Inspired Entertainment, Inc. 10-K

ITEM 8. Financial Statements and Supplementary Data. INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022 Page Report of Independent Registered Public Accounting Firm PCAOB ID # 688 F-2 Consolidated Balance Sheets F-4 Consolidated Statements of Operations and Comprehensive Income (Loss) F-5 Consolidated Statements of Stockholders’ Deficit F-6 Consolidated Statements of Cash Flows F-7 Notes to the Consolidated Financial Statements F-8 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Inspired Entertainment, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Inspired Entertainment, Inc. and Subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss (income), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 , and our report dated April 15, 2024 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of material weaknesses. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Use of IT Systems to track and invoice revenue and the determination of the various promises in the arrangement Certain of the Company’s revenue contracts with customers include multiple promises (such as hardware, software and maintenance, among others). The Company is required to evaluate whether each promise represents a performance obligation. The evaluation of whether promises are both capable of being distinct in the context of a contract (and thus constitute performance obligations) can require significant judgment and could change the amount of revenue recognized in a given period. We identified the determination of performance obligations for contracts with higher contract values as a critical audit matter because of the judgments and estimates management makes to evaluate such contracts and the impact of such judgments on the amount of revenue recognized in a given period. This required a high degree of auditor judgment and an increased extent of testing. F- 2 Addressing the matter involved performing procedures and evaluation of audit evidence that included, among others: We involved IT professionals with specialized skills and knowledge, who assisted in evaluating the sufficiency of the audit evidence obtained related to: ● General IT controls and IT application controls for the relevant IT systems used to gather and process data, ● The transfer of information among the different systems used to gather the data, and ● The configuration and change management controls for the reports that were used from the various systems to determine the amount of revenue recognized. We also performed the following procedures: ● Evaluating contract terms and conditions, ● Reviewing and assessing the methodology applied and testing the reliability and mathematical accuracy of the underlying data and calculations, ● Testing management’s identification of performance obligations by evaluating whether the promises were both capable of being distinct and distinct within the context of the contract, including reading the selected contracts and inquiring of certain of the Company’s accounting and operations personnel to understand the nature of the promises and how they are delivered to the customer and, ● Evaluating and concluding on the reasonableness of management’s judgments and estimates. ● Reviewed specific contracts with third party customers to evaluate the contract terms associated with ASC 606 Revenue from Contracts with Customers, Agent vs. Principal literature. Capitalization of Developed Software for Internal or External Use The Company classifies software development costs as either internal use software or external use software, whereby any costs incurred during preliminary project stages are expensed as incurred; for external use software, direct costs incurred during the application development stages are capitalized; and costs incurred during the post-implementation/operation stages are expensed. Once the software is placed in operation, the Company amortizes the capitalized cost of the software over its economic useful life, which ranges from two to five years. During the year ended December 31, 2023, the Company capitalized $9,663,295 of software development costs. We identified the evaluation of the Company’s capitalization of internal direct labor costs as a critical audit matter. There were inherent challenges in obtaining an understanding of the structure of systems and processes used to capture the large volumes of internal direct labor data. Furthermore, subjective judgement was required to evaluate the relevant data that was captured and aggregated, and to assess the sufficiency of the audit evidence obtained. The primary procedures we performed to address this critical audit matter included the following. We involved IT professionals with specialized skills and knowledge, who assisted in evaluating the sufficiency of the audit evidence obtained related to: ● General IT controls and IT application controls for the relevant IT systems used to gather and process data, ● The transfer of information among the different systems used to gather the data, and ● The configuration and change management controls for the reports that were used from the various systems to determine the amount of internal direct labor costs to capitalize. In addition, we evaluated, on a sample basis, the Company’s manual aggregation of information from various IT systems, to determine the sufficiency of the audit evidence obtained, by: ● Inspecting the capital project codes to assess that the nature of the activity is capitalized in accordance with U.S. generally accepted accounting principles, ● Comparing salary and wage information for capitalized internal direct labor costs to employee human resource documents and system profiles, ● Comparing the hours of capitalized internal direct labor to the hours recorded to capital activities on the employees’ timesheets, ● Inquiring of employees and project managers as to the accuracy of the hours reflected as capital activities on the employee timesheets, ● Evaluating the methodology used to determine the labor rates and comparing the cost types, dates incurred, and amounts of labor costs used to derive the labor rates to data from the source systems. ● Obtained underlying verification over the timing a project was placed in service, ● Interviewed executives with day-to-day job responsibilities that impact the development of software costs, ● Corroborated with human resource personal regarding employee job descriptions and day-to-day job responsibilities, and ● Judgmentally selected large projects at random to verify if any restatement adjustment should or should not apply. /s/ Marcum llp Marcum LLP We have served as the Company’s auditor since 2016 . New York, NY April 15, 2024 F- 3 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in millions, except share data) December 31, 2023 December 31, 2022 Assets Cash $ 40.0 $ 25.0 Accounts receivable, net 40.6 40.4 Inventory, net 32.3 30.3 Prepaid expenses and other current assets 39.6 31.2 Total current assets 152.5 126.9 Property and equipment, net 62.8 45.1 Software development costs, net 21.8 18.3 Other acquired intangible assets subject to amortization, net 13.4 14.6 Goodwill 58.8 55.5 Operating lease right of use asset 14.2 16.0 Costs of obtaining and fulfilling customer contracts, net 9.4 7.0 Other assets 8.0 3.8 Total assets $ 340.9 $ 287.2 Liabilities and Stockholders’ Deficit Current liabilities Accounts payable and accrued expenses $ 60.8 $ 52.7 Corporate tax and other current taxes payable 6.3 10.1 Deferred revenue, current 5.6 4.6 Operating lease liabilities 4.7 3.9 Current portion of long-term debt 19.1 — Other current liabilities 4.2 3.6 Total current liabilities 100.7 74.9 Long-term debt 295.6 277.6 Finance lease liabilities, net of current portion 1.6 1.2 Deferred revenue, net of current portion 7.1 2.8 Operating lease liabilities 9.8 12.3 Other long-term liabilities 4.1 4.0 Total liabilities 418.9 372.8 Commitments and contingencies - - Stockholders’ deficit Preferred stock; $ 0.0001 par value; 1,000,000 shares authorized, no shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively — — Common stock; $ 0.0001 par value; 49,000,000 shares authorized; 26,219,021 shares and 25,909,516 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively — — Additional paid in capital 386.1 378.2 Accumulated other comprehensive income 44.5 50.8 Accumulated deficit ( 508.6 ) ( 514.6 ) Total stockholders’ deficit ( 78.0 ) ( 85.6 ) Total liabilities and stockholders’ deficit $ 340.9 $ 287.2 The accompanying notes are an integral part of these consolidated financial statements. F- 4 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in millions, except share and per share data) Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 Revenue: Service $ 261.2 $ 248.4 $ 180.2 Product sales 61.8 33.2 25.6 Total revenue 323.0 281.6 205.8 Cost of sales: Cost of service (1) ( 75.1 ) ( 71.4 ) ( 51.8 ) Cost of product sales ( 52.6 ) ( 21.9 ) ( 17.8 ) Selling, general and administrative expenses ( 115.5 ) ( 101.9 ) ( 90.3 ) Acquisition and integration related transaction expenses — ( 0.5 ) ( 1.6 ) Depreciation and amortization ( 39.9 ) ( 39.9 ) ( 48.8 ) Net operating income (loss) 39.9 46.0 ( 4.5 ) Other expense Interest expense, net ( 27.7 ) ( 25.3 ) ( 44.3 ) Change in fair value of warrant liability — — 0.9 Gain on disposal of business — 0.9 — Other finance income 0.4 1.1 5.7 Total other expense, net ( 27.3 ) ( 23.3 ) ( 37.7 ) Income (loss) before income taxes 12.6 22.7 ( 42.2 ) Income tax (expense) benefit ( 5.0 ) ( 2.1 ) 1.6 Net income (loss) 7.6 20.6 ( 40.6 ) Other comprehensive (loss) income: Foreign currency translation (loss) gain ( 5.9 ) 12.7 0.7 Change in fair value of hedging instrument — — 0.3 Reclassification of loss on hedging instrument to comprehensive income 0.3 0.7 1.5 Actuarial (losses) gains on pension plan ( 0.7 ) ( 6.4 ) 10.5 Other comprehensive (loss) income ( 6.3 ) 7.0 13.0 Comprehensive income (loss) $ 1.3 $ 27.6 $ ( 27.6 ) Net income (loss) per common share – basic $ 0.27 $ 0.73 $ ( 1.66 ) Net income (loss) per common share – diluted $ 0.26 $ 0.71 $ ( 1.66 ) Weighted average number of shares outstanding during the year – basic 28,073,408 28,049,918 24,402,461 Weighted average number of shares outstanding during the year – diluted 29,214,583 29,092,855 24,402,461 Supplemental disclosure of stock-based compensation expense Stock-based compensation included in: Selling, general and administrative expenses $ ( 11.2 ) $ ( 10.8 ) $ ( 13.0 ) (1) Excluding depreciation and amortization The accompanying notes are an integral part of these consolidated financial statements. F- 5 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (in millions, except share data) Shares Amount capital income deficit deficit Common stock Additional paid in Accumulated other comprehensive Accumulated Total stockholders’ Shares Amount capital income deficit deficit Balance as of January 1, 2021 22,430,475 $ — $ 324.6 $ 30.8 $ ( 484.2 ) $ ( 128.8 ) Foreign currency translation adjustments — — — 0.7 — 0.7 Actuarial gains on pension plan — — — 10.5 — 10.5 Change in fair value of hedging instrument — — — 0.3 — 0.3 Reclassification of loss on hedging instrument to comprehensive income — — — 1.5 — 1.5 Shares issued in settlement of RSUs 324,122 — ( 6.4 ) — — ( 6.4 ) Shares issued upon exercise of warrants 3,678,965 — 42.4 — — 42.4 Stock-based compensation expense — — 11.7 — — 11.7 Net loss — — — — ( 40.6 ) ( 40.6 ) Balance as of December 31, 2021 26,433,562 — 372.3 43.8 ( 524.8 ) ( 108.7 ) Foreign currency translation adjustments — — — 12.7 — 12.7 Actuarial losses on pension plan — — — ( 6.4 ) — ( 6.4 ) Reclassification of loss on hedging instrument to comprehensive income — — — 0.7 — 0.7 Shares issued in settlement of RSUs 543,294 — ( 4.1 ) — — ( 4.1 ) Repurchases of common stock ( 1,067,340 ) — — — ( 10.4 ) ( 10.4 ) Stock-based compensation expense — — 10.0 — — 10.0 Net income — — — — 20.6 20.6 Balance as of December 31, 2022 25,909,516 — 378.2 50.8 ( 514.6 ) ( 85.6 ) Balance 25,909,516 — 378.2 50.8 ( 514.6 ) ( 85.6 ) Foreign currency translation adjustments — — — ( 5.9 ) — ( 5.9 ) Actuarial losses on pension plan — — — ( 0.7 ) — ( 0.7 ) Reclassification of loss on hedging instrument to comprehensive income — — — 0.3 — 0.3 Shares issued in settlement of RSUs 435,283 — ( 2.9 ) — — ( 2.9 ) Repurchases of common stock ( 125,778 ) — — — ( 1.6 ) ( 1.6 ) Stock-based compensation expense — — 10.8 — — 10.8 Net income — — — — 7.6 7.6 Net income (loss) — — — — 7.6 7.6 Balance as of December 31, 2023 26,219,021 $ — $ 386.1 $ 44.5 $ ( 508.6 ) $ ( 78.0 ) Balance 26,219,021 $ — $ 386.1 $ 44.5 $ ( 508.6 ) $ ( 78.0 ) The accompanying notes are an integral part of these consolidated financial statements. F- 6 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 Cash flows from operating activities: Net income (loss) $ 7.6 $ 20.6 $ ( 40.6 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 39.9 39.9 48.8 Amortization of right of use asset 3.8 3.5 4.5 Profit on disposal of trade and assets ( 0.9 ) — Stock-based compensation expense 11.2 10.8 13.0 Unrealized transactional currency gain/loss on senior secured notes — — ( 4.7 ) Change in fair value of warrant liability — — ( 0.9 ) Reclassification of loss on hedging instrument to comprehensive income 0.3 0.7 1.5 Non-cash interest expense relating to senior debt 2.0 1.8 17.2 Contract cost expense ( 10.3 ) ( 7.2 ) ( 6.3 ) Changes in assets and liabilities: Accounts receivable 1.7 ( 12.1 ) ( 4.7 ) Inventory ( 0.4 ) ( 16.7 ) 3.2 Prepaid expenses and other assets ( 8.5 ) ( 4.3 ) ( 12.4 ) Corporate tax and other current taxes payable ( 6.4 ) ( 6.1 ) ( 9.7 ) Accounts payable and accrued expenses 4.5 5.8 3.8 Deferred revenue and customer prepayment 4.8 ( 4.4 ) ( 5.9 ) Operating lease liabilities ( 3.9 ) ( 3.7 ) ( 4.0 ) Other long-term liabilities ( 0.8 ) ( 3.0 ) ( 0.4 ) Net cash provided by operating activities 45.5 24.7 2.4 Cash flows from investing activities: Purchases of property and equipment ( 32.8 ) ( 22.2 ) ( 11.3 ) Acquisition of subsidiary company assets — ( 0.6 ) ( 12.4 ) Acquisition of third-party company trade and assets ( 0.6 ) — — Disposal of trade and assets — 1.3 — Purchases of capital software ( 15.0 ) ( 11.1 ) ( 8.7 ) Net cash used in investing activities ( 48.4 ) ( 32.6 ) ( 32.4 ) Cash flows from financing activities: Proceeds from issuance of long-term debt — — 333.1 Proceeds from issuance of revolver 18.9 — — Repurchase of common stock ( 1.6 ) ( 10.4 ) — Proceeds from exercise of warrants — — 30.5 Repayments of revolver and long-term debt, including exit premium — — ( 320.6 ) Payment of debt issuance costs — — ( 9.1 ) Cash paid in connection with terminated interest rate swaps — — ( 2.1 ) Repayments of finance leases ( 1.1 ) ( 0.6 ) ( 0.6 ) Net cash (used in) provided by financing activities 16.2 ( 11.0 ) 31.2 Effect of exchange rate changes on cash 1.7 ( 3.9 ) ( 0.5 ) Net increase (decrease) in cash 15.0 ( 22.8 ) 0.7 Cash, beginning of period 25.0 47.8 47.1 Cash, end of period $ 40.0 $ 25.0 $ 47.8 Supplemental cash flow disclosures Cash paid during the period for interest $ 24.0 $ 23.0 $ 30.8 Cash paid during the period for income taxes $ 5.0 $ — $ 1.2 Cash paid during the period for operating leases $ 6.6 $ 7.8 $ 6.6 Supplemental disclosure of noncash investing and financing activities Additional paid in capital from net settlement of RSUs $ ( 2.9 ) $ ( 4.1 ) $ ( 6.4 ) Lease liabilities arising from obtaining right of use assets $ ( 0.9 ) $ ( 1.8 ) $ — Adjustment to customer relationships intangible asset arising from adjustment to fair value of assets acquired $ — $ ( 0.9 ) $ — Property and equipment acquired through finance lease $ 1.2 $ — $ 2.6 Property and equipment transferred to inventory $ — $ 0.8 $ 1.3 The accompanying notes are an integral part of these consolidated financial statements. F- 7 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 1. Nature of Operations, Management’s Plans and Summary of Significant Accounting Policies Company Description and Nature of Operations We are a global gaming technology company, supplying content, platform, gaming terminals and other products and services to online and land-based regulated lottery, betting and gaming operators worldwide through a broad range of distribution channels, predominantly on a business-to-business basis. We provide end-to-end digital gaming solutions (i) on our own proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices and online computer applications and (ii) through third party networks. Our content and other products can be found through the consumer-facing portals of our interactive customers and, through our land-based customers, in licensed betting offices, adult gaming centers, pubs, bingo halls, airports, motorway service areas and leisure parks. Management Liquidity Plans As of December 31, 2023, the Company’s cash on hand was $ 40.0 million, and the Company had working capital in addition to cash of $ 11.8 million. The Company recorded net income of $ 7.6 million and $ 20.6 million and net losses of $ 40.6 million for the year ended December 31, 2023, 2022 and 2021, respectively. Net income/losses include excess capital expenditure, excluding the acquisition of subsidiary assets, over depreciation and amortization, of $ 7.9 million and $ 6.6 million for the years ended December 31, 2023 and 2022, respectively, and excess depreciation and amortization over capital expenditure, excluding the acquisition of subsidiary assets, of $ 28.8 million for the year ended December 31, 2021, non-cash stock-based compensation of $ 11.2 million, $ 10.8 million and $ 13.0 million for the year ended December 31, 2023, 2022 and 2021, respectively, and non-cash changes in fair value of warrant liability of $ 0.9 million gain for the year ended December 31, 2021. Historically, the Company has generally had positive cash flows from operating activities and has relied on a combination of cash flows provided by operations and the incurrence of debt and/or the refinancing of existing debt to fund its obligations. Cash flows provided by operations amounted to $ 45.5 million, $ 24.7 million and $ 2.4 million for the year ended December 31, 2023, 2022 and 2021 respectively, with the changes year on year due primarily to 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. Working capital of $ 51.8 million includes a non-cash settled item of $ 5.6 million of deferred income. Management currently believes that the Company’s cash balances on hand, cash flows expected to be generated from operations, ability to control and defer capital projects and amounts available from the Company’s external borrowings will be sufficient to fund the Company’s net cash requirements through April 2025. F- 8 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Basis of Presentation The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Principles of Consolidation All monetary values set forth in these consolidated financial statements are in US Dollars (“USD”) unless otherwise stated herein. The accompanying consolidated financial statements include the results of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Foreign Currency Translation For most of our operations, the British pound (“GBP”) is our functional currency. Our reporting currency is the USD. We also have operations where the local currency is the functional currency, including our operations in mainland Europe and North America. Assets and liabilities of foreign operations are translated at period-end rates of exchange, equity is translated at historical rates of exchange and results of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating the foreign currency financial statements are recorded as a separate component of accumulated other comprehensive income in stockholders’ deficit. Gains or losses resulting from foreign currency transactions are included in Selling, general and administrative expenses, Interest expense, net and Other finance (expense) income in the Consolidated Statement of Operations and Comprehensive Income (Loss). Aggregate foreign currency losses (gains) included in net income amounted to $ 1.1 million, $ 0.1 million and ($ 4.6 ) million for the years ended December 31, 2023, December 31, 2022 and December 31, 2021, respectively. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates these estimates, including those related to the revenue recognition for contracts involving software and non-software elements, allowance for credit losses, inventory reserve for net realizable value, currency swaps, valuation of hedging activities, goodwill and intangible assets, useful lives of long-lived assets, stock-based compensation, valuation allowances on deferred taxes, warrant liability, pension liability, commitments and contingencies and litigation, among others. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. We regularly evaluate these significant factors and make adjustments when facts and circumstances dictate. Actual results may differ from these estimates. F- 9 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Cash We deposit cash with financial institutions that management believes are of high credit quality. Substantially all of the Company’s cash is held outside of the U.S. Included within the cash balance of $ 40.0 million at December 31, 2023 is $ 3.1 million of cash floats held on site at holiday parks. Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear interest. Our standard credit terms are net 30 to 60 days. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. Changes in circumstances relating to the collectability of accounts receivable may result in the need to increase or decrease our allowance for doubtful accounts in the future. We determine the allowance using an aging method for credit losses by which receivable balances are grouped based on an aging category. The grouping is then adjusted to take account of the specific receivables and an appropriate default rate then applied to receivables remaining that are overdue in excess of 90 days. We also consider customer specific information based on historical experience, current market trends, and our customers’ financial condition. and provide for expected credit losses on an individual debtor basis where appropriate. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote. Under certain contracts, the timing of our invoices does not coincide with revenue recognized under the contract. We have unbilled accounts receivable which represent revenue recorded in excess of amounts invoiced under the contract and generally become billable at contractually specified dates. These amounts consist primarily of revenue from our share of net winnings earned on a daily basis where the billing period does not fall on the last day of the period. We had $ 24.0 million and $ 18.0 million of unbilled accounts receivable as of December 31, 2023 and December 31, 2022, respectively. Inventories Inventories consist primarily of component parts and related parts used in gaming terminals. Inventories are stated at the lower of cost or net realizable value, using the first-in-first-out method. We determine the lower of cost or net realizable value of our inventory based on estimates of potentially excess and obsolete inventories after considering historical and forecasted demand and average selling prices. Demand for gaming terminals and parts inventory is also subject to technological obsolescence. Cost includes all direct costs and an appropriate proportion of fixed and variable overheads. Property and Equipment Property and equipment are recorded at cost, and when placed into service, depreciated and amortized to their residual values using the straight-line method over the estimated useful lives of the related assets as follows: Schedule of Property and Equipment Estimated Useful Lives Leasehold property Shorter of the useful life or the life of the lease Gaming and amusement terminals 2 – 7 years Plant and machinery and fixtures and fittings 3 – 10 years Computer equipment 3 – 5 years Our policy is to periodically review the estimated useful lives of our fixed assets. We also assess the recoverability of long-lived assets (or asset groups) whenever events or changes in circumstances indicate that the carrying amount of such an asset (or asset groups) may not be recoverable. Repairs and maintenance costs are expensed as incurred. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are written off and any resulting gain or loss is credited or charged to income. F- 10 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Software Development Costs Research and development costs, which primarily consist of employee compensation costs and exclude costs relating to non-project time, leave and absence, are expensed as incurred, except for software product development costs that are eligible for capitalization, as described below. Total research and development costs amounted to $ 20.3 million, $ 18.3 million and $ 13.8 million in the years ended December 31, 2023, 2022 and 2021, respectively. Software development costs amounting to $ 7.5 million, $ 6.9 million and $ 5.9 million were capitalized during the year ended December 31, 2023, 2022 and 2021, respectively. In addition, amounts relating to Costs of obtaining and fulfilling customer contracts, net of $ 3.9 million, $ 2.9 million and $ 1.7 million were capitalized during the year ended December 31, 2023, 2022 and 2021, respectively. We expensed $ 8.9 million, $ 8.5 million and $ 6.2 million during the year ended December 31, 2023, 2022 and 2021, respectively as they related to maintenance, research or support costs. Employee related costs associated with these activities are included in Selling, general and administrative expenses in the Consolidated Statement of Operations and Comprehensive Income (Loss). We capitalize certain eligible costs incurred to develop internal-use software as well as external use software to be used in the products we sell, lease or market to customers. We account for costs incurred to develop internal use software, including software developed to deliver our cloud-based offerings to customers, in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal Use Software. Consequently, certain direct costs incurred during the application development stages are capitalized while all other related costs are expensed as incurred. Once the software is substantially complete and ready for its intended use, we amortize the capitalized internal use software costs over their estimated economic useful life, which ranges from two to five years. Amortization of such costs is included in Depreciation and amortization in the Consolidated Statement of Operations and Comprehensive Income (Loss). We purchase, license and incur costs to develop external use software to be used in the products we sell, lease or license to customers. Such costs are capitalized under ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed. Costs incurred in developing such software are expensed when incurred as research and development costs until technological feasibility has been established, after which costs are capitalized up to the date the software is available for general release to customers. We capitalize the payments made for software that we purchase or license for use in our products that has previously met the technological feasibility criteria prior to our purchase or license. Once available for general release, capitalized external use software development costs are amortized over the estimated economic life, which ranges from two to five years. Amortization of such costs is included in Depreciation and amortization in the Consolidated Statement of Operations and Comprehensive Income (Loss). Goodwill and Other Acquired Intangible Assets Our principal acquired intangible assets relate to goodwill, trademarks and customer relationships. Goodwill represents the excess purchase price over the fair value of the identifiable net assets acquired in a business combination. Trademarks and customer relationships were originally recorded at their fair values in connection with business combinations. Goodwill and other intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible assets with finite lives are amortized on a straight-line basis over three to thirteen years to their estimated residual values and reviewed for impairment. Factors considered when assigning useful lives include legal, regulatory and contractual provisions, product obsolescence, demand, competition and other economic factors. Impairment of Goodwill and Long-Lived Assets We test for goodwill impairment at least annually on the last day of our fiscal period, and whenever other facts and circumstances indicate that the carrying value may not be recoverable. For goodwill impairment evaluations, we first make a qualitative assessment to determine if goodwill is likely to be impaired. If it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value, we then compare the fair value of the reporting unit to its respective carrying amount. Goodwill is carried, and therefore tested, at the reporting unit level. As of December 31, 2023 we have five reporting units, Virtual Sports, Interactive, Leisure, and two reporting units within our Gaming segment. If the fair value of the reporting unit is less than its carrying amount, the amount of the impairment loss, if any, will be measured by comparing the implied fair value of goodwill to its carrying amount and would be charged to operations as an impairment loss. As of December 31, 2023, 2022, and 2021 management determined there were no indicators of impairment and concluded that no impairment was required at any of these dates. We assess the recoverability of long-lived assets and intangible assets with finite useful lives whenever events arise or circumstances change that indicate the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets (or asset groups) to be held and used is measured by a comparison of the carrying amount of the asset (or asset group) to the expected net future undiscounted cash flows to be generated by that asset (or asset group) or, for identifiable intangibles with finite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through expected net future undiscounted cash flows. The amount of impairment of other long-lived assets and intangible assets with finite lives is measured by the amount by which the carrying amount of the asset exceeds the fair market value of the asset. As of December 31, 2023, 2022, and 2021 management determined there were no indicators of impairment and concluded that no impairment was required at any of these dates. Refer to Note 8, “Intangible Assets and Goodwill” for more information. F- 11 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Equity Method Investment For investments in entities over which the Company exercises significant influence, but which do not meet the requirements for consolidation, the Company uses the equity method of accounting. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investment may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other-than-temporary. Since April 2020, the Company has had no equity method investments and has therefore recognized no impairments. Deferred Revenue and Deferred Cost of Sales Deferred revenue arises from the timing differences between the shipment or installation of gaming terminals and systems products and the satisfaction of all revenue recognition criteria consistent with our revenue recognition policy, as well as prepayment of contracts which are recognized ratably over a service period, such as maintenance or licensing fees. Deferred cost of sales, recorded as prepaid expenses and other assets, consists of the direct costs associated with the manufacture of gaming equipment and systems products for which revenue has been deferred. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue in current liabilities. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Debt Issuance Costs Debt issuance costs incurred in connection with the Company’s debt are capitalized and amortized as interest expense over the term of the related debt. The Company presents debt issuance costs as a reduction from the carrying amount of debt. Only costs that are wholly attributable to obtaining the related debt finance are treated as debt issuance costs. Any other costs are expensed to the Consolidated Statement of Operations and Comprehensive Income (Loss) as part of Acquisition and integration related transaction expenses. Value Added Tax The Company is subject to Value Added Tax (“VAT”) in some locations. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods and services sold less VAT paid on purchases made with the relevant supporting invoices. VAT is collected from customers by the Company on behalf of the tax authorities and is therefore not charged to the Consolidated Statement of Operations and Comprehensive Income (Loss). Common Stock Purchase Warrants and Derivative Financial Instruments The Company reviews any common stock purchase warrants and other freestanding derivative financial instruments at each balance sheet date and classifies them on the consolidated balance sheet as: a) Equity if they (i) require physical settlement (full or net-share settlement), or (ii) gives the Company a choice of net-cash settlement or physical settlement in its own shares (full or net shares), or b) Assets or liabilities if they (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (full physical settlement or net-share settlement). F- 12 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 At each reporting date, the Company determines whether a change in classification between assets and liabilities is required. During the year ending December 31, 2021, (i) an aggregate of 2,651,129 shares of common stock were issued pursuant to the exercise of 5,302,258 Public Warrants and (ii) an aggregate of 1,027,836 shares of common stock were issued pursuant to the exercise (on a cashless basis) of 9,049,230 Private Warrants. There were no warrants outstanding as of December 31, 2023 or December 31, 2022, respectively. From time to time we enter into foreign currency forward contracts to mitigate the risk associated with cash payments required to be made in non-functional currencies or to mitigate the risk associated with cash to be received in non-functional currencies. Accounting Policy for Derivative Instruments and Hedging Activities FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, “Fair Value Measurements,” the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Revenue Recognition The Company evaluates the recognition of revenue and rental income based on the criteria set forth in ASC 606 or ASC 842, as appropriate. Revenue is recognized net of rebates and discounts when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of distinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied and the customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for goods or services. Under the standard, a contract’s transaction price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: 1. identify the contracts with a customer; 2. identify the performance obligations within the contract, including whether they are distinct in the context of the contract and capable of being distinct; F- 13 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 3. determine the transaction price; 4. allocate the transaction price to the performance obligations in the contract; and 5. recognize revenue when, or as, the Company satisfies each performance obligation. Step 1 – Identify the contract The Company identifies contracts with its customers when all parties have approved the contract and are committed to perform their respective obligations, when each party’s rights and the payment terms regarding the goods or services to be transferred can be identified. The contract must also have commercial substance, and it must be probable that the Company will collect the consideration to which it will be entitled. Contracts entered into at or near the same time with the same customer or related parties of the customer are accounted for as one contract if any of the following criteria are met: a. Contracts were negotiated as a single commercial package (including whether a