low Margin sales activity. Selling, general and administrative expenses Selling, general and administrative (“SG&A”) expenses for the twelve-month period ended December 31, 2023 increased by $12.5 million, or 13.7% over the twelve-month period ended December 31, 2022. The increase in the twelve-month period ended December 31, 2023 was mainly driven by the below Adjusted EBITDA costs inclusive of group restructure costs $3.1 million and restatement of previously issued financial statements $5.0 million in 2023 partially offset by group simplification activity in 2022 of $0.7 million with the remaining $5.1 million relating to Non-Staff costs of which the largest increases were for Professional fees due to the change in Audit provider during the year $1.7 million and Exhibition costs $1.2 million not incurred in the previous year. Stock-based compensation During the twelve-month period ended December 31, 2023, the Company recorded expenses of $11.2 million, compared to expenses of $10.8 million, for the twelve month period ended December 31, 2022. All expenses related to outstanding awards, but the twelve months ended December 31, 2023, included $0.4 million of shares that fully vested on the date of grant. Acquisition and integration related transaction expenses During the twelve months ended December 31, 2023 there were no cost was recorded for acquisition and integration whereas during the twelve months ended December 31, 2022, the Company recorded an expense of $0.5 million 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 On a reported basis depreciation and amortization were flat for the twelve-month period ended December 31, 2023 with a decrease on a functional currency basis of $0.5 million. Net operating income / Net Income During the twelve-month period ended December 31, 2023 net operating income was $39.9 million, a decrease of $7.0 million over the twelve-month period ended December 31, 2022. This decrease was attributable primarily to the increase in SG&A cost of $12.5 million which was predominantly driven by below Adjusted EBITDA costs inclusive of group restructure costs $3.1 million and restatement of previously issued financial statements $5.0 million in 2023 partially offset by group simplification activity in 2022 of $0.7 million partially offset by the gain in gross margin of $4.8 million. Interest expense increased by $2.0 million mainly due to the increase in foreign exchange movements on bank accounts. plus the termination of swaps and the draw on the revolver in 2023. Profit on disposal of trade and assets had a decrease of $0.9 million as the prior-year included the sale of Italian trading assets. Other finance income decreased by $0.7 million to $0.4 million. Income tax expense increased by $2.9 million relating to the impact of US losses brought forward not being sufficient to offset the 2023 taxable profits. 42 For deferred tax we recorded a valuation allowance against all our deferred tax assets as of both December 31, 2023, and December 31, 2022. 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 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. During the twelve-month period ended December 31, 2023 net income was $7.6 million, an decrease of $13.2 million year-over-year, primarily due to the decrease in net operating income $7.0 million, an increase in interest expense, net $2.0 million, a decrease in profit on disposal $0.9 million, a decrease in other finance income $0.7 million and an increase in income tax expense of $2.8 million. Segment Results ( for the twelve months ended December 31, 2023, compared to the twelve months ended December 31, 2022) 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 December 31, 2023 vs December 31, 2022 Gaming December 31, 2023 December 31, 2022 % End of period installed base (# of terminals) (2) 34,500 34,903 (403 ) (1.2 )% Total Gaming - Average installed base (# of terminals) (2) 34,563 34,681 (118 ) (0.3 )% Participation - Average installed base (# of terminals) (2) 30,305 31,268 (963 ) (3.1 )% Fixed Rental - Average installed base (# of terminals) 4,258 3,412 846 24.8 % Service Only - Average installed base (# of terminals) 11,688 16,584 (4,896 ) (29.5 )% Customer Gross Win per unit per day (1) (2) £ 96.5 £ 91.0 £ 5.5 6.0 % Customer Net Win per unit per day (1) (2) £ 70.5 £ 66.5 £ 4.0 6.0 % Inspired Blended Participation Rate 5.6 % 5.7 % (0.1 )% Inspired Fixed Rental Revenue per Gaming Machine per week £ 47.5 £ 48.5 £ (1.0 ) (2.1 )% Inspired Service Rental Revenue per Gaming Machine per week £ 5.1 £ 4.7 £ 0.4 8.5 % Gaming Long term license amortization (£’m) £ 2.6 £ 4.3 £ (1.7 ) (39.5 )% Number of Machine sales 9,475 3,027 6,448 213.0 % Average selling price per terminal £ 4,890 £ 7,843 £ (2,953 ) (37.7 )% (1) Includes all SBG terminals in which the Company takes a participation revenue share across all territories. (2) Includes circa 2,500 of lottery terminals where the share is on handle instead of net win. In the table above: “End of Period Installed Base” is equal to the number of deployed Gaming terminals at the end of each period that have been placed on a participation or fixed rental basis. Gaming participation revenue, which comprises the majority of Gaming Service revenue, is directly related to the participation terminal installed base. This is the medium by which our customers generate revenue and distribute a revenue share to the Company. To the extent all other KPIs and certain other factors remain constant, the larger the installed base, the higher the Company’s revenue would be for a given period. Management gives careful consideration to this KPI in terms of driving growth across the segment. This does not include Service Only terminals. Revenue is derived from the performance of the installed base as described by the Gross and Net Win KPIs. 43 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 impact 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”. 44 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 December 31, 2023 vs December 31, 2022 (In £ millions) December 31, 2023 December 31, 2022 % Gaming Recurring Revenue Total Gaming Revenue £ 114.1 £ 90.4 £ 23.7 26.2 % Gaming Participation Revenue £ 44.3 £ 43.5 £ 0.8 1.8 % Gaming Project Recurring Revenue £ 0.9 £ 0.4 £ 0.5 125.0 % Gaming Other Fixed Fee Recurring Revenue £ 13.7 £ 12.6 £ 1.1 8.7 % Gaming Long-term license amortization £ 2.7 £ 4.3 £ (1.6 ) (37.2 )% Total Gaming Recurring Revenue * £ 61.6 £ 60.8 £ 0.8 1.3 % Gaming Recurring Revenue as a % of Total Gaming Revenue † 54.0 % 67.3 % (13.3 )% Total Gaming excluding VAT -related revenue £ 114.1 £ 89.6 Gaming Recurring Revenue as a % of Total Gaming Revenue (excluding VAT-related revenue) 54.0 % 67.8 % Gaming Recurring Revenue as a % of Total Gaming Revenue (excluding Low Margin Sales) † 68.6 % 67.3 % * Does not reflect Low Margin-related revenue. † Total Gaming Revenue for the twelve-month period ended December 31, 2023 has no VAT-related revenue, the twelve-month period ended December 31, 2022, includes £0.8 million of VAT-related revenue, which is not reflected in Gaming Recurring Revenue for that period. Excluding VAT-related revenue, Gaming Recurring Revenue was 53% and 67%%, respectively of Total Gaming Revenue for such period. Total Gaming Revenue for the twelve-month period ended December 31, 2023 includes £24.8 million of Low Margin sales. For the twelve-month period ended December 31, 2022 there are no Low Margin sales. Excluding Low Margin sales, Gaming Recurring Revenue was 68% of Total Gaming Revenue. 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 Project Recurring Revenue” relates specifically to a single customer for machine estate upgrades and distribution. “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. 45 For the Twelve-Month Period ended Variance (In millions) December 31, 2023 December 31, 2022 December 31, 2023 vs December 31, 2022 Total Functional Currency % Service Revenue: UK LBO $ 40.4 $ 40.7 $ (0.3 ) (0.1 )% 1.0 % UK VAT - Related Income 0.0 1.0 (1.0 ) (100.0 )% (100 )% UK Other 13.9 12.1 1.8 14.9 % 7.4 % Italy 2.7 2.7 0.0 0.0 % 0.0 % Greece 18.7 18.1 0.6 3.3 % 2.2 % Rest of the World 2.1 0.7 1.4 200.0 % 200 % Lotteries 5.2 5.1 0.1 2.0 % 2.0 % Total Service revenue $ 83.0 $ 80.4 $ 2.6 3.2 % 2.9 % Exchange Rate - $ to £ 1.25 1.23 Note: Exchange rate in the table is calculated by dividing the USD total service revenue by the GBP total service revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions. Gaming, Results of Operations For the Twelve-Month Period ended Variance December 31, 2023 vs December 31, 2022 (In millions) December 31, 2023 December 31, 2022 Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Revenue: Service $ 83.0 $ 80.4 $ 0.6 $ 2.0 2.5 % 3.2 % Product 59.6 30.9 1.5 27.2 88.0 % 92.9 % Total revenue 142.6 111.3 2.1 29.2 26.2 % 28.1 % Cost of Sales, excluding depreciation and amortization: Cost of Service (24.6 ) (23.7 ) (0.4 ) (0.5 ) 2.1 % 3.8 % Cost of Product (51.5 ) (20.4 ) (0.9 ) (30.2 ) 148.0 % 152.5 % Total cost of sales (76.1 ) (44.1 ) (1.3 ) (30.7 ) 69.6 % 72.6 % Selling, general and administrative expenses (22.5 ) (23.8 ) (0.2 ) 1.5 (6.3 )% (5.5 )% Stock-based compensation (1.5 ) (1.6 ) 0.0 0.1 (6.3 )% (6.3 )% Depreciation and amortization (19.0 ) (19.6 ) (0.1 ) 0.7 (3.6 )% (3.1 )% Net operating Income (Loss) $ 23.5 $ 22.2 $ 0.5 $ 0.8 3.6 % 5.9 % Profit on disposal of trade & assets 0.0 0.9 (0.1 ) (0.8 ) (88.9 )% (100.0 )% Net Income (Loss) $ 23.5 $ 23.1 $ 0.4 $ 0.0 0 % 1.7 % Exchange Rate - $ to £ 1.25 1.23 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 $29.2 million, or 26.2%, this was driven by a $2.0 million increase in Service revenue and $27.2 million increase in Product revenue. The increase in Gaming Service revenue was driven by $1.4 million for North America, $1.1 million in the UK, $0.3 million in Greece and $0.1 million for Lotteries offset by no VAT-related revenue in 2023 of $1.0 million. Product revenue increase was primarily driven by higher Product sales of $38.2 million in the UK inclusive of $30.0 million relating to Low Margin activity and $2.2 million higher sales in Europe offset by $13.8 million lower sales in North America compared to prior year. Gaming Operating / Net Income Net income was flat year-on-year on a functional currency basis with a decrease in gross margin of $1.5 million (mainly due to the expiration of software licenses for terminals installed in Greece in 2018 and the reduction in VAT-related revenue of $1.0 million) offsetting against the favorable SG&A, depreciation and amortization movements to arrive at a net operating income of $0.8 million offset by the decrease in profit on disposal of $0.8 million. 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 December 31, 2023 vs December 31,2022 December 31, 2023 December 31, 2022 % Virtuals No. of Live Customers at the end of the period 56 66 (10 ) (15.2 )% Average No. of Live Customers 57 65 (8 ) (12.3 )% Total Revenue (£’m) £ 45.3 £ 44.1 £ 1.2 2.7 % Total Revenue £’m - Retail £ 10.2 £ 9.0 £ 1.2 13.3 % Total Revenue £’m - Online Virtuals £ 35.2 £ 35.2 £ - 0 % 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. During 2023 a number of smaller customers were turned off driving the reduction. “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 December 31, 2023 vs December 31,2022 (In £ millions) December 31, 2023 December 31, 2021 % Virtual Sports Recurring Revenue Total Virtual Sports Revenue £ 45.3 £ 44.1 £ 1.2 2.7 % Recurring Revenue - Retail Virtuals £ 9.9 £ 8.7 £ 1.2 13.8 % Recurring Revenue - Online Virtuals £ 34.6 £ 35.1 £ (0.5 ) (1.4 )% Total Virtual Sports Long-term license amortization £ 0.2 £ - £ 0.2 100 % Total Virtual Sports Recurring Revenue £ 44.7 £ 43.8 £ 0.9 2.1 % Virtual Sports Recurring Revenue as a Percentage of Total Virtual Sports Revenue 98.7 % 99.3 % (0.6 )% 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, Results of Operations For the Twelve-Month Period ended Variance December 31, 2023 vs December 31, 2022 (In millions) December 31, 2023 December 31, 2022 Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Service Revenue $ 56.2 $ 54.2 $ 0.5 $ 1.5 2.8 % 3.7 % Cost of Service (1.4 ) (1.8 ) 0.0 0.4 (22.2 )% (22.2 )% Selling, general and administrative expenses (7.1 ) (8.0 ) (0.1 ) 1.0 (12.5 )% (11.3 )% Stock-based compensation (0.4 ) (0.7 ) 0.0 0.3 (42.9 )% (42.9 )% Depreciation and amortization (3.3 ) (2.7 ) 0.1 (0.7 ) 25.9 % 22.2 % Net operating Income (Loss) $ 44.0 $ 41.0 $ 0.5 $ 2.5 6.1 % 7.3 % Exchange Rate - $ to £ 1.25 1.23 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 ended December 31, 2023 revenue increased by $1.5 million, or 2.8% driven by Retail Virtual Sports mainly for Greece where we have increased content and game scheduling frequency. Virtual Sports operating income Operating income increased by $2.5 million in the twelve-month period ended December 31, 2023. This increase was primarily due to the increase in gross margin of $1.9 million, a decrease in SG&A expenses of $1.0 million and in Stock-based compensation of $0.3 million offset by an increase in depreciation and amortization of $0.7 million. 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 December 31, 2023 vs December 31, 2022 Interactive December 31, 2023 December 31, 2022 % No. of Live Customers at the end of the period 149 130 19 14.6 % Average No. of Live Customers 142 125 17 13.6 % No. of Live Games at the end of the period 290 270 20 7.4 % Average No. of Live Games 259 254 5 2.0 % Total Revenue (£’m) £ 22.4 £ 16.7 £ 5.7 34.1 % 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. 