contract would be loss-making without taking into account the consideration received under another contract) b. Consideration in one contract depends on the other contract c. Goods or services (or some of the goods or services) are a single performance obligation. Step 2 – Identify performance obligations Performance obligations are identified by considering whether a good or service is distinct. The Company considers a good or service to be distinct only when the customer can benefit from it either on its own or together with other resources that are readily available, and when the promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. The Company applies the series guidance to its performance obligations where the following criteria apply: a. Each distinct good or service in the series meets the criteria to be a performance obligation satisfied over time. b. The same method would be used to measure progress toward complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer. Step 3 – Determine the transaction price The Company considers all amounts to which it has rights in exchange for the goods or services transferred in determining the transaction price. This includes fixed and variable consideration. If the consideration promised by a customer includes a variable amount, we estimate the amount to which we expect to be entitled using either the expected value or most likely amount method. In the case where the variable consideration is in the form of usage based fees, the Company evaluates the royalties to determine whether they qualify for the sales and usage-based royalty exception, as discussed under Step 5. The Company also considers the impact of any liquidated damages clauses or service level agreements that could result in credits or refunds to the client or incentive payments/bonuses from the customer upon achieving certain agreed-upon metrics. Incentive payments are accounted for as variable considerations when the likely amount of revenue to be recognized can be estimated to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Where variable considerations relates to a performance obligation determined to be a series, variable consideration is not estimated upfront in accordance with the exception allowed by ASC 606. The Company’s contracts with customers generally do not include non-cash consideration. In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money if the payment terms are not standard and the timing of payments agreed to by the parties to the contract provide the customer or the Company with a significant benefit of financing, in which case the contract contains a significant financing component. In accordance with the practical expedient in ASC 606-10-32-18, the Company elected to not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. Invoices are generally issued as control transfers and/or as services are rendered. Our standard payment terms dictate that payment is due upon receipt of invoice, payable within 30 to 60 days. Sales taxes and all other items of a similar nature are excluded from the measurement of the transaction price and shipping and handling activities are treated as a fulfillment of our promise to transfer the goods, hence, included in cost of sales. F- 14 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Step 4 – Allocate the transaction price The Company allocates the contract’s transaction price to each performance obligation based on the relative standalone selling prices of the goods or services being provided. Where a contract includes multiple performance obligations, the Company determines the standalone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocates the transaction price in proportion to those standalone selling prices. Where possible, the Company uses the price charged for the good or service to other customers in similar circumstances as evidence of standalone selling price. Where this is not possible, the standalone selling price is estimated by experienced management using the best available judgement considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives, and pricing practices. With respect to performance obligations that are considered to be a series, where appropriate and where the required criteria are met, variable consideration is allocated entirely to a distinct good or service that is part of a series. Step 5 – Recognize revenue The Company recognizes revenue over time for performance obligations that meet one of the following criteria: a. The customer simultaneously receives and consumes the benefits provided by the Company’s performance as the Company performs. b. The Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. c. The Company’s performance does not create an asset with an alternative use to the Company, and the Company has an enforceable right to payment for performance completed to date Revenue for the Company’s remaining performance obligations that do not meet one of the above criteria is recognized at the point at which the customer obtains control of the good or service. The Company assesses usage-based fees it receives as consideration in contracts that contain licenses of its intellectual property to determine if such fees constitute a sales- or usage-based royalty, in which case the usage-based fee is included in the contract’s transaction price as and when the usage occurs, since by that time our licensing obligations have been (or are in process of being) fulfilled. Acting as a Principal or an Agent The Company evaluates arrangements where they may be acting as a principal or an agent. We may include subcontractor services or third-party vendor services or products in certain arrangements. In these arrangements, revenue from sales of third-party vendor services or products are recorded net of our costs when we are acting as an agent between the customer and the vendor, and gross when we are the principal for the transaction. To determine whether we are an agent or principal, we consider whether we obtain control of the services or products before they are transferred to the customer. In making this evaluation, several factors are considered, most notably whether we have primary responsibility for fulfillment to the customer, as well as inventory risk and pricing discretion. Segment Revenue The Company has detailed evaluation of segment specific revenue recognition requirements under ASC 606 or ASC 842, as appropriate. Gaming Revenue Gaming contracts typically include multiple performance obligations such as delivery of our gaming terminals preloaded with proprietary gaming software, sever-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. Consideration with respect to these performance obligations typically takes the form of a fixed price per terminal billed upfront and a usage based fee in the form of percentage of net winnings, billed in arrears (usually monthly). Transaction price is allocated to all performance obligations within a contract on the basis of their standalone selling prices. Terminal revenue is recognized at the point in time in accordance with contractual terms of each arrangement, but predominantly upon transfer of physical possession of the terminal or the lapse of customer acceptance provisions. Services such as terminal repairs, maintenance, software updates and upgrades and content development are considered stand-ready obligations; therefore, control transfers and revenue is recognized over time over the term of the service period. As the license of our intellectual property is the predominant item to which the royalty relates, variable consideration related to sales- and usage-based royalty are recognized in the period the sale or usage occurs in accordance with ASC 606-10-55-65(A). The Company also enters into arrangements that provide the customer with the right to use the terminals, wherein the Company operate as both a lessor and a content and service provider. ASC 842 provides a practical expedient that permits lessors to aggregate non-lease components (sever-based content, terminal repairs, maintenance, software updates and upgrades and content development) and the associated lease components (terminals) if certain conditions are met and account for the combined unit of accounting under either ASC 606 or ASC 842, based on the predominant characteristic in the arrangement. In contracts where we provide content and services that are identified as non-lease components as well as underlying assets that are identified as lease components and the lease is an operating lease, the content and service provided to the customer represents the most critical element of the arrangement. The Company has elected to combine the non-lease component and the lease component and account for the entire arrangement under ASC 606 based on the consideration that the content and service offering is the predominant and critical element of the contract. F- 15 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Virtual Sports Revenue In Virtual Sports , the Company packages products and services in two ways: ● An on-premise solution which consists of a complex software and networking package delivered to retail betting outlets that may install and run the solution in their own environment without connection to Inspired’s platform; and ● A hosted solution capable of fulfilling the product delivery needs of the Company’s customers which includes the proprietary Virtual Plug and Play end to end online and mobile turnkey solutions and a cloud-based solution that requires an XML sportsbook integration that is fully hosted and operated by Inspired. For the on-premise solution, contracts typically include multiple performance obligations such as delivery of the software license, games and the content in addition to certain services such as software maintenance, support, updates, upgrades on an when and if available basis and content development. Consideration with respect to these performance obligations typically takes the form of a percentage of net winnings billed in arrears (usually monthly). As the license of intellectual property is the predominant item to which the royalty relates, the sales- and usage-based royalty is recognized in the period the sale or usage occurs in accordance with ASC 606-10-55-65(A). Services such as software maintenance, support, updates, upgrades on an when and if available basis and content development are considered stand-ready obligations; therefore, control transfers and revenue is recognized over time over the term of the service period. Occasionally, customer arrangements also may include licenses for which the Company bills an upfront fixed fee. Revenue from such licenses is recognized at the point in time the customer obtains the right to use the license. Upfront fees are normally billed upon signing of the relevant agreement, and become due and payable at set times thereafter. The Company also enters into arrangements to develop bespoke games on a fixed fee basis. The license to bespoke games is recognized at a point in time the customer obtains the right to use the license or when acceptance is obtained, in instances where acceptance is required. The Company has no ongoing service obligations subsequent to customer acceptance of the bespoke game, and they meet the criteria to be considered distinct. Payment for bespoke games is typically due within a number of days after delivery. For the hosted solution, the Company provides daily access to the gaming platform as well as a stand ready obligation to deliver customer support, platform maintenance, updates and upgrades. Such arrangements are accounted for as a single performance obligation composed of a series of distinct services that are substantially the same and have the same pattern of transfer (i.e., distinct days of service). Consideration with respect to these arrangements typically takes the form of usage based fees (percentage of net winnings) which is recognized as usage is incurred. These fees are billed in arrears (usually monthly) and due typically 30 days from the date of the invoice. Interactive Revenue Interactive revenue is generated from 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. The Company provides daily access to these platforms as well as a stand ready obligation to deliver customer support, platform maintenance, updates and upgrades, as such arrangements are accounted for as a single performance obligation composed of a series of distinct services that are substantially the same and have the same pattern of transfer (i.e., distinct days of service). Consideration with respect to these performance obligations typically takes the form of usage based fees (percentage of net win) which is recognized as usage is incurred. These fees are billed in arrears (usually monthly) and due typically 30 days from the date of the invoice. Leisure Revenue The Company jointly operate arcades within holiday resorts with the resort owners. The Company also wholly operates a number of gaming arcades within certain motorway service stations. The Leisure segment contract typically include one stand-ready performance obligation to provide managed services to pubs, holiday resorts and amusement arcades, both standalone and within motorway service stations. Managed service is an end-to-end management solution to provide a comprehensive range of gaming machine terminals, amusement machine terminals, and service of operating amusements over a term, as well as service obligations related to terminal repairs, content and maintenance, cash collections, personnel and other services. Consideration with respect to these performance obligations typically takes the form of usage based fees (percentage of net win) which is recognized as usage is incurred, with adjustments to account for the movement of income uncollected in the specific period. These fees are billed in arrears (usually monthly) and due typically 30 days from the date of the invoice. The Company also provides terminal maintenance and spares management services to third parties, including customers. Consideration with respect to this stand-ready performance obligation takes the form of either variable fees based on number of machines being serviced during a period or fixed fees per time period. These fees are billed in arrears and typically settled within 30 days. Revenue is recognized over time over the term of the service period . Costs to Obtain or Fulfill a Contract The Company capitalizes certain contract acquisition costs that are incremental to obtaining a contract with a customer, to the extent that such costs are recoverable from the associated contract margin. Capitalized contract acquisition costs primarily consist of certain sales commissions programs paid to internal sales personnel and external advisors. The Company also capitalizes certain costs to fulfill a contract with a customer when the costs relate directly to the contract, are expected to generate resources that will be used to satisfy a future performance obligation under the contract and are expected to be recovered through revenue generated under the contract. These costs primarily consist of employee-related costs for time incurred on software development projects associated with customer contracts. Capitalized contract acquisition costs and costs to fulfill a contract are amortized on a systematic basis over the expected period of benefit which ranges from 0 to 3 years based on the contract term and pattern of transfer of the underlying goods and/or services being provided to the customer. Capitalized costs to obtain and fulfill contracts with customers are included in Costs of obtaining and fulfilling customer contracts, net, in the Consolidated Balance Sheets and amortization of such costs is included in Depreciation and amortization in the Consolidated Statement of Operations and Comprehensive Income (Loss). F- 16 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Disaggregation of revenue Information on disaggregation of revenue is included in Note 28, “Segment Reporting and Geographic Information.” Shipping and Handling Costs Shipping and handling costs for products sales and terminals related to subscription services are included in cost of sales, excluding depreciation and amortization for all periods presented. Share-Based Payment Arrangements The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation” (“ASC 718”). ASC 718 requires generally that all equity awards be accounted for at their “fair value.” This fair value is measured on the grant date for stock-settled awards. Fair value is equal to the underlying value of the stock for “full-value” awards such as restricted stock and restricted stock units that have time and performance vesting conditions, restricted stock and restricted stock units that have market conditions are valued using a Monte Carlo simulation model. Costs equal to these fair values are recognized ratably over the requisite service period based on the number of awards that are expected to vest, or in the period of grant for awards that vest immediately and have no future service condition. The Company accounts for forfeitures as they occur. For awards that vest over time, previously recognized compensation cost is reversed if the service or performance conditions are not satisfied and the award is forfeited. Subsequent modifications to outstanding awards result in incremental cost if the fair value is increased as a result of the modification. The incremental cost is charged over the estimated derived service period. Income Taxes Income taxes are accounted for under the asset and liability method. Our provision for income taxes is principally based on current period income (loss), changes in deferred tax assets and liabilities and changes in estimates with regard to uncertain tax positions. We estimate current tax expense and assess temporary differences resulting from differing treatments of items for tax and accounting purposes using enacted tax rates in effect for each taxing jurisdiction in which we operate for the period in which those temporary differences are expected to be recovered or settled. These differences result in deferred tax assets and liabilities. Our total deferred tax assets are principally comprised of depreciation and net operating loss carry forwards. Significant management judgment is required to assess the likelihood that deferred tax assets will be recovered from future taxable income. In assessing the realizability of these deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Management makes this assessment on a jurisdiction by jurisdiction basis considering the historical trend of taxable losses, projected future taxable income and the reversal of deferred tax liabilities. We evaluate income tax uncertainties, assess the probability of the ultimate settlement with the applicable taxing authority and records an amount based on that assessment. Interest and penalties, if any, associated with uncertain tax positions are included in income tax expense. Comprehensive (Loss) Income We include and separately classify in comprehensive (loss) income unrealized gains and losses and hedges from our foreign currency translation adjustments, gains or losses associated with pension or other post-retirement benefits, prior service costs or credits associated with pension or other post-retirement benefits and transition assets or obligations associated with pension or other post-retirement benefits. F- 17 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Leases We determine if an arrangement is a lease at inception of the arrangement. Once it is determined that an arrangement is, or contains, a lease, that determination should only be reassessed if the legal arrangement is modified. Changes to assumptions such as market-based factors do not trigger a reassessment. Determining whether a contract contains a lease requires judgement. In general, arrangements are considered to be a lease when all of the following apply: ● it conveys the right to control the use of an identified asset for a period of time in exchange for consideration; ● we have substantially all economic benefits from the use of the asset; and ● we can direct the use of the identified asset. The terms of a lease arrangement determine how a lease is classified and the resulting income statement recognition. When the terms of a lease effectively transfer control of the underlying asset, the lease represents an in substance financed purchase (sale) of an asset and the lease is classified as a finance lease by the lessee and a sales-type lease by the lessor. When a lease does not effectively transfer control of the underlying asset to the lessee, but the lessor obtains a guarantee for the value of the asset from a third party, the lessor would classify a lease as a direct financing lease. All other leases are classified as operating leases. Where a lease contains more than one component, the consideration in the contract is allocated on a relative standalone price basis to the separate lease components and the non-lease components. Leases – the Company as lessee Lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available on the date that we adopted Topic 842, or the commencement date, if later, in determining the present value of future payments. The lease ROU asset includes any lease payment made and initial direct costs incurred. Our operating lease terms may include options to extend or terminate the lease which are included in the measurement of the ROU assets and lease liabilities when it is reasonably certain that we will exercise that option. F- 18 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The lease expense for minimum operating lease payments is recognized on a straight-line basis over the lease term. Finance lease assets are amortized straight-line over their useful life where the lease transfers ownership of the underlying asset, or to the earlier of the end of the useful life of the asset and the end of the lease term where ownership is not transferred. Interest on finance leases is recognized as the amount that results in a constant periodic discount rate on the remaining balance of the liability. We have operating lease agreements with lease and non-lease components. The Company did not make the election to treat the lease and non-lease components as a single component and considers the non-lease components as a separate unit of account. The Company has elected not to apply the recognition requirements of ASC 842 to short-term operating leases. We recognize the lease payments for short-term leases on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Leases – the Company as lessor The Company’s lease arrangements are a mixture of sales-type leases and operating leases. Sales-type lease receivables are recognized based on the net investment in the lease, at the present value of future minimum lease payments receivable over the lease term, plus any guaranteed residual value of the underlying asset, at the commencement date. The discount rate used in determining the present value of the future minimum lease payments is the rate implicit in the lease. This is calculated using the fair value of the underlying asset and the present value of any unguaranteed residual value. The underlying asset is derecognized at the point of inception and a selling profit is recognized at lease commencement. Subsequent interest income is recognized over the term of the lease, at an amount that produces a constant periodic discount rate on the remaining balance of the net investment in the lease. For operating leases, we continue to recognize the underlying asset. Lease income is recognized on a straight-line basis over the lease term. F- 19 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Recently Issued Accounting Standards In October 2023, the FASB issued ASU No. 2023-06, “Disclosure Improvements – Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” (“ASU 2023-06”). ASU 2023-06 modifies the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. The guidance will be effective on the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The amendments in the Update should be applied prospectively. The adoption of ASU 2023-06 is not expected to have a material impact on the Company’s financial statement presentation or disclosures. In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in the Update 1) Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss (collectively referred to as the “significant expense principle”). 2) Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss. 3) Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods. 4) Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. 5) Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. 6) Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this Update and all existing segment disclosures in Topic 280. The guidance will be effective for annual periods beginning on January 1, 2024, and for interim periods beginning on January 1, 2025. We are still evaluating the effect of this guidance, however, the adoption of ASU 2023-07 is not expected to have a material impact on the Company’s financial statement presentation or disclosures. In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”). The amendments in ASU 2023-09 enhance income tax disclosures, primarily through standardization, disaggregation of rate reconciliation categories, and income taxes paid by jurisdiction. ASU 2023-09 is effective for annual periods beginning on January 1, 2025, with early adoption allowed. We are still evaluating the effect of this guidance, however, the adoption of ASU 2023-09 is not expected to have a material impact on the Company’s financial statement presentation or disclosures. Newly Adopted Accounting Standards On January 1, 2023, the Company adopted Topic 326 Financial Instruments – Credit Losses (“ASC 326”). ASC 326 affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. It requires an entity to recognize expected credit losses rather than incurred losses for financial assets and requires a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Credit risk software is used to monitor credit risk, both for new and existing customers. Monthly review meetings are held involving senior management in which issues are raised and concerns discussed with respect to high-value debtors. The main risk experienced by the Company is that of changes of circumstances within a customer’s business that affect their ability to meet their liabilities. Suspension of services can be effected to mitigate the risk of debtor default, and payment methods such as direct debit give early indications of potential payment difficulties. The Company uses an aging method for developing its allowance for credit losses by which receivable balances are grouped based on an aging category. The grouping is then adjusted to take account of the specific receivables and an appropriate default rate then applied to receivables remaining that are overdue in excess of 90 days. We also consider customer specific information and provide for expected credit losses on an individual debtor basis where appropriate. The adoption of ASC 326 has no material effect on the beginning of the first period to which it affects. Disclosures with respect to allowances for credit losses are given in footnote 3 to these financial statements. F- 20 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 2. Acquisitions and Disposals In January 2022, the Company sold its Italian VLT business, including all terminal and other assets, staff costs and facilities and contracts, to a non-connected party for total proceeds of € 1.1 million ($ 1.2 million), recognizing a profit on disposal of € 0.8 million ($ 0.9 million). The Company continues to serve these Italian markets in the form of the provision of platform and games. On December 31, 2021, the Company acquired 100 % of the membership interests of Sportech Lotteries, LLC, which has since been renamed Inspired Entertainment Lotteries, LLC. The Company concluded that Inspired Entertainment Lotteries, LLC’s contract with its only customer represented substantially all of the fair value of the gross assets acquired and, in accordance with ASC 805, determined that the asset set did not comprise a business. The Company therefore applied asset acquisition accounting to the transaction and recorded the acquisition of the customer contract as an intangible asset in the amount of $ 12.4 million. The intangible asset will be amortized over its remaining useful life of 13.2 years. During the year ended December 31, 2022, as a result of revisions made to management’s preliminary assessments, the Company recognized an additional $ 0.9 million long-term receivable related to Inspired Entertainment Lotteries, LLC, and reduced the value of the customer contract intangible asset accordingly. F- 21 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 3. Accounts Receivable Accounts receivable consist of the following: Schedule of Accounts Receivable December 31, 2023 December 31, 2022 (in millions) Trade receivables $ 42.8 $ 44.6 Less: long-term receivable recorded in other assets ( 3.0 ) ( 3.0 ) Finance lease receivables 1.9 0.2 Allowance for credit losses ( 1.1 ) ( 1.4 ) Total accounts receivable, net $ 40.6 $ 40.4 Changes in the allowance for credit losses are as follows: Schedule of Changes in Allowance for Credit Losses December 31, 2023 December 31, 2022 (in millions) Beginning balance $ ( 1.4 ) $ ( 1.8 ) Additional allowance for credit losses ( 0.2 ) ( 0.2 ) Recoveries 0.2 — Write offs 0.4 0.4 Foreign currency translation adjustments ( 0.1 ) 0.2 Ending balance $ ( 1.1 ) $ ( 1.4 ) 4. Inventory Inventory consists of the following: Schedule of Inventory December 31, 2023 December 31, 2022 (in millions) Component parts $ 23.3 $ 20.7 Work in progress 0.4 3.6 Finished goods 8.6 6.0 Total inventories $ 32.3 $ 30.3 Component parts include parts for gaming terminals. Included in inventory are reserves for excess and slow-moving inventory of $ 2.2 million and $ 2.5 million as of December 31, 2023 and 2022, respectively. Our finished goods inventory primarily consists of gaming terminals which are ready for sale. F- 22 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 5. Prepaid Expenses and Other Assets Prepaid expenses and other assets consist of the following: Schedule of Prepaid Expenses and Other Assets December 31, 2023 December 31, 2022 (in millions) Prepaid expenses and other assets $ 15.6 $ 13.2 Unbilled accounts receivable 24.0 18.0 Total prepaid expenses and other assets $ 39.6 $ 31.2 6. Property and Equipment, net Schedule of Property and Equipment December 31, 2023 December 31, 2022 (in millions) Short-term leasehold property $ 3.5 $ 3.1 Gaming and amusement terminals 200.0 168.1 Computer equipment 12.7 10.9 Plant and machinery 4.1 3.9 Property and equipment, gross 220.3 186.0 Less: accumulated depreciation and amortization ( 157.5 ) ( 140.9 ) Property and equipment, net $ 62.8 $ 45.1 Depreciation expense amounted to $ 19.5 million, $ 21.5 million and $ 25.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. 7. Software Development Costs, net Software development costs, net consisted of the following: Schedule of Software Development Costs December 31, 2023 December 31, 2022 (in millions) Software development costs $ 145.3 $ 125.2 Less: accumulated amortization ( 123.5 ) ( 106.9 ) Software development costs, net $ 21.8 $ 18.3 During the years ended December 31, 2023 and 2022, the Company capitalized $ 12.5 million and $ 10.8 million of software development costs, respectively. As of December 31, 2023 and 2022, approximately $ 1.3 million and $ 1.3 million of capitalized software development costs related to the Company’s implementation of an enterprise resource planning system, respectively. Other capitalized cloud-based implementation costs were not material as of December 31, 2023 and 2022. The total amount of software costs amortized was $ 10.1 million, $ 9.5 million and $ 15.7 million for the years ended December 31, 2023, 2022, and 2021, respectively. Software costs written down to net realizable value amounted to $ 0.3 million, $ 0.4 million and $ 0.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. The weighted average amortization period was 3.8 years and 3.9 years for the years ended December 31, 2023 and 2022, respectively. F- 23 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The estimated software amortization expense for the years ending December 31, excluding costs that are yet to commence amortization, are as follows: Schedule of Estimated Software Amortization Expense Year ending December 31, (in millions) 2024 $ 7.6 2025 4.0 2026 2.2 2027 1.1 2028 0.1 Thereafter 0.3 Total $ 15.3 8. Intangible Assets and Goodwil l The following tables present certain information regarding our intangible assets. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives of ten to thirteen years with no estimated residual values, which materially approximates the expected pattern of use. Schedule of Intangible Assets and Goodwill December 31, 2023 December 31, 2022 (in millions) Trademarks $ 20.4 $ 19.4 Customer relationships 29.5 28.7 Intangible assets, gross 49.9 48.1 Less: accumulated amortization ( 36.5 ) ( 33.5 ) Intangible assets, net $ 13.4 $ 14.6 Aggregate intangible asset amortization expense amounted to $ 1.5 million, $ 1.5 million and $ 0.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. The estimated intangible asset amortization expense for the years ending December 31 are as follows: Schedule of Estimated Intangible Asset Amortization Expense Year ending December 31, (in millions) 2024 $ 1.6 2025 1.6 2026 1.6 2027 1.6 2028 1.6 Thereafter 5.4 Total $ 13.4 Goodwill Goodwill is summarized as follows: Schedule of Goodwill December 31, 2023 December 31, 2022 (in millions) Balance at beginning of period, gross $ 76.0 $ 82.7 Accumulated goodwill impairment losses ( 20.5 ) ( 20.5 ) Balance at beginning of period, net 55.5 62.2 Foreign currency translation adjustments 3.3 ( 6.7 ) Ending balance, net $ 58.8 $ 55.5 F- 24 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 9. Other Assets Other assets consist of the following: Schedule of Other Assets December 31, 2023 December 31, 2022 (in millions) Long term finance lease receivable $ 4.8 $ 0.6 Long term receivables 3.0 3.0 Long term prepaid expenses and other assets 0.2 0.2 Total $ 8.0 $ 3.8 10. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following: Schedule of Accounts Payable and Accrued Expense December 31, 2023 December 31, 2022 (in millions) Accounts payable $ 41.9 $ 23.7 Payroll and related costs 5.5 10.3 Cost of sales including inventory 6.4 9.2 Other creditors 7.0 9.5 Total $ 60.8 $ 52.7 11. Contract Related Disclosures The following table summarizes contract related balances: Schedule of Contract Related Balances Accounts Receivable Unbilled Accounts Receivable Right to recover asset Deferred Income Customer Prepayments and Deposits (in millions) At December 31, 2023 $ 42.8 $ 24.0 $ 0.6 $ ( 12.7 ) $ ( 2.9 ) At December 31, 2022 $ 44.6 $ 18.0 $ — $ ( 7.4 ) $ ( 2.4 ) Unbilled accounts receivable are a form of contract asset and primarily result from revenue being recognized when or as control of a solution or service is transferred to the customer, but where invoicing is contingent upon the completion of other performance obligations or payment terms differ from the provisioning of services. The current portion of unbilled accounts receivable is reported within prepaid expenses and other current assets in the consolidated balance sheet, and the non-current portion is included in other assets. Right to recover assets are recognized in respect of the transfer of products with a right of return where the Company has also recognized a refund liability. Right to return assets are recognized in other debtors and refund liabilities are recognized as part of deferred income. Contract liabilities (deferred income and customer prepayments and deposits) primarily relate to consideration received from customers in advance of delivery of the related goods and services to the customer. Contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period. Revenue recognized that was included in the deferred income balance at the beginning of the period amounted to $ 8.7 million, $ 7.0 million and $ 10.