50 Interactive, Results of Operations For the Twelve-Month Period ended Variance December 31, 2023 vs December 31, 2022 (In millions) December 31,2023 December 31, 2022 Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Service Revenue $ 27.9 $ 20.6 $ 0.4 $ 6.9 33.5 % 35.4 % Cost of Service (1.7 ) (1.3 ) 0.0 (0.4 ) 30.8 % 30.8 % Selling, general and administrative expenses (10.8 ) (8.0 ) 0.0 (2.8 ) 35.0 % 35.0 % Stock-based compensation (0.6 ) (0.7 ) 0.0 0.1 (14.3 )% (14.3 )% Depreciation and amortization (3.6 ) (2.0 ) 0.0 (1.6 ) 80.0 % 80.0 % Net operating Income (Loss) $ 11.2 $ 8.6 $ 0.4 $ 2.2 25.6 % 30.2 % Exchange Rate - $ to £ 1.25 1.23 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 ended December 31, 2023 revenue increased by $6.9 million, driven by recurring revenue growth due to the 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 ended December 31, 2023 increased by $2.2 million. This increase was driven by the increase in gross margin of $6.5 million, partially offset by a $2.8 million increase in SG&A expenses driven by the investment in staff and IT in the segment to help drive revenue and higher depreciation and amortization reflecting the heightened investment in this segment. 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 December 31, 2023 vs December 31, 2022 Leisure December 31, 2023 December 31, 2022 % End of period installed base Gaming machines (# of terminals) 10,741 11,008 (267 ) (2.4 )% Average installed base Gaming machines (# of terminals) 10,761 10,960 (199 ) (1.8 )% End of period installed base Other (# of terminals) 4,209 4,646 (437 ) (9.4 )% Average installed base Other (# of terminals) 4,371 5,306 (935 ) (17.6 )% Pub Digital Gaming Machines - Average installed base (# of terminals) 6,175 6,102 73 1.2 % Pub Analogue Gaming Machines - Average installed base (# of terminals) 367 1,334 (967 ) (72.5 )% MSA and Bingo Gaming Machines - Average installed base (# of terminals) (1) 3,048 3,216 (168 ) (5.2 )% Inspired Leisure Revenue per Gaming Machine per week £ 67.7 £ 64.3 £ 3.4 5.3 % Inspired Pub Digital Revenue per Gaming Machine per week £ 70.0 £ 68.6 £ 1.4 2.0 % Inspired Pub Analogue Revenue per Gaming Machine per week £ 34.7 £ 38.3 £ (3.6 ) (9.4 )% Inspired MSA and Bingo Revenue per Gaming Machine per week £ 93.5 £ 91.0 £ 2.5 2.7 % Inspired Other Revenue per Machine per week £ 21.4 £ 19.7 £ 1.7 8.6 % Total Holiday Parks Revenue (Gaming and Non Gaming) (£’m) £ 32.2 £ 30.0 £ 2.2 7.3 % (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 December 31, 2023 vs December 31, 2022 (In £ millions) December 31, 2023 December 31, 2022 % Leisure Recurring Revenue Total Leisure Revenue £ 77.2 £ 77.7 £ (0.5 ) (0.6 )% Total Leisure Recurring Revenue £ 75.4 £ 75.4 £ 0.0 0.0 % Leisure Recurring Revenue as a Percentage of Total Leisure Revenue 97.7 % 97.0 % 0.7 52 Leisure, Results of Operations For the Twelve-Month Period ended Variance December 31, 2023 vs December 31, 2022 (In millions) December 31, 2023 December 31,2022 Variance Attributable to Currency Movement Variance on a Functional currency basis Total Functional Currency Variance % Total Reported Variance % Revenue: Service $ 94.1 $ 93.2 $ 1.4 $ (0.5 ) (0.5 )% 1.0 % Product 2.2 2.3 (0.1 ) - 0.0 % (4.3 )% Total revenue 96.3 95.5 1.3 (0.5 ) (0.5 )% 0.8 % Cost of Sales, excluding depreciation and amortization: Cost of Service (47.4 ) (44.6 ) (1.0 ) (1.8 ) 4.0 % 6.3 % Cost of Product (1.1 ) (1.5 ) 0.1 0.3 (20.0 )% (26.7 )% Total cost of sales (48.5 ) (46.1 ) (0.9 ) (1.5 ) 3.3 % 5.2 % Selling, general and administrative expenses (28.4 ) (25.4 ) (0.1 ) (2.9 ) 11.4 % 11.8 % Stock-based compensation (1.0 ) (0.6 ) - (0.4 ) 66.7 % 66.7 % Depreciation and amortization (11.6 ) (13.5 ) - 1.9 (14.1 )% (14.1 )% Net operating Income (Loss) 6.8 9.9 $ 0.3 $ (3.4 ) (34.3 )% (31.3 )% Exchange Rate - $ to £ 1.25 1.23 Note: Exchange rate in the table is calculated by dividing the USD total revenue by the GBP total revenue, therefore this could be slightly different from the average rate during the period depending on timing of transactions. All variances discussed in the 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 ended December 31, 2023 revenue decreased by $0.5 million, or 0.8%. Service revenue decreased by $0.5 million, the increase in Holiday Parks of $2.0 million due to new locations and higher bookings was offset by decrease in Pubs $1.9 million due to the reduction in the estate size and sale of prize vend assets in 2022, decrease in Bingo $0.2 million and decrease in other Leisure activities of $0.4 million. Leisure Operating Income/ (Loss) Operating income for the twelve-month period ended December 31, 2023 reduced by $3.4 million, from income of $9.9 million to income of $6.8 million. This was primarily due to the decrease in revenue of $0.5 million with increases in cost of sales of $1.5 million mainly due to seasonal staff increases inclusive of additional heads in the new locations plus higher UK national living wage and salary increases and increased SG&A cost $2.9 million which mainly relates to staff cost driven by the investment in staff to help to drive revenue and improve processes. 