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. For the year ended December 31, 2023 and 2022 there was no significant amounts of revenue recognized as a result of changes in contract transaction price related to performance obligations that were satisfied in the respective prior periods. The Company capitalizes certain costs incurred in obtaining or fulfilling a customer contract. The following table summarizes amounts capitalized on the Consolidated Balance Sheets at December 31, 2023 and 2022, net of accumulated amortization. Schedule of Customer Contract December 31, 2023 December 31, 2022 (in millions) Costs to obtain contracts with customers, net $ 0.5 $ 0.4 Customer contract fulfillment costs, net 8.9 6.6 Total costs of obtaining and fulfilling customer contracts, net $ 9.4 $ 7.0 Amortization of capitalized contract costs was $ 8.5 million, $ 7.0 million, and $ 6.4 million during the years ended December 31, 2023, 2022, and 2021, respectively. We did no t recognize any impairment losses on such costs during the years ended December 31, 2023, 2022, or 2021. F- 25 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Transaction Price Allocated to Remaining Performance Obligations At December 31, 2023, the transaction price allocated to unsatisfied performance obligations for contracts expected to be greater than one year, or performance obligations for which we do not have a right to consideration from the customer in the amount that corresponds to the value to the customer for our performance completed to date, variable consideration which is not accounted for in accordance with the sales-based or usage-based royalties guidance, or contracts which are not wholly unperformed, is approximately $ 107.7 million. Of this amount, we expect to recognize as revenue approximately 36 % within the next 12 months, approximately 45 % between 13 and 36 months, approximately 19 % between 37 and 60 months, and the remaining balance through December 31, 2029. 12. Other Liabilities Other liabilities consist of the following: Schedule of Other Liabilities December 31, 2023 December 31, 2022 (in millions) Customer prepayments and deposits $ 2.9 $ 2.4 Foreign exchange contract liabilities 0.6 0.2 Current portion of finance lease liabilities 0.7 1.0 Total other liabilities, current 4.2 3.6 Asset retirement obligations 1.4 1.1 Other creditors 0.7 0.8 Pension liability 2.0 2.1 Total other liabilities, long-term 4.1 4.0 Total other liabilities $ 8.3 $ 7.6 13. Long Term and Other Debt Senior Secured Notes On May 20, 2021, Inspired Entertainment (Financing) PLC, a wholly owned subsidiary of the Company, issued £ 235.0 million ($ 299.6 million, as translated at December 31, 2023) aggregate principal amount of its 7.875 % senior secured notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of 7.875 % per annum and mature on June 1, 2026 . Interest is payable on the Senior Secured Notes on June 1 and December 1 of each year, commencing on December 1, 2021 The Senior Secured Notes and related guarantees were issued under an indenture (the “Indenture”), among Inspired Entertainment (Financing) PLC, as issuer, the Company and certain English and U.S. subsidiaries of the Company, as guarantors (collectively and together with the Company, the “Guarantors”), GLAS Trustees Limited, as trustee, GLAS Trust Corporation Limited, as security agent and GLAS Trust Company LLC as paying agent, transfer agent and registrar. The terms of the Senior Secured Notes and related guarantees are governed by the Indenture. The Senior Secured Notes are fully and unconditionally guaranteed on a senior secured first-priority basis by the Guarantors on a joint and several basis. The Senior Secured Notes and related guarantees are secured, subject to certain permitted collateral liens, on a first-priority basis by substantially all assets of the Guarantors and all claims of the Inspired Entertainment (Financing) PLC under an intercompany loan to Gaming Acquisitions Limited, a private limited liability company incorporated under the laws of England and Wales and an indirect wholly-owned subsidiary of the Company (“GAL”), of the proceeds of the offering of the Senior Secured Notes. F- 26 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The Indenture contains incurrence covenants that limit the ability of the Company and the Company’s restricted subsidiaries to, among other things, (i) incur or guarantee additional debt and issue certain preferred stock of restricted subsidiaries; (ii) create or incur certain liens; (iii) make restricted payments, including dividends or distributions to the Company’s stockholders or repurchase the Company’s stock; (iv) prepay or redeem subordinated debt; (v) make certain investments, including participating joint ventures; (vi) create encumbrances or restrictions on the payment of dividends or other distributions by restricted subsidiaries; (vii) sell assets, or consolidate or merge with or into other companies; (viii) sell or transfer all or substantially all of the Company’s assets or those of the Company’s subsidiaries on a consolidated basis; (ix) engage in certain transactions with affiliates; and (x) create unrestricted subsidiaries. Certain of these covenants will be suspended if and for so long as the Senior Secured Notes have investment grade ratings from any two of Moody’s Investors Service, Inc., Standard & Poor’s Investors Ratings Services and Fitch Ratings, Inc. These covenants are subject to exceptions and qualifications as set forth in the Indenture. Inspired Entertainment (Financing) PLC may redeem the Senior Secured Notes, in whole or in part, at any time and from time to time on or after June 1, 2023, at the redemption prices set forth in the Indenture and form of the Senior Secured Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Revolving Credit Facility In connection with the issuance of the Senior Secured Notes on May 20, 2021, the Company and certain of our direct and indirect wholly-owned subsidiaries, entered into a Super Senior Revolving Credit Facility Agreement (the “RCF Agreement”) with Global Loan Agency Services Limited, as agent, Barclays Bank plc (“Barclays”) and Macquarie Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK” and together with Barclays, the “Arrangers”) as arrangers and each lender party thereto (the “Lenders”), pursuant to which the Lenders agreed to provide, subject to certain conditions, a secured revolving facility loan in an original principal amount of £ 20 million ($ 25.5 million) under which certain of our subsidiaries are able to draw funds (the “RCF Loan”). The RCF Loans will terminate on November 20, 2025. The funding of the RCF Loan is subject to customary conditions set forth in the RCF Agreement. The undrawn commitment of each Lender under the RCF Loan will automatically terminate, unless previously terminated by the Company, on October 20, 2025. The RCF Loans will bear interest at a rate per annum equal to (i) SONIA for borrowings in sterling, (ii) LIBOR (or, on and after December 31, 2021, SOFR) for borrowings in dollars, or (iii) EURIBOR for borrowings in Euro, as applicable, plus, in each case, a margin (based on the Company’s consolidated senior secured net leverage ratio) ranging from 4.25 % to 4.75 % per annum. With respect to the RCF Loan, a commitment fee of 30 % of the then applicable margin is payable at any time on any unutilized portion of the RCF Loan. The RCF Agreement contains various covenants (which include restrictions regarding the incurrence of liens, the incurrence of indebtedness by the Company’s subsidiaries and fundamental changes, subject in each case to certain exceptions), representations, warranties, limitations and events of default (which include non-payment, breach of obligations under the financing documents, cross-default, insolvency and litigation) customary for similar facilities for similarly rated borrowers and subject to customary carve-outs and grace periods. Following the occurrence of an event of default which has not been waived or remedied, the Lenders who represent more than 66.67 % of total commitments under the RCF may, subject to the terms of an intercreditor agreement (which governs the relationship between the Lenders and the holders of the Senior Secured Notes), instruct the agent to (i) accelerate the RCF Loans, (ii) instruct the security agent to enforce the transaction security and/or (iii) exercise any other remedies available to the Lenders. F- 27 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The RCF Agreement requires that the Company maintain a maximum consolidated senior secured net leverage ratio of 6.25x on the test date for the relevant period ending June 30, 2021, stepping down to 6.0x on March 31, 2022, 5.75x on March 31, 2023 and 5.50x from March 31, 2024 and thereafter (the “RCF Financial Covenant”). The RCF Financial Covenant is calculated as the ratio of consolidated senior secured net debt to consolidated pro forma EBITDA (defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense) for the 12-month period preceding the relevant quarterly testing date and is tested quarterly on a rolling basis, subject to the Initial Facility (as defined in the RCF Agreement) being drawn on the relevant test date. The RCF Agreement does not include a minimum interest coverage ratio or other financial covenants. The outstanding principal amount of each advance under the RCF Loans is payable on the last day of the interest period relating to such advance, unless such advance is rolled over on a cashless basis in accordance with customary rollover provisions contained in the RCF Agreement, with a final repayment on November 20, 2025 . During the year ended December 31, 2023, the Company drew down on the RCF Agreement. Amounts due under the RCF Agreement at December 31, 2023 amounted to £ 15.0 million ($ 19.1 million). Interest relating to amounts drawn under the RCF Agreement amounted to $ 0.2 million and is recorded in Interest expense, net for the year ended December 31, 2023. Termination of Prior Financing The Company’s previous debt consisted of two tranches of senior secured term loans in a principal amount of £ 145.8 million ($ 185.9 million) with a cash interest rate of 8.25 % plus 3-month LIBOR and € 93.1 million ($ 102.8 million) with a cash interest rate of 7.75 % plus 3-month EURIBOR, respectively and a secured revolving facility loan in a principal amount of £ 20.0 million ($ 25.5 million) with a cash interest rate on any utilization of 6.50% plus 3-month LIBOR (the “Prior Financing”). In connection with the issuance of the Senior Secured Notes and the entry into the RCF Agreement, on May 20, 2021, the Prior Financing was repaid in full and the senior facilities agreement (dated September 27, 2019, as amended and restated on June 25, 2020, (the “Prior SFA) see below) relating to the Prior Financing was terminated. No prepayment premium applied to the repayment (although customary break cost provisions applied). Debt fees of $ 14.4 million were expensed to the Consolidated Statements of Operations and Consolidated Income (Loss) within Interest Expense as part of the repayment. In addition, on May 19, 2021, we terminated the interest rate swaps relating to the Prior Financing and applicable termination fees were settled on May 20, 2021 (see Note 14). Senior Facilities Agreement The Company’s Prior SFA (which was with Lucid Agency Services Limited, as agent, Nomura International plc and Macquarie Corporate Holdings Pty Limited (UK Branch) as arrangers and/or bookrunners) was entered into in connection with the Company’s acquisition of the Gaming Technology Group of Novomatic UK Ltd on October 1, 2019, and, provided for, subject to certain conditions, two tranches of senior secured term loans, in an original principal amount of £ 140.0 million ($ 178.5 million) and € 90.0 million ($ 99.4 million), respectively and a secured revolving facility loan in an original principal amount of £ 20.0 million ($ 25.5 million). The term loans, which were funded on October 1, 2019, were used to, among other things, pay the purchase price of the NTG Acquisition and refinance the Company’s prior indebtedness. The term loan for £ 140.0 million ($ 178.5 million) initially carried a cash interest rate of 7.25 % plus 3-month LIBOR, and the term loan for € 90.0 million ($ 99.4 million) initially carried a cash interest rate of 6.75 % plus 3-month EURIBOR. The £ 20.0 million ($ 25.5 million) revolving credit facility initially carried a cash interest rate on any utilization at 5.50 % plus 3-month LIBOR, with any unutilized amount initially carrying a cash interest cost at 30 % of the applicable margin on the revolving credit facility loan. F- 28 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The provisions from the June 2020 amendments to the Prior SFA included, among other things, (i) capitalizing certain interest payments that fell due on April 1, 2020, (ii) resetting the applicable leverage and capital expenditure financial covenants, removing certain applicable rating requirements, (iii) allowing the Company and its subsidiaries to incur additional indebtedness under the UK Coronavirus Large Business Interruption Loan Scheme under a stand-alone facility, which may rank pari passu or junior to the facilities under the Prior SFA, in an amount not exceeding £ 10.0 million ($ 12.7 million), (iv) removing certain applicable rating requirements, (v) limiting the ability of the Company and its subsidiaries to incur additional indebtedness, including by reducing the amount of general indebtedness the Company and its subsidiaries are permitted to incur and removing the ability to incur senior secured, second lien and unsecured indebtedness in an amount not exceeding the aggregate of (A) an unlimited amount, as long as, pro forma for the utilization of such indebtedness, the consolidated total net leverage ratio does not exceed the lower of 3.4:1 and the then applicable ratio with respect to the consolidated total net leverage financial covenant summarized further below, plus (B) an amount equal to the greater of £16.0 million ($20.4 million) and 25% of the consolidated pro forma EBITDA of the Company and its subsidiaries for the relevant period (as defined, but disregarding, for the purposes of calculating the usage of such cap, any financial indebtedness applied to refinancing other financial indebtedness, together with any related interest, fees, costs and expenses), (vi) increasing the margin applicable to the Facilities (as defined) by 1 %, and adding an additional payment-in-kind margin of 0.75 % payable on any principal amounts outstanding under Facility B (as defined in the Prior SFA) after September 24, 2021 (the “Relevant Date”), (vii) adding an exit fee payable by the Company with respect to any repayment or prepayment of Facility B after the Relevant Date at the time of such repayment or prepayment in an amount equal to 0.75 % of the principal amount of Facility B being repaid or prepaid, (viii) removing any ability to carry forward or carry back any unused allowance under the applicable capital expenditure financial covenant and (ix) granting certain additional information rights to the lenders under the Prior SFA, including the provision of a budget, and certain board observation rights until December 31, 2022. All other material terms of the SFA remained unchanged in all material respects. In consideration for the amendments listed above, the Company agreed to pay the lenders an amendment fee equal to 1 % of the Total Commitments (as defined in the Prior SFA). The amendment fee was payable to the lenders pro rata to their commitments under the Prior SFA. F- 29 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Outstanding Debt and Finance Leases The following reflects outstanding debt and finance leases as of the dates indicated below: Schedule of Outstanding Debt and Finance Leases Principal Unamortized deferred financing charge Book value, December 31, 2023 (in millions) Senior secured notes $ 318.7 $ ( 4.0 ) $ 314.7 Finance lease liabilities 2.4 — 2.4 Total long-term debt outstanding 321.1 ( 4.0 ) 317.1 Less: current portion of long-term debt ( 19.8 ) — ( 19.8 ) Long-term debt, excluding current portion $ 301.3 $ ( 4.0 ) $ 297.3 Principal Unamortized d eferred financing charge Book value, December 31, 2022 (in millions) Senior secured notes $ 282.9 $ ( 5.3 ) $ 277.6 Finance lease liabilities 2.2 — 2.2 Total long-term debt outstanding 285.1 ( 5.3 ) $ 279.8 Less: current portion of long-term debt ( 1.0 ) — ( 1.0 ) Long-term debt, excluding current portion $ 284.1 $ ( 5.3 ) $ 278.8 The Company is in compliance with all relevant financial covenants and the long-term debt portion is correctly classified as such in line with the underlying agreements. Long term debt as of December 31, 2023 matures as follows: Schedule of Maturities of Long-term Debt Fiscal period: Senior bank debt Finance leases Total (in millions) 2024 $ 19.1 $ 0.7 $ 19.8 2025 — 0.9 0.9 2026 299.6 0.5 300.1 2027 — 0.3 0.3 2028 — — — Total $ 318.7 $ 2.4 $ 321.1 14. Derivatives and Hedging Activities On January 15, 2020, the Company entered into two interest rate swaps with UBS AG designed to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a portion of the previous floating rate debt facilities. The swaps fixed the variable interest rate of the debt facilities and provided protection over potential interest rate increases by providing a fixed rate of interest payment in return. The interest rate swaps were for £ 95.0 million ($ 121.1 million) at a fixed rate of 0.9255 % based on the 6-month LIBOR rate and for € 60.0 million ($ 66.3 million) at a fixed rate of 0.102 % based on the 6-month EURIBOR rate. In connection with the issuance of the Senior Secured Notes and the entry into the RCF Agreement, on May 19, 2021, the Company terminated its two interest rate swaps. The termination fees were settled on May 20, 2021, for £ 1.3 million ($ 1.9 million) and € 0.1 million ($ 0.2 million), respectively. F- 30 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Hedges of Multiple Risks The Company’s objectives in using interest rate derivatives were to add stability to interest and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily used interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative was recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in Accumulated Other Comprehensive Income related to derivatives have now all been reclassified to interest expense as interest payments were made on the Company’s variable-rate debt. As of December 31, 2023 and 2022, the Company did not have any derivatives. Losses reclassified from accumulated other comprehensive income into interest expense in the consolidated statements of operations and income (loss) for the years ended December 31, 2023 and December 31, 2022 amounted to $ 0.3 million and $ 0.7 million, respectively. F- 31 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income for the year ended December 31, 2021. Schedule of Accumulated Other Comprehensive Income Amount of Gain/(Loss) Recognized in Other Comprehensive Income on Derivative Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Income (in millions) (in millions) Interest Rate Products $ 0.3 Interest Expense $ ( 1.5 ) Total $ 0.3 $ ( 1.5 ) The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the year ended December 31, 2021. Schedule of Consolidated Statements of Operations Interest Expense (in millions) Total amounts of income and expense line items presented in the statement of operations and comprehensive loss in which the effects of fair value or cash flow hedges are recorded $ 39.8 Gain/(loss) on cash flow hedging relationships in Subtopic 815-20 $ ( 1.5 ) F- 32 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 15. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of our assets and liabilities utilizing an established three-level hierarchy. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions. Level 3: Unobservable inputs that are supported by little or no market activity that are significant to the fair value of the asset or liability. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that are unable to be corroborated with observable market data. The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments approximates their recorded values. F- 33 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The fair value of our long-term senior debt as of December 31, 2023, was $ 280.1 million, based upon quoted prices in the marketplace, which are considered Level 2 inputs. Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s principal financial officer, who reports to the principal executive officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Principal Financial Officer and approved by the Principal Executive Officer. At December 31, 2023 and December 31, 2022, there were no Level 3 inputs, and no transfers in or out of Level 3 from other levels in the fair value hierarchy. 16. Stockholders’ Deficit Preferred Stock The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $ 0.0001 per share in one or more series. The Company’s Board of Directors is authorized to fix the voting rights, if any, designations, powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions thereof, applicable to the shares of each series. At December 31, 2023 and December 31, 2022, there were no shares of preferred stock issued or outstanding. Common Stock The Company is authorized to issue 49,000,000 shares of common stock, par value $ 0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each common share. Warrants As of December 31, 2020, the Company had 19,079,130 outstanding warrants to purchase an aggregate of 9,539,565 shares of the Company’s common stock, which included 7,999,900 warrants originally issued as part of the initial public offering (the “IPO”) (the “Public Warrants”) and 11,079,230 warrants issued in private placements in connection with the IPO and the Merger (the “Private Placement Warrants”). The warrants became exercisable 30 days after the closing of the Merger and had an expiration date of December 23, 2021. Each warrant entitled its holder to purchase one-half of one share of the Company’s common stock at an exercise price of $ 11.50 per whole share. The warrants were able to be exercised only for a whole number of shares of common stock. As of December 31, 2020, the warrants met the definition of a derivative under ASC 815 and were classified as a liability measured at fair value, with changes in fair value each period reported in earnings. During the year ended December 31, 2021, (i) an aggregate of 2,651,129 shares of common stock were issued pursuant to the exercise of 5,302,258 Public Warrants and (ii) an aggregate of 1,027,836 shares of common stock were issued pursuant to the exercise (on a cashless basis) of 9,049,230 Private Warrants. There were no warrants outstanding as of December 31, 2023 or 2022. 17. Stock-Based Compensation The Company’s stock-based compensation plans authorize awards of restricted stock units (“RSUs”), stock options and other equity-related awards. The Company’s 2023 Omnibus Incentive Plan (“2023 Plan”) was adopted by the Company’s Board of Directors on April 10, 2023 and approved by our stockholders on May 9, 2023. The 2023 Plan succeeds the 2021 Omnibus Incentive Plan and the 2018 Omnibus Incentive Plan (collectively, the “Prior Plans”) such that shares subject to the unused reserves of the Prior Plans (e.g., as a result of termination or forfeiture of awards) are instead rolled over to the 2023 Plan. The Company has two other predecessor plans, the 2016 Long-Term Incentive Plan and the Second Long-Term Incentive Plan (collectively, the “Terminated Plans”), whose available balances were terminated in connection with approval of the 2018 Omnibus Incentive Plan. Although outstanding awards under the Terminated Plans remain governed by the terms of such plans, no new awards may be granted or become available for grant thereunder. As of December 31, 2023, there were (i) 378,000 shares subject to outstanding awards under the 2023 Plan, including 250,000 shares subject to performance-based target awards, 93,750 shares subject to market-price vesting conditions, and 31,250 shares subject to awards as to which the applicable vesting conditions have been met which remain subject to deferred settlement , (ii) 2,433,225 shares subject to outstanding awards under the Prior Plans, including 358,506 shares subject to performance-based target awards, 97,500 shares subject to market-price vesting conditions, 190,586 shares subject to awards that were previously subject to performance criteria that were determined to have been met for the applicable performance year which awards continue to remain subject to a time-based vesting schedule and 1,225,300 shares subject to awards as to which the applicable vesting conditions have been met which remain subject to deferred settlement; and (iii) 1,168,686 shares subject to outstanding awards under the Terminated Plans as to which the applicable vesting conditions have been met which remain subject to deferred settlement. As of December 31, 2023, there were 2,881,460 shares available for new awards under the 2023 Plan (which includes shares rolled over from the Prior Plans) and no shares available for new awards under the Prior Plans. All awards outstanding as of December 31, 2023 consisted of RSUs (including time-based RSUs, performance-based RSUs and stock price based RSUs). F- 34 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The Company also has an employee stock purchase plan (“ESPP”) that authorizes the issuance of up to an aggregate of 500,000 shares of common stock pursuant to purchases thereunder by employees. The ESPP, which was approved by stockholders in July 2017, is administered by the Compensation Committee which has discretion to designate the length of offering periods and other terms subject to the requirements of the ESPP. Offerings may also be under the ESPP’s subplan for UK-based employees (the “Subplan”) which was adopted in June 2022 and is designed to meet the requirements of a sharesave scheme under UK law. The terms applicable to offerings approved under the ESPP and Subplan for 2022 and 2023 are described below. ESPP — Eligible employees may contribute up to 10 % of base compensation through payroll deductions over a period of twelve months, a maximum of 1,000 shares may be purchased per participant, the purchase price is equal to 85 % of the lower of the closing price of the common stock at the beginning of the offering period and the end of the offering period and shares are purchased on the last day of the offering period. Subplan (UK) — Eligible employees may contribute a maximum amount of £ 350 per month through payroll deductions over a period of three years, the purchase price is equal to 85 % of the closing price of the common stock on the day prior to commencement of the enrollment window for the offering, and participants have a period of six months following the end of the offering to elect to purchase shares or receive a refund. As of December 31, 2023, a total of 463,671 shares remained available for purchase under the ESPP. No shares were issued under the ESPP in 2021 or 2022 and a total of 4,080 shares were purchased in 2023 (at a purchase price of $ 8.483 per share) and such shares were issued in 2024. Based on enrollments in the ESPP (including the Subplan), an aggregate of approximately 105,000 shares were subject to outstanding purchase rights thereunder as of December 31, 2023. A summary of the Company’s RSU activity is as follows: Schedule of Restricted Stock Unit Activity Number of Shares Weighted Average Grant Date Fair Value Per Share Unvested Outstanding at January 1, 2023 1,647,544 $ 11.11 Granted (1) 888,225 $ 14.14 Forfeited ( 66,880 ) $ ( 14.00 ) Vested (2) ( 914,214 ) $ ( 11.52 ) Unvested Outstanding at December 31, 2023 1,554,675 $ 12.57 (1) The amount shown as granted in the table includes 219,213 performance-based target RSUs as to which the number eligible to vest ranged from 0 % to 200 % of the target amount of RSUs (a maximum of 438,426 RSUs based on attainment of Adjusted EBITDA targets for 2023 and criteria previously set by the Compensation Committee). Following the year ended December 31, 2023, the Committee determined that the performance level attained would equate to approximately 47 % of the target amount of RSUs. The amount shown in the table includes additional performance-based RSUs, awarded as sign-on grants to our Executive Chairman and our CEO (comprising tranches covering an aggregate of 250,000 Adjusted EBITDA RSUs (with targets for 2025, 2026 and 2027) and 125,000 stock-price based RSUs) which can be earned at up to 100 % of the target amount of RSUs. (2) The RSUs that vested during the year ended December 31, 2023 included: (a) approximately 351,000 RSUs that are subject to deferred settlement terms; and (b) approximately 546,000 RSUs that vested on the last day of the year and will be settled on a net share basis in 2024. The Company issued a total of 435,283 shares during the year ended December 31, 2023 in net settlement of RSUs which included an aggregate of 332,227 shares in settlement of RSUs that vested during the prior year on December 30, 2022. The weighted average grant date fair value of awards granted for years ended December 31, 2023, December 31, 2022 and December 31, 2021 amounted to $ 14.14 , $ 14.36 and $ 10.15 , respectively. The vesting date value of RSUs vesting for years ended December 31, 2023, December 31, 2022 and December 31, 2021 amounted to $ 10.2 million, $ 10.8 million and $ 16.1 million, respectively. There was no income tax benefit recognized related to awards that vested during the years ended December 31, 2023, 2022, and 2021 , respectively as there is a full valuation allowance in place against the RSU scheme ’s deferred tax asset . Stock-based compensation is recognized as an expense over the requisite service period, which is generally the vesting period. For performance awards that are contingent upon the Company achieving certain pre-determined financial performance targets, compensation expense is calculated based on the number of shares expected to vest after assessing the probability that the performance criteria will be met. Determining the probability of achieving a performance target requires estimates and judgment. For market-based awards that are contingent upon the Company’s stock achieving certain pre-determined price targets, compensation expense is calculated based upon the determination of the fair value of the awards as derived through multiple running of the Monte Carlo valuation model, with the fair value recognized on a straight-line basis over the requisite service period. The requisite service period for awards to employees is generally satisfied over a vesting period of three years (and one year for non-employee directors). The Company accounts for forfeitures as they occur. For stock purchase rights under the Company’s ESPP (including its subplan), the Company estimates fair value using the Black-Scholes option pricing model on the dates of grant, with the compensation expense recognized over the requisite service period. F- 35 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The Company recognized stock-based compensation expense as follows: Schedule of Stock Based Compensation Expense Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 (in millions) Restricted Stock and RSUs $ 10.4 $ 10.1 $ 11.9 ESPP 0.2 — — Payroll taxes on vesting of RSUs 0.6 0.7 1.1 $ 11.2 $ 10.8 $ 13.0 Total unrecognized compensation expense related to unvested stock awards and unvested RSUs at December 31, 2023 amounts to $ 5.4 million and is expected to be recognized over a weighted average period of 1.2 years. 18. Accumulated Other Comprehensive Loss (Income) The accumulated balances for each classification of comprehensive loss (income) are presented below: Schedule of Accumulated Other Comprehensive Loss (Income) Foreign Currency Translation Adjustments Change in Fair Value of Hedging Instrument Unrecognized Pension Benefit Costs Accumulated Other Comprehensive (Income) (in millions) Balance at January 1, 2021 $ ( 70.8 ) $ 2.8 $ 37.2 $ ( 30.8 ) Change during the period ( 0.7 ) ( 1.8 ) ( 10.5 ) ( 13.0 ) Balance at December 31, 2021 ( 71.5 ) 1.0 26.7 ( 43.8 ) Change during the period ( 12.7 ) ( 0.7 ) 6.4 ( 7.0 ) Balance at December 31, 2022 ( 84.2 ) 0.3 33.1 ( 50.8 ) Change during the period 5.9 ( 0.3 ) 0.7 6.3 Balance at December 31, 2023 $ ( 78.3 ) $ — $ 33.8 $ ( 44.5 ) 19. Net Income (Loss) per Share Basic income/loss per share (“EPS”) is computed by dividing net income/loss attributable to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period, including stock options, restricted stock, RSUs and warrants, using the treasury stock method, unless the inclusion would be anti-dilutive. The computation of diluted EPS excludes the common stock equivalents of the following potentially dilutive securities because they were either contingently issuable shares or because their inclusion would be anti-dilutive: Schedule of Anti-dilutive Securities Excluded from Computation of Earnings per Share Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 RSUs 799,756 382,500 2,039,254 Anti-dilutive securities 799,756 382,500 2,039,254 The following table reconciles the numerators and denominators of the basic and diluted EPS computations for the year ended December 31, 2023 and December 31, 2022, respectively. There were no reconciling items for the year ended December 31, 2021. Schedule of Numerators and Denominators of the Basic and Diluted EPS Computations Income (Numerator) Shares (Denominator) Per-Share Amount, Year Ended December 31, 2023 (in millions) Basic EPS Income available to common stockholders $ 7.6 28,073,408 $ 0.27 Effect of Dilutive Securities RSUs — 1,141,175 ( 0.01 ) Diluted EPS Income available to common stockholders $ 7.6 $ 29,214,583 $ 0.26 Income (Numerator) Shares (Denominator) Per-Share Amount, Year Ended December 31, 2022 (in millions) Basic EPS Income available to common stockholders $ 20.6 28,049,918 $ 0.73 Effect of Dilutive Securities RSUs — 1,042,937 ( 0.02 ) Diluted EPS Income available to common stockholders $ 20.6 $ 29,092,855 $ 0.71 The calculation of Basic EPS includes the effects of 2,425,236 , 1,703,142 and 1,583,650 shares for the years ended December 31 2023, 2022 and 2021, respectively, with respect to RSU awards that have vested but have not yet been issued. F- 36 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 20. Repurchase of Common Stock On May 10, 2022, the Board of Directors authorized the Company to use up to $ 25.0 million to repurchase Inspired common shares (such amount being exclusive of any fees, commissions or other expenses), subject to repurchases being effected on or before May 10, 2025 (the “Share Repurchase Program”). Management has discretion as to whether to repurchase shares of the Company. During the year ended December 31, 2023, the Company repurchased 125,778 shares under the Share Repurchase Program for gross payments of approximately $ 1.6 million, which were canceled and retired during the year ended December 31, 2023. As of December 31, 2023, approximately $ 13.0 million remained available for future repurchases under the Share Repurchase Program. 