53 Non-GAAP Financial Measures We use certain non-GAAP financial measures, including EBITDA, to analyze our operating performance. We use these financial measures to manage our business on a day-to-day basis. We believe that these measures are also commonly used in our industry to measure performance. For these reasons, we believe that these non-GAAP financial measures provide expanded insight into our business, in addition to standard U.S. GAAP financial measures. There are no specific rules or regulations for defining and using non-GAAP financial measures, and as a result the measures we use may not be comparable to measures used by other companies, even if they have similar labels. The presentation of non-GAAP financial information should not be considered in isolation from, or as a substitute for, or superior to, financial information prepared and presented in accordance with U.S. GAAP. You should consider our non-GAAP financial measures in conjunction with our U.S. GAAP financial measures. We define our non-GAAP financial measures as follows: EBITDA is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense. Adjusted EBITDA is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense, and other additional exclusions and adjustments (see Adjusted EBITDA reconciliation table). Such additional excluded amounts include stock-based compensation U.S. GAAP charges where the associated liability is expected to be settled in stock, and changes in the value of earnout liabilities and income and expenditure in relation to legacy portions of the business (being those portions where trading no longer occurs) including closed defined benefit pension schemes. Additional adjustments are made for items considered outside the normal course of business, including but not limited to (1) restructuring costs, which include charges attributable to employee severance, impairments, management changes, restructuring, dual running costs, costs related to facility closures and integration costs, (2) merger and acquisition costs and (3) gains or losses not in the ordinary course of business. 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. Adjusted Revenue (Revenue Excluding Low Margin Gaming Hardware Sales) is defined as revenue excluding Gaming hardware sales that are sold at Low Margin with the intention of securing longer term recurring revenue streams. Functional Currency at Constant rate. Currency impacts discussed have been calculated as the current-period average GBP: USD rate less the equivalent average rate in the prior period, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior-period average GBP: USD rate, as a proxy for functional currency at constant rate movement. Currency Movement represents the difference between the results in our reporting currency (USD) and the results on a functional currency (at constant rate) basis. 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, 2023 For the Twelve-Month Period ended December 31, 2023 (In millions) Statutory Heading Total Gaming Virtual Sports Interactive Leisure Corporate Net Income/ (loss) Net Income $ 7.6 $ 23.5 $ 44.0 $ 11.2 $ 6.8 $ (77.9 ) Pension charges (1) SG&A $ 0.9 0.9 Cost of Group Restructure (2) SG&A $ 3.6 - 3.6 Cost of Group Restatement (3) SG&A $ 5.0 5.0 Stock-based compensation expense (4) Stock-based compensation expense $ 11.2 1.5 0.4 0.6 1.0 7.7 Depreciation and amortization (4) Depreciation and amortization $ 39.9 19.0 3.3 3.6 11.6 2.4 Interest expense net (4) Interest expense net $ 27.7 27.7 Other finance expenses / (income) (4) Other finance expenses / (income) $ (0.4 ) (0.4 ) Income Tax (4) Income Tax $ 5.0 5.0 Adjusted EBITDA $ 100.5 $ 44.0 $ 47.7 $ 15.4 $ 19.4 $ (26.0 ) Adjusted EBITDA £ 80.6 £ 35.6 £ 38.3 £ 12.4 £ 15.4 £ (21.1 ) Exchange Rate - $ to £ (6) 1.25 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, 2022 For the Twelve-Month Period ended December 31, 2022 (In millions) Statutory Heading Total Gaming Virtual Sports Interactive Leisure Corporate Net Income/ (loss) $ 20.6 $ 23.1 $ 41.0 $ 8.6 $ 9.9 $ (62.0 ) Pension charges (1) SG&A $ 0.7 0.7 Acquisition and integration related transaction expenses (7) SG&A $ 0.5 0.5 Acquisition and integration related transaction expenses (7) Cost of Sale $ 0.6 0.3 0.3 Litigation Settlement(8) 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) Stock-based compensation expense $ 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. 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) “Cost of Group Restructure” include redundancy costs, payment in lieu of notice costs and any associated employer taxes. To qualify as being an adjusting item, costs must be part of a large restructuring project, which will net save ongoing future costs or be in relation to the exit of an Executive. (3) “Cost of Group Restatement” includes accounting advice associated with the restatement of the 2020, 2021 and 2022 annual accounts and the 2023 Q1 and Q2 interim accounts. To qualify as being an adjusting item, costs must be specific to the event and be neither normal nor recurring in nature. 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) 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 (8) “Litigation Settlement” refers to full and final settlement of a contractual dispute relating to a Development Services and Management Agreement. Reconciliation to Adjusted Revenue We believe that accounting for Low Margin hardware sales in conformance with U.S. GAAP can result in a distorted presentation of our revenue and growth. Therefore, we use Revenue Excluding Low Margin Sales, or Adjusted Revenue, to internally analyze our operating performance. A reconciliation from revenue, as shown in our Consolidated Statements of Operations and Comprehensive Loss included elsewhere in this report, to Adjusted Revenue is shown below. For the Twelve-Month Period ended (In millions) December 31, 2023 December 31 2022 Net revenue $ 323.0 $ 281.6 Less Low Margin Gaming Sales (30.6 ) - Adjusted Revenue $ 292.4 $ 281.6 Adjusted Revenue £ 234.7 £ 229.0 Exchange Rate - $ to £ 1.25 1.23 57 Liquidity and Capital Resources Twelve Months ended December 31, 2023, compared to Twelve Months ended December 31, 2022 Cash Flow Summary - A Two Year Comparative Twelve Months ended Variance (in millions) Dec 31, Dec 31, 2023 2022 2023 to 2022 Net profit $ 7.6 $ 20.6 $ (13.0 ) Non-cash interest expense relating to senior debt 2.0 1.8 0.2 Change in fair value of derivative liabilities and stock-based compensation expense 11.5 11.5 - Profit on sale of Gaming business - (0.9 ) 0.9 Contract cost additions (10.3 ) (7.2 ) (3.1 ) Depreciation and amortization (incl RoU assets) 43.7 43.4 0.3 Other net cash utilized by operating activities (9.0 ) (44.5 ) 35.5 Net cash provided by operating activities 45.5 24.7 20.8 Net cash used in investing activities (48.4 ) (32.6 ) (15.8 ) Net cash generated/(used) by financing activities 16.2 (11.0 ) 27.2 Effect of exchange rates on cash 1.7 (3.9 ) 5.6 Net increase/(decrease) in cash and cash equivalents $ 15.0 $ (22.8 ) $ 37.8 Net cash provided by operating activities For the twelve months ended December 31, 2023, net cash inflow provided by operating activities was $45.5 million, compared to a $24.7 million inflow for the twelve months ended December 31, 2022, representing a $20.8 million increase in cash generation. This increase was driven primarily by an improved working capital position with favorable movements in inventory which was expanded in the twelve months ended December 31, 2022 to safeguard future supply for production after the COVID-19 pandemic. Favorable movements were also seen in accounts receivable and accounts payable due to timing and varying levels of production activity including the installation of 2,500 machines into Greece during the last few months of 2023. Amortization of debt fees increased by $0.2 million, to $2.0 million, due to the marking to market for short term currency contracts held at the end of 2023. Change in the fair value of derivative and warrant liabilities and stock-based compensation expense was unchanged at $11.5 million. A higher stock-based compensation expense ($0.2 million) was partly offset by a lower gain relating to terminated cross currency swaps ($0.2 million) as these terminated at the end of September 2023. The twelve-months ended December 31, 2022, included a $0.9 million gain on disposal of business due to the sale of part of our Italian Gaming operations. Contract cost additions increased by $3.1 million to $10.3 million for the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022. Depreciation and amortization increased by $0.3 million, to $43.7 million, with increases of $2.0 million in amortization of intangible assets and $0.3 million in amortization of right of use assets offset by a $2.0 million decrease in machine depreciation. Other net cash utilized by operating activities improved by $35.5 million, to an outflow of $9.0 million. The relative movements between the twelve months ended December 31, 2023 and the twelve months ended December 31, 2022 resulted in a $16.3 million inventory improvement following Inspired making the strategic decision to secure components to protect future sales resulting in inventory levels increasing during the prior year. Accounts receivable saw a $13.8 million improvement due to the timing of machine sales resulting in a high balance at the end of the twelve months ended December 31, 2022. Another area that showed improvement in cash utilization for the twelve months ended December 31, 2023 was deferred revenue creditors, $9.1 million. These were partly offset by a relative outflow in prepayments and accrued income, $4.3 million. 