21. Other Finance Income Other finance income consisted of the following: Schedule of Other Finance Income Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 (in millions) Pension interest cost $ ( 3.4 ) $ ( 2.2 ) $ ( 1.7 ) Expected return on pension plan assets 3.8 3.3 2.8 Foreign currency translation on senior bank debt — — 4.6 Other finance income $ 0.4 $ 1.1 $ 5.7 22. Income Taxes The effective tax rates for the years ended December 31, 2023, 2022 and 2021 were 39.7 % , 9.2 % and 3.8 % respectively. For the year ended December 31, 2023 and 2022, the Company’s effective tax rate differs from the federal statutory rate primarily due to losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit as well as an inclusion for global intangible low-taxed income. For the year ended December 31, 2021, the Company’s effective tax rate differs from the federal statutory rate primarily due to losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit and non-deductible officer’s compensation. The components of earnings (loss) before income taxes on the Company’s consolidated statement of operations by the United States and foreign jurisdictions were as follows: Schedule of Earnings (Loss) Before Income Tax Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 (in millions) United States $ ( 17.7 ) $ ( 8.1 ) $ ( 13.5 ) Foreign jurisdictions 30.3 30.8 ( 28.7 ) Total earnings (loss) before income taxes $ 12.6 $ 22.7 $ ( 42.2 ) Income tax provision (benefit), as reflected in the Company’s consolidated statement of operations, consists of the following: Schedule of Provision for Income Taxes Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 (in millions) Current provision (benefit) - Federal $ 3.0 $ 0.7 $ — State 0.4 — — Foreign 1.6 1.4 ( 1.6 ) Total current $ 5.0 $ 2.1 $ ( 1.6 ) Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 (in millions) Deferred provision (benefit) Federal $ — $ — $ — State — — — Foreign — — — Total deferred $ — $ — $ — F- 37 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The differences between the federal statutory tax rate and our effective rate are reflected in the following table for the years ended December 31, 2023, 2022 and 2021: Schedule of Differences Between the Federal Statutory Tax Rate and our Effective Rate December 31, 2023 December 31, 2022 December 31, 2021 (in millions) Statutory income tax 21.0 % 21.0 % 21.0 % State taxes (net of federal) 2.3 % 0.4 % 0.0 % Non-deductible officers’ compensation 8.8 % 7.5 % ( 4.9 )% Global intangible low-taxed income 45.2 % 33.1 % 0.0 % Other permanent differences ( 0.8 )% 0.3 % ( 2.2 )% Prior year true ups ( 5.6 )% 0.0 % 0.0 % Effect of rates different than statutory 3.8 % ( 2.2 )% ( 0.7 )% Non-creditable withholding taxes 9.0 % 4.7 % 0.0 % Foreign tax true ups 0.4 % ( 0.1 )% 4.2 % Research and development tax credits 0.0 % ( 1.2 )% 0.3 % Change in valuation allowance ( 44.4 )% ( 54.3 )% ( 13.9 )% Effective income tax rate 39.7 % 9.2 % 3.8 % The net deferred tax assets and liabilities arising from temporary differences are as follows: Schedule of Deferred Tax Assets and Liabilities December 31, 2023 December 31, 2022 (in millions) Depreciation $ 49.7 $ 52.3 Net operating losses 22.7 23.4 Other temporary differences 3.2 2.5 Intangible Assets 5.6 4.8 Right of Use Asset 3.6 4.1 Total gross deferred tax assets 84.8 87.1 Valuation allowance balance ( 81.2 ) ( 83.1 ) Gross deferred tax assets 3.6 4.0 Intangible assets — — Other temporary differences — — Right of Use Liability ( 3.6 ) ( 4.0 ) Gross deferred tax liabilities ( 3.6 ) ( 4.0 ) Net deferred tax assets $ — $ — Changes in the valuation allowance are as follows: Schedule of Changes in the Valuation Allowance December 31, 2023 December 31, 2022 (in millions) Beginning balance $ 83.1 $ 109.2 (Decrease) increase ( 1.9 ) ( 26.1 ) Reversal of allowance — — Ending balance $ 81.2 $ 83.1 As of December 31, 2023 and 2022, the Company has $ 0.0 million and $ 3.8 million, respectively, of gross federal net operating loss carry forwards, these losses have an unlimited carry forward. The cumulative state net operating losses as of December 31, 2023 are $ 39.7 million, which begin to expire in 2026. The utilization of the Company’s state net operating losses may be subject to a limitation in the future due to the “change of ownership provisions” under Section 382 of the Internal Revenue Code. As of December 31, 2023, the Company has not had an ownership change under Section 382. As of December 31, 2023 and 2022, the Company also has gross net operating losses in foreign jurisdictions, primarily the UK, totaling $ 80.7 million and $ 82.2 million, respectively. The majority of these net operating losses have an unlimited carry forward period. The Company recorded a valuation allowance against all of our deferred tax assets as of both December 31, 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 that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve. The valuation allowance we recorded as of December 31, 2023 and December 31, 2022 was $ 81.2 million and $ 83.1 million, respectively. The Company has not recognized deferred tax liabilities in respect of unremitted earnings that are considered indefinitely reinvested in foreign subsidiaries. We do not provide for taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed because we intend to invest such undistributed earnings indefinitely outside of the United States. Currently, there are no federal, state or foreign jurisdiction tax audits pending. The Company’s corporate federal and state tax returns from 2020 to 2022 remain subject to examination by tax authorities and the Company’s foreign tax returns from 2015 to 2022 remain subject to examination by tax authorities. In accordance with ASC 740, the Company has evaluated its tax positions to determine if there are any uncertain tax positions. As of December 31, 2023 and 2022, the Company has no unrecognized tax benefits for uncertain tax positions and has no accrued interest or penalties related to uncertain tax positions. The Company does not anticipate any material change in the total amount of unrecognized tax benefits will occur within the next twelve months. F- 38 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 23. Related Parties Macquarie Corporate Holdings Pty Limited (UK Branch) (“Macquarie UK”), (an arranger and lending party under our RCF Agreement), and Macquarie Capital (Europe) Limited (“Macquarie EUR”), (an arranger and initial purchaser of our Senior Secured Notes), are affiliates of MIHI LLC, which beneficially owned approximately 11.5 % of our common stock as of December 31, 2023, and 11.7 % of our common stock as of December 31, 2022. Macquarie UK was also one of the lending parties with respect to the Prior Financing and its associated revolving credit facility. Macquarie UK held $ 2.1 million of the total $ 19.1 million of RCF drawn at December 31, 2023. Macquarie UK did not hold any of the Company’s aggregate senior debt at December 31, 2023 or December 31, 2022. Interest expense payable to Macquarie UK amounted to $ 0.0 million for each of the years ended December 31, 2023, 2022 and 2021, respectively. In addition, Macquarie EUR received $ 0.6 million of $ 5.5 million of fees paid in connection with the issuance of the Senior Secured Notes and the RCF in the year ended December 31, 2021. MIHI LLC is also a party to a stockholders agreement with the Company and other stockholders, dated December 23, 2016, pursuant to which, subject to certain conditions, MIHI LLC, jointly with Hydra Industries Sponsor LLC, are permitted to designate two directors to be nominated for election as directors of the Company at any annual or special meeting of stockholders at which directors are to be elected, until such time as MIHI LLC and Hydra Industries Sponsor LLC in the aggregate hold less than 5 % of the outstanding shares of the Company. HG Vora Special Opportunities Master Fund Limited (“HG Vora”) (a purchaser of our Senior Secured Notes issued on May 20, 2021) was a significant stockholder until October 12, 2021. Interest expense payable to HG Vora while a related party for the year ended December 31, 2021 amounted to $ 1.7 million. On December 31, 2021, the Company entered into a consultancy agreement with Richard Weil, the brother of A. Lorne Weil, our Executive Chairman, under which he received a success fee in the amount of $ 130,000 for services he provided in connection with our acquisition of Sportech Lotteries, LLC. The success fee was paid during the year ended December 31, 2022. Under the agreement, as extended in November 2022 and in July 2023 and December 2023, he will provide consulting services to the Company relating to the lottery in the Dominican Republic through December 31, 2024, for which he was compensated at a rate of $ 10,000 per month in consulting fees through to June 30, 2023, and at a rate of $ 12,500 per month for the remainder of the term of the agreement. The aggregate amount incurred by the Company in consulting fees was $ 0.1 million and $ 0.1 million for the years ended December 31, 2023 and December 31, 2022, respectively. We incurred certain offering expenses in connection with an underwritten public offering of shares held by a significant stockholder, the Landgame Trust, which closed on June 1, 2021, as to which our expenses were reimbursed by the stockholder. For the year ended December 31, 2021, the aggregate amount invoiced for reimbursement was $ 0.2 million. The stockholder sold an aggregate of 6,217,628 shares in the offering (including 810,995 shares subject to an over-allotment option that was exercised in full) at an offering price of $ 9.25 per share, less underwriting discounts and commissions of $ 0.4625 per share. One of the participating underwriters in the offering was Macquarie Capital (USA) Inc., an affiliate of MIHI LLC (see paragraph above), pursuant to which it purchased 870,468 of the shares including 113,539 shares subject to the over-allotment option. 24. Leases The Company as Lessee The Company is party to operating leases with third parties with respect to various real estate and vehicle assets. Both real estate and vehicle leases typically include a lease (of the property or vehicle) and a non-lease (provision of services) component which are accounted for separately. Payment terms are typically fixed, however, certain leases may contain various provisions for increases in rental rates based either on changes in a specific price index (such as the published Consumer Price Index CPI), a predetermined escalation schedule or rate, or as a percentage of sales. Such variable lease payments are recognized as lease expense as they are incurred. We initially measure the present value of the lease payments using the index at the lease commencement date. Additional payments based on the future subsequent change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded when incurred as variable payments. The lease term begins on the commencement date, which is the date the Company takes possession of the property. The Company’s lease terms may include options to extend or terminate the lease. These options to extend or terminate are assessed on a lease-by-lease basis, and the ROU assets and lease liabilities are adjusted when it is reasonably certain that the option to extend or terminate will be exercised. The lease term is used to determine lease classification as an operating or finance lease and is used to calculate straight-line expense for operating leases. The operating leases have remaining terms of 1 to 10 years. During the year to December 31, 2021, certain concessions were granted with respect to the Company’s operating leases in light of Covid-19. These took the form of lease extensions, where nothing was paid for a period of time with that same period of time and payments added onto the lease at the end, payment holidays, where payments were deferred until a later date, but with no lease extension, and discounted payments, where payments were reduced and not repaid either at a later date or through lease extensions. The Company elected to use the practical expedient granted by the FASB and account for the concessions as if they were part of the enforceable rights and obligations of the parties under the existing lease contract for all affected operating leases. Lease extensions and discounted payments were accounted using the ‘cash basis’ approach, with the lease liability and right-of-use asset continuing to be accounted for as if payments were still being made under the original terms of the lease. Payment holidays were accounted for using the ‘remeasurement consistent with resolving a contingency’ approach, which involved remeasuring the liability and the right-of-use asset and continuing to recognize the total cost of the lease on a straight line basis over the period to which it relates. F- 39 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The Company is also party to finance leases with third parties with respect to gaming machines. The leases have remaining terms of between 18 and 43 months. The components of lease expense were as follows: Schedule of Lease Expense Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 (in millions) Finance lease costs: Depreciation $ 0.7 $ 0.9 $ 0.5 Interest 0.3 0.2 0.2 Operating lease costs 5.5 5.8 6.4 Short-term lease costs 2.1 1.2 1.3 Variable lease costs 2.3 2.5 1.0 Total $ 10.9 $ 10.6 $ 9.4 December 31, 2023 December 31, 2022 Weighted average remaining lease term – finance leases 30.9 months 29.8 months Weighted average remaining lease term – operating leases 73.3 months 68.5 months Weighted average discount rate – finance leases 10.5 % 9.0 % Weighted average discount rate – operating leases 8.9 % 8.9 % Assets leased under finance leases had a cost of $ 3.6 million and $ 2.3 million at December 31, 2023 and 2022, respectively, and accumulated depreciation associated with these assets was $ 1.7 million and $ 1.2 million at December 31, 2023 and 2022, respectively. Future minimum finance lease payments as of December 31, 2023 were as follows: Schedule of Future Minimum Finance Lease Payments Year ending December 31, (in millions) 2024 $ 1.1 2025 1.1 2026 0.6 2027 0.4 2028 — Thereafter — Total future minimum lease payments 3.2 Less: imputed interest ( 0.8 ) Total $ 2.4 Future minimum operating lease payments as of December 31, 2023 were as follows: Schedule of Future Minimum Operating Lease Payments Year ending December 31, (in millions) 2024 $ 5.0 2025 3.5 2026 2.9 2027 1.4 2028 1.1 Thereafter 5.1 Total future minimum lease payments 19.0 Less: imputed interest ( 4.5 ) Total $ 14.5 F- 40 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The Company as Lessor Certain of our arrangements include leases for equipment installed at customer locations. As the lessor, we combine lease and non-lease components for all classes of underlying assets in arrangements that involve operating leases. The single combined component is accounted for under ASC 606, Revenue from Contracts with Customers based on the consideration that the non-lease components are the predominant items in the arrangements. If a component cannot be combined, the consideration is allocated between the lease component and the non-lease component based on relative standalone selling price. The lease component is accounted for under ASC 842, Leases and the non-lease component is accounted for under ASC 606. Profit recognized at commencement date of sales type leases amounted to $ 2.5 million, $ 0.3 million and $ 0.0 million for the years ended December 31, 2023, 2022 and 2021, respectively. Lease income from operating leases and variable income and interest receivable from sales type leases is not material for any of the years presented. Future minimum sales type lease receivables as of December 31, 2023 were as follows: Schedule of Future Minimum Sales Type Lease Receivables Year ending December 31, (in millions) 2024 $ 2.8 2025 2.7 2026 2.0 2027 0.2 2028 — Total future minimum lease receivables 7.7 Less: imputed interest ( 1.0 ) Total $ 6.7 F- 41 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 25. Commitments and Contingencies Employment Agreements We are party to employment agreements with our executive officers and other employees of the Company and our subsidiaries which contain, among other terms, provisions relating to severance and notice requirements. Arrangements with Daniel B. Silvers, former Executive Vice President and Chief Strategy Officer Effective January 10, 2023, Mr. Silvers stepped down from his position as Executive Vice President and Chief Strategy Officer of the Company. Pursuant to Mr. Silvers’ employment agreement dated December 14, 2016, as amended, Mr. Silvers was entitled to receive a base salary at a rate of $ 385,000 per year, a target annual bonus of not less than 100 % of his base salary and a maximum annual bonus of 200 % of his base salary. He was also entitled to reimbursement for private medical insurance and to certain severance benefits. Legal Matters From time to time, the Company may become involved in lawsuits and legal matters arising in the ordinary course of business. While the Company believes that, currently, it has no such matters that are material, there can be no assurance that existing or new matters arising in the ordinary course of business will not have a material adverse effect on the Company’s business, financial condition or results of operations. 26. Pension Plan We operate a defined contribution plan in the US and both defined benefit and defined contribution pension schemes in the UK. The defined contribution scheme assets are held separately from those of the Company in an independently administered fund. The defined contribution pension cost charge represents contributions payable by the Company and amounted to $ 3.4 million, $ 2.9 million and $ 2.