58 Net cash used in investing activities Net cash utilized in investing activities increased by $15.8 million, to $48.4 million in the twelve months ended December 31, 2023. This was driven by higher spend on plant, property and equipment (a $10.6 million increase compared to 2022 driven by the updating of machines in Greece with 2,500 terminals installed) and capitalized software (a $3.9 million increase compared to 2022). The twelve months ended December 31, 2022 included a $1.3 million disposal relating to assets sold as part of the sale of our Italina Gaming operations. Net cash (used)/generated by financing activities During the twelve months ended December 31, 2023, net cash generated by financing activities was $16.2 million due to the draw down of £15.0 million ($18.9 million) of the Company’s revolving facility. This was offset by the Company’s repurchase of its common shares under the Share Repurchase Program, $1.6 million, and finance lease spend of $1.1 million. During the twelve months ended December 31, 2022, financing activities utilized $11.0 million of cash due to the Company’s repurchase of its common shares under the Share Repurchase Program, $10.4 million, and finance lease spend of $0.6 million. 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, 2023, we had liquidity consisting of $40.0 million in cash and a further $6.4 million of undrawn revolver facility. This compares to $25.0 million of cash as of December 31, 2022, with a further $24.1 million of revolver facilities undrawn. We had a working capital outflow of $9.0 million for the twelve months ended December 31, 2023, compared to a $44.5 million outflow for the twelve months ended December 31, 2022. 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 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, 2023, $3.1 million of our $40.0 million of cash were held as operational floats within the machines. At December 31, 2022, $2.5 million of our $25.0 million of cash 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 April 2025. 59 Long Term and Other Debt (In millions) December 31, 2023 December 31, 2022 Cash held £ 31.4 $ 40.0 £ 20.8 $ 25.0 Revolver drawn (15.0 ) (19.1 ) - - Original principal senior debt (235.0 ) (299.6 ) (235.0 ) (282.9 ) Cash interest accrued (1.6 ) (2.0 ) (1.5 ) (1.8 ) Finance lease creditors (1.9 ) (2.4 ) (1.8 ) (2.2 ) Total £ (222.1 ) $ (283.1 ) £ (217.6 ) $ (261.9 ) Debt Covenants Under our debt facilities in place as of December 31, 2023, 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, 2023 showed covenant compliance. The Indenture contains covenants and certain reporting requirements including the requirement to provide the Lender, within 60 days after the close of the quarter, unaudited quarterly financial statements with footnote disclosures. The Company was unable to comply with this requirement as of September 30, 2023 due to the requirement to restate previously reported financial statements as reported in a Current Report on Form 8-K filed with the SEC on November 8, 2023. The debt agreement allows the Company a 30-day grace period to provide such financial information once they receive any notice of non-compliance. No such notice was received and concurrent with the filing of the September 30,2023 10Q with the SEC on February 27, 2024, the reporting requirement was met. There were no other breaches of the debt covenants in the periods ended December 31, 2023 or December 31, 2022. Liens and Encumbrances As of December 31, 2023, our senior secured notes were 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, 2023, an aggregate of $12.0 million of our shares of common stock had been repurchased. 60 Contractual Obligations As of December 31, 2023, our contractual obligations were as follows: Contractual Obligations (in millions) Total Less than 1 year 1-2 years 3-5 years More than 5 years Operating activities Interest on long term debt $ 59.0 $ 23.6 $ 23.5 $ 11.9 $ - Purchase of Vantage machines 12.6 12.6 - - - Financing activities Revolver repayment 20.1 20.1 - - - Senior secured notes - principal repayment 299.6 - - 299.6 - Finance lease payments 2.4 0.7 0.9 0.8 - Operating lease payments 14.5 4.7 3.0 4.2 2.6 Interest on non-utilization fees 0.6 0.2 0.4 - - Total $ 408.8 $ 61.9 $ 27.8 $ 316.5 $ 2.6 Off-Balance Sheet Arrangements As of December 31, 2023, there were no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, promulgated by the U.S. Securities and Exchange Commission. Critical Accounting Policies and Accounting Estimates The preparation of our audited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenue and expenses, and our disclosure of commitments and contingencies at the date of the consolidated financial statements. On an on-going basis, we evaluate our estimates and judgments. We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business and industry and current and expected economic conditions, that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.     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 revenue of $261.2 million and $61.8 million, respectively, for the year ended December 31,2023. 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. 61 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, 2023, total goodwill with the Virtual Sports, Interactive, and two Gaming reporting units is $44.8 million, $1.8 million, $9.3 million, and $2.9 million, respectively. There is no remaining goodwill within the Leisure reporting unit. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) annually on the last day of our fiscal period or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative one-step process. If we perform a qualitative assessment and determine that the fair value of a reporting unit more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the quantitative test, we are required to compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, we recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s estimated fair value. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Performance of the qualitative goodwill assessment requires judgment in identifying and considering the significance of relevant key factors, events and circumstances that affect the fair value or carrying amount of the reporting units. Such events and circumstances that we have considered include macroeconomic conditions, industry specific and market considerations, and reporting unit-specific factors such as overall actual and projected financial performance, among other factors. We also considered the results from the most recent date that a fair value measurement was performed as a part of a quantitative goodwill assessment and specifically the cushion between each reporting unit’s fair value and carrying value. The estimates used to calculate the fair value of a reporting unit as a part of a quantitative goodwill assessment change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment, if any, for each reporting unit. We performed our annual goodwill impairment test as of December 31, 2023 using a qualitative assessment for all of our reporting units. Based on the results of our qualitative impairment assessments, we concluded that it is more likely than not that the fair values of each of our reporting units substantially exceeded their respective carrying values and there were no reporting units requiring further assessment. 62 Long-lived Assets and Finite-lived Intangible Assets We evaluate the recoverability of intangible assets and other long-lived assets with finite useful lives by comparing the carrying value of the asset group to the estimated undiscounted future cash flows that we expect the asset to generate if events or changes in circumstances indicate that these assets are not recoverable. If the asset group fails the recoverability test, an impairment loss is measured as the amount by which the carrying amount of the asset group exceeds its fair value. The fair value is determined using a discounted cash flow approach where projections of future cash flows generated by those assets are discounted using an estimated discount rate. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. We also make judgments about the remaining useful lives of intangible assets and other long-lived assets that have finite lives. While we believe our estimates of future operating results and projected cash flows are reasonable, any significant adverse changes in key assumptions (i.e., adverse change in the extent or manner in which an asset or asset group is being used or expectation that, more likely than not, an asset or asset group will be sold or otherwise disposed of before the end of its useful life) or adverse changes in economic and market conditions may cause a change in our evaluation of recoverability or our estimation of fair value and could result in an impairment charge that could be material to our financial statements. Any impairment loss shall be allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value. Management determined that there were no new indicators of impairment for the years ended December 31, 2023 and 2022 and the Company concluded that there was no impairment of the Company’s intangible and long-lived assets as of December 31, 2023 and 2022. 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. 63