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. Contributions totaling $ 0.4 million and $ 1.2 million were payable to the fund as at December 31, 2023 and 2022, respectively. The defined benefit scheme has been closed to new entrants since April 1, 1999 and closed to future accruals for services rendered to the Company for the entire financial statement periods presented in these consolidated financial statements. Retirement benefits are generally based on a portion of an employee’s pensionable earnings during years prior to 2010. The latest triennial actuarial valuation of the scheme as at March 31, 2021 was finalized in June 2022. The actuarial valuation revealed that the statutory funding objective was not met, i.e. there were insufficient assets to cover the Scheme’s Technical Provisions and there was a funding shortfall of £ 8.2 million ($ 10.5 million) at the valuation date. Under the Recovery Plan and Schedule of Contributions agreed between the Trustee and the Company on June 28, 2022, it was agreed that the shortfall will be met by contributions of £0.9 million ($1.1 million) for each the years ended December 31 2021, 2022, 2023 and 2024, of £0.7 million ($0.9 million) for the year ended December 31, 2025 and of £0.5 million ($0.6 million) for the period January 1, 2026 to October 31, 2026. The Company will also make expense contributions of £ 0.3 million ($ 0.4 million) per annum for the period covered by the Recovery Plan and Schedule of Contributions. F- 42 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The trustee has made an allowance for the pension scheme liability profile when deciding the investment strategy of the pension scheme. Since the pension scheme is closed to new entrants and ceased future accrual with effect from March 31, 2010, it has continued to mature gradually. Therefore, the trustee reviews the investment strategy regularly to check whether any changes are needed. When considering the investment strategy, the trustee has taken into account the effect of any possible increases in the deficit reduction contributions on the financial position of the Company, and the extent to which the Company will be able to bear these changes. The scheme’s investment policy is to maximize long-term financial return commensurate with security and minimizing risk, with an objective of achieving a return of around 3% per annum above the return on UK Government bonds. This is achieved by holding a portfolio of marketable investments that avoids over-concentration of investment and spreads assets both over industries and geographies. In setting investment strategy, the trustees considered the lowest risk strategy that they could adopt in relation to the scheme’s liabilities and designed an asset allocation to achieve a higher return while maintaining a cautious approach to meeting the scheme’s liabilities. The trustees undertake periodic reviews of the investment strategy and take advice from their investment advisors. They consider a full range of asset classes, the risks and rewards of a range of alternative asset allocation strategies, the suitability of each asset class and the need for appropriate diversification. The current strategy is to hold 12% in a diversified growth fund, 24% in diversified credit, 18% in a equity-linked liability-driven investment funds, 6% in credit-linked liability-driven investment funds and 40% in a buy-in policy. The Company recognizes gains or losses on pension settlements if the cost of the settlements exceeds the sum of service and interest cost for the year. Lump-sum settlements are monitored at the end of every quarter to determine whether settlement amounts have exceeded the defined thresholds. In instances where the Company determines that it is probable that the lump settlements could exceed the sum of interest and service cost for the year, the Company accounts for the settlements as they occur. Our pension benefit costs are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, inflation, expected returns on plan assets, mortality rates and other factors. The assumptions used in recording the obligations under our plans represent our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance as well as other factors that might cause future expectations to differ from past trends. Differences in actual experience or changes in assumptions may affect our pension obligations and future expense. The principal factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension benefit obligations as of the measurement date and (2) differences between the expected and the actual return on plan assets. Our valuation methodologies used for pension assets measured at fair value are as follows. There have been no changes in the methodologies used at December 31, 2023 and December 31, 2022. The diversified fund is valued at fair value by using the net asset value (“NAV”) of shares held by the plan at the year end. The NAV of the diversified fund is not publicly quoted. The majority of the underlying securities have observable Level 1 or 2 pricing inputs, including quoted prices for similar assets in active or non-active markets. ASC 820 states that where NAV is allowed to be used as an estimate of fair value, if the reporting entity has the ability to redeem its investment at NAV as of the measurement date, that investment shall be categorized as a Level II fair value measurement. If the investment cannot be redeemed at the measurement date, but may be redeemable in the future, but at an uncertain date, the investment shall be categorized as a Level 3 fair value measurement. As of December 31, 2023 and December 31, 2022, the diversified fund was redeemable at NAV as of the measurement dates. With respect to the buy-in contract, it was agreed during the year ended September 27, 2014, that 281 pensioners of the plan would be insured by means of a pensioner buy-in. The pensioner buy-in contract is similar to an annuity contract, which matches cash flows with future benefit payments for a specific group of pensioners, with the obligation remaining with the plan. The liabilities and assets in respect of insured pensioners are assumed to match for the purposes of ASC 715, Pensions - Retirement Benefits, disclosures (i.e. the full benefits have been insured). The approach adopted has therefore been to include within the total value of assets, an amount equal to the fair value of the buy-in assets and to set the buy-in portion of the total liability (pension benefit obligation) equal to the fair value of the buy-in based on the actuarial assumptions adopted for ASC 715 purposes at each measurement date. The buy-in contract is valued on an insurer pricing basis, reflecting assumptions on the purchase price adjusted for changes in discount rates and other actuarial assumptions, which approximates fair value and is, therefore, classified as Level 3. F- 43 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The following table sets forth the combined funded status of the pension plans and their reconciliation to the related amounts recognized in our consolidated financial statements at the respective measurement dates: Schedule of Pension Plans and their Reconciliation December 31, 2023 December 31, 2022 (in millions) Change in benefit obligation: Benefit obligation at beginning of period $ 71.2 $ 122.7 Interest cost 3.4 2.2 Actuarial loss (gain) 0.6 ( 39.0 ) Benefits paid ( 3.0 ) ( 3.5 ) Foreign currency translation adjustments 4.1 ( 11.2 ) Benefit obligation at end of period $ 76.3 $ 71.2 Change in plan assets: Fair value of plan assets at beginning of period $ 69.1 $ 125.7 Actual gain (loss) on plan assets 2.8 ( 42.4 ) Employer contributions 1.4 1.4 Benefits paid ( 3.0 ) ( 3.5 ) Foreign currency translation adjustments 4.0 ( 12.1 ) Fair value of assets at end of period $ 74.3 $ 69.1 Amount recognized in the consolidated balance sheets: Unfunded status (non-current) $ ( 2.0 ) $ ( 2.1 ) Net amount recognized $ ( 2.0 ) $ ( 2.1 ) The following table presents the components of our net periodic pension (benefit) cost: Schedule of Defined Benefit Plans Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 (in millions) Components of net periodic pension (benefit) cost: Interest cost $ 3.4 $ 2.2 $ 1.7 Expected return on plan assets ( 3.8 ) ( 3.3 ) ( 2.8 ) Amortization of net loss 0.9 0.5 0.9 Net periodic cost (benefit) $ 0.5 $ ( 0.6 ) $ ( 0.2 ) The accumulated benefit obligation for all defined benefit pension plans was $ 76.3 million and $ 71.2 million as of December 31, 2023 and December 31, 2022, respectively. The underfunded status of our defined benefit pension plans recorded as a liability in our consolidated balance sheets as of December 31, 2023 and December 31, 2022 was $ 2.0 million and $ 2.1 million, respectively. The estimated net loss, net transition asset (obligation) and prior service cost for the plan that will be amortized from accumulated other comprehensive income into net periodic pension cost over the next fiscal year are $ 1.1 million, $ nil and $ nil , respectively. The fair value of the plan assets at December 31, 2023 by asset category is presented below: Schedule of Fair Value of Plan Assets Level 1 Level 2 Level 3 Total (in millions) Diversified fund $ — $ 45.1 $ — $ 45.1 Buy-in contract — — 28.9 28.9 Cash and other current assets 0.3 — — 0.3 Total $ 0.3 $ 45.1 $ 28.9 $ 74.3 F- 44 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The fair value of the plan assets at December 31, 2022 by asset category is presented below: Level 1 Level 2 Level 3 Total (in millions) Diversified fund $ — $ 40.7 $ — $ 40.7 Buy-in contract — — 28.1 28.1 Cash 0.3 — — 0.3 Total $ 0.3 $ 40.7 $ 28.1 $ 69.1 The table below presents the weighted-average actuarial assumptions used to determine the benefit obligation and net periodic benefit cost for the Plan. Schedule of Benefit Obligation and Net Periodic Benefit Cost for Plan December 31, 2023 December 31, 2022 Discount rate – non-insureds 4.71 % 5.00 % Discount - insureds 4.07 % 4.15 % Expected return on assets 5.30 % 5.70 % RPI inflation 3.02 % 3.13 % CPI inflation – pre 2030 2.02 % 2.13 % CPI inflation – post 2030 2.82 % 2.93 % Pension increases – pre-2006 service 2.83 % 2.90 % Pension increases – post-2006 service 1.86 % 1.89 % Pension increases – post 1988 GMP – pre 2030 1.77 % 1.83 % Pension increases – post 1988 GMP – post 2030 2.16 % 2.21 % The following benefit payments are expected to be paid: Schedule of Benefit Payments are Expected to Be Paid (in millions) 2024 $ 3.4 2025 $ 3.4 2026 $ 3.6 2027 $ 3.9 2028 $ 3.9 2029 to 2033 $ 23.3 27. Segment Reporting and Geographic Information Operating segments are identified as components of an enterprise for which separate and discrete financial information is available and is used by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief decision-maker is the Office of the Executive Chairman. The Company’s chief decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue and operating profit by reporting unit. This information is used for purposes of allocating resources and evaluating financial performance. The Company operates its business along four operating segments, which are segregated on the basis of revenue stream: Gaming, Virtual Sports, Interactive and Leisure. The Company believes this method of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated. The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies.” F- 45 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 The following tables present revenue, cost of sales, excluding depreciation and amortization, selling, general and administrative expenses, depreciation and amortization, stock-based compensation expense and acquisition related transaction expenses, operating profit/(loss), total assets and total capital expenditures for the years ended December 31, 2023, December 31, 2022 and December 31, 2021, respectively, by business segment. Certain unallocated corporate function costs have not been allocated to the Company’s reportable operating segments because these costs are not allocable and to do so would not be practical. Corporate function costs consist primarily of selling, general and administrative expenses, depreciation and amortization, capital expenditures, right of use assets, cash, prepaid expenses and property and equipment and software development costs relating to corporate/shared functions. All acquisition and integration related transaction expenses are allocated as corporate function costs. Segment Information Schedule of Segment Reporting Information by Segment Year Ended December 31, 2023 Gaming Virtual Sports Interactive Leisure Corporate Functions Total (in millions) Revenue: Service $ 83.0 $ 56.2 $ 27.9 $ 94.1 $ — $ 261.2 Product sales 59.6 — — 2.2 — 61.8 Total revenue 142.6 56.2 27.9 96.3 — 323.0 Cost of sales, excluding depreciation and amortization: Cost of service ( 24.6 ) ( 1.4 ) ( 1.7 ) ( 47.4 ) — ( 75.1 ) Cost of product sales (51.5 ) — — (1.1 ) — (52.6 ) Selling, general and administrative expenses ( 22.5 ) ( 7.1 ) ( 10.8 ) ( 28.4 ) ( 35.5 ) ( 104.3 ) Stock-based compensation expense ( 1.5 ) ( 0.4 ) ( 0.6 ) ( 1.0 ) ( 7.7 ) ( 11.2 ) Acquisition and integration related transaction expenses — — — — — — Depreciation and amortization ( 19.0 ) ( 3.3 ) ( 3.6 ) ( 11.6 ) ( 2.4 ) ( 39.9 ) Segment operating income (loss) 23.5 44.0 11.2 6.8 ( 45.6 ) 39.9 Net operating income $ 39.9 Total assets at December 31, 2023 $ 130.0 $ 59.7 $ 18.4 $ 72.6 $ 60.2 $ 340.9 Total goodwill at beginning of period (1) $ 11.6 42.1 1.8 20.5 — 76.0 Accumulated goodwill impairment losses (2) — — — ( 20.5 ) — ( 20.5 ) Total goodwill at beginning of period, net 11.6 42.1 1.8 — — 55.5 Foreign currency translation adjustments 0.6 2.7 — — — 3.3 Total goodwill at December 31, 2023, net $ 12.2 $ 44.8 $ 1.8 $ — $ — $ 58.8 Total capital expenditures for the year ended December 31, 2023 $ 22.5 $ 3.9 $ 2.7 $ 18.6 $ 1.8 $ 49.5 Year Ended December 31, 2022 Gaming Virtual Sports Interactive Leisure Corporate Functions Total (in millions) Revenue: Service $ 80.4 $ 54.2 $ 20.6 $ 93.2 $ — $ 248.4 Product sales 30.9 — — 2.3 — 33.2 Total revenue 111.3 54.2 20.6 95.5 — 281.6 Cost of sales, excluding depreciation and amortization: Cost of service ( 23.7 ) ( 1.8 ) ( 1.3 ) ( 44.6 ) — ( 71.4 ) Cost of product sales (20.4 ) — — (1.5 ) — (21.9 ) Selling, general and administrative expenses ( 23.8 ) ( 8.0 ) ( 8.0 ) ( 25.4 ) ( 25.9 ) ( 91.1 ) Stock-based compensation expense ( 1.6 ) ( 0.7 ) ( 0.7 ) ( 0.6 ) ( 7.2 ) ( 10.8 ) Acquisition and integration related transaction expenses — — — — ( 0.5 ) ( 0.5 ) Depreciation and amortization ( 19.6 ) ( 2.7 ) ( 2.0 ) ( 13.5 ) ( 2.1 ) ( 39.9 ) Segment operating income (loss) 22.2 41.0 8.6 9.9 ( 35.7 ) 46.0 Net operating income $ 46.0 Total assets at December 31, 2022 $ 104.3 $ 56.6 $ 12.0 $ 68.3 $ 46.0 $ 287.2 Total goodwill at beginning of period (1) $ 13.0 47.2 2.0 20.5 — 82.7 Accumulated goodwill impairment losses (2) — — — ( 20.5 ) — ( 20.5 ) Total goodwill at beginning of period, net 13.0 47.2 2.0 — — 62.2 Foreign currency translation adjustments ( 1.4 ) ( 5.1 ) ( 0.2 ) — — ( 6.7 ) Total goodwill at December 31, 2022, net $ 11.6 $ 42.1 $ 1.8 $ — $ — $ 55.5 Total capital expenditures for the year ended December 31, 2022 $ 13.1 $ 1.7 $ 3.2 $ 10.9 $ 3.6 $ 32.5 F- 46 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 Year Ended December 31, 2021 Gaming Virtual Sports Interactive Leisure Corporate Functions Total (in millions) Revenue: Service $ 58.8 $ 35.0 $ 20.7 $ 65.7 $ — $ 180.2 Product sales 22.6 — — 3.0 — 25.6 Total revenue 81.4 35.0 20.7 68.7 — 205.8 Cost of sales, excluding depreciation and amortization: Cost of service ( 17.3 ) ( 1.2 ) ( 1.8 ) ( 31.5 ) — ( 51.8 ) Cost of product sales (15.0 ) — — (2.8 ) — (17.8 ) Selling, general and administrative expenses ( 22.4 ) ( 7.7 ) ( 6.8 ) ( 19.5 ) ( 20.9 ) ( 77.3 ) Stock-based compensation expense ( 1.8 ) ( 0.8 ) ( 0.6 ) ( 0.6 ) ( 9.2 ) ( 13.0 ) Acquisition and integration related transaction expenses — — — — ( 1.6 ) ( 1.6 ) Depreciation and amortization ( 24.6 ) ( 3.8 ) ( 2.7 ) ( 15.9 ) ( 1.8 ) ( 48.8 ) Segment operating income (loss) 0.3 21.5 8.8 ( 1.6 ) ( 33.5 ) ( 4.5 ) Net operating loss $ ( 4.5 ) Total capital expenditures for the year ended December 31, 2021 $ 8.7 $ 2.1 $ 2.4 $ 8.8 $ 1.4 $ 23.4 (1) As a result of the October 1, 2019 acquisition of the Acquired Businesses, the Company recognized £ 26.1 million of Goodwill from the completion of the acquisition. In accordance with ASC 350-20, Intangibles—Goodwill and Other—Goodwill , we assessed the synergies that were expected at the time of acquisition and reallocated £ 9.6 million and £ 1.4 million of goodwill from the Acquired Businesses reporting unit to Server Based Gaming and Interactive reporting units, respectively. (2) During the first quarter of 2020, as a result of a triggering event caused by the impacts of the COVID-19 pandemic, we completed a qualitative and quantitative impairment analysis and determined that goodwill within the Acquired Businesses (now Leisure) reporting unit was fully impaired. Geographic Information Geographic information for revenue is set forth below: Schedule of Geographic Information Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 (in millions) Total revenue UK $ 250.9 $ 208.6 $ 148.6 Greece 24.3 22.4 18.2 Rest of world 47.8 50.6 39.0 Total $ 323.0 $ 281.6 $ 205.8 T otal revenue $ 323.0 $ 281.6 $ 205.8 UK revenue includes revenue from customers headquartered in the UK, but whose revenue is generated globally. Geographic information of our non-current assets excluding goodwill is set forth below: December 31, 2023 December 31, 2022 (in millions) UK $ 91.9 $ 82.7 Greece 15.3 5.8 Rest of world 22.4 16.3 Total $ 129.6 $ 104.8 T otal non- current assets excluding goodwill $ 129.6 $ 104.8 Software development costs are included as attributable to the market in which they are utilized. F- 47 INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2023 AND 2022, AND FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 28. Customer Concentration During the year ended December 31, 2023 two customers represented at least 10% of revenue, accounting for 12 % and 11 % of the Company’s revenue, respectively. The customers were served by the Gaming, Virtual Sports and Interactive segments, and by the Virtual Sports and Interactive segments, respectively. During the year ended December 31, 2022, one customer represented at least 10% of revenue, accounting for 13 % of the Company’s revenue. This customer was served by the Virtual Sports and Interactive segments. During the year ended December 31, 2021, no customers represented at least 10 % of revenue. At December 31, 2023, there was one customer that represented at least 10% of the Company’s accounts receivable, accounting for 12 % of the Company’s accounts receivable. At December 31, 2022, there was one customer that represented at least 10% of the Company’s accounts receivable, accounting for 24 % of the Company’s accounts receivable. 29. Subsequent Events The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued. The Company did not identify subsequent events that would have required adjustment or disclosure in the consolidated financial statements. F- 48 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.