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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2023

 

OR

 

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

 

For the transition period _______________

 

Commission File Number: 001-36689

 

INSPIRED ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of February 22, 2024, there were 26,219,021 shares of the Company’s common stock issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 1
     
ITEM 1. FINANCIAL STATEMENTS 1
     
  Condensed Consolidated Balance Sheets 1
     
  Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income 2
     
  Condensed Consolidated Statement of Stockholders’ Deficit 3
     
  Condensed Consolidated Statements of Cash Flows 5
     
  Notes to Condensed Consolidated Financial Statements 6
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 23
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 49
     
ITEM 4. CONTROLS AND PROCEDURES 50
     
PART II. OTHER INFORMATION 51
     
ITEM 1. LEGAL PROCEEDINGS 51
     
ITEM 1A. RISK FACTORS 51
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 52
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 52
     
ITEM 4. MINE SAFETY DISCLOSURES 52
     
ITEM 5. OTHER INFORMATION 52
     
ITEM 6. EXHIBITS 52
     
SIGNATURES 53

 

 i 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

 ii 

 

 

EXPLANATORY NOTE

 

Restatement and Revision

 

As previously reported by the Company in a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on November 8, 2023, the Audit Committee (the “Audit Committee”) of the Board of Directors of the Company, in consultation with the Company’s management, determined that (i) the Company’s previously issued audited consolidated financial statements as of December 31, 2021 and 2022 and for the years ended December 31, 2020, 2021 and 2022 included in the Company’s Annual Report on Form 10-K, (ii) associated reports of the Company’s independent registered public accounting firm, Marcum LLP (“Marcum”), and (iii) the Company’s previously issued unaudited condensed consolidated financial statements during those years and for the first and second quarters of 2023 included in the Company’s Quarterly Reports on Form 10-Q (the “Subject Periods”) contained the accounting errors relating to the compliance with U.S. GAAP in connection with the Company’s accounting policies for capitalizing software development costs. The errors related primarily to the application of the relevant accounting standards to projects, including the timing of capitalization with respect to software development projects and the nature of costs eligible for capitalization.

 

As a result of these errors, the Audit Committee determined that the Company’s previously issued consolidated financial statements for the Subject Periods should no longer be relied upon and should be restated. Similarly, any previously issued or filed reports, press releases, earnings releases, investor presentations or other communications of the Company describing the Company’s financial results or other financial information relating to the Subject Periods should no longer be relied upon.

 

Additionally, the previous reports of Marcum LLP on the Company’s consolidated financial statements as of December 31, 2021 and 2022 and for the years ended December 31, 2020, 2021 and 2022 likewise should no longer be relied upon.

 

As of the date of this report, the Company has filed with the SEC an amendment to its Annual Report on Form 10-K for the year ended December 31, 2022 and to the Quarterly Reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023 that include financial statements that amend and restate the previously issued unaudited consolidated financial statements originally filed with such filings and reports. The foregoing Quarterly Reports amend and restate the financial statements as of and for the comparable 2022 periods.

 

This quarterly report on Form 10-Q for the three and nine months ended September 30, 2023 includes financial statements that amend and restate the Company’s unaudited financial statements as of and for the three and nine-month periods ended September 30, 2022. Please see Note 2 to the unaudited financial statements included in this Quarterly Report on Form 10-Q for a discussion of the restatement and the impact on the specific accounts in such unaudited financial statements.

 

 iii 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

  

September 30,

2023

  

December 31,

2022, as restated

 
   (Unaudited)     
Assets        
Cash  $26.4   $25.0 
Accounts receivable, net   29.2    40.4 
Inventory   39.9    30.3 
Prepaid expenses and other current assets   37.8    31.2 
Total current assets   133.3    126.9 
           
Property and equipment, net   52.6    45.1 
Software development costs, net   21.6    18.3 
Other acquired intangible assets subject to amortization, net   13.6    14.6 
Goodwill   56.3    55.5 
Operating lease right of use asset   14.3    16.0 
Costs of obtaining and fulfilling customer contracts, net   8.5    7.0 
Other assets   4.5    3.8 
Total assets  $304.7   $287.2 
           
Liabilities and Stockholders’ Deficit          
Current liabilities          
Accounts payable and accrued expenses  $58.0   $52.7 
Corporate tax and other current taxes payable   3.6    10.1 
Deferred revenue, current   8.7    4.6 
Operating lease liabilities   4.1    3.9 
Other current liabilities   3.4    3.6 
Total current liabilities   77.8    74.9 
           
Long-term debt   282.7    277.6 
Finance lease liabilities, net of current portion   1.8    1.2 
Deferred revenue, net of current portion   1.6    2.8 
Operating lease liabilities   10.3    12.3 
Other long-term liabilities   3.0    4.0 
Total liabilities   377.2    372.8 
           
Commitments and contingencies   -     -  
           
Stockholders’ deficit          
Preferred stock; $0.0001 par value; 1,000,000 shares authorized        
Common stock; $0.0001 par value; 49,000,000 shares authorized; 26,214,739 shares and 25,909,516 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively        
Additional paid in capital   386.3    378.2 
Accumulated other comprehensive income   49.8    50.8 
Accumulated deficit   (508.6)   (514.6)
Total stockholders’ deficit   (72.5)   (85.6)
Total liabilities and stockholders’ deficit  $304.7   $287.2 

 

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

 

1
 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(in millions, except share and per share data)

(Unaudited)

 

   2023   2022, as restated   2023   2022, as restated 
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2023   2022, as restated   2023   2022, as restated 
Revenue:                
Service  $70.7   $68.6   $195.7   $188.7 
Product sales   26.8    5.6    46.1    16.3 
Total revenue   97.5    74.2    241.8    205.0 
                     
Cost of sales:                    
Cost of service (1)   (21.4)   (20.3)   (56.9)   (54.9)
Cost of product sales (1)   (26.7)   (4.1)   (41.8)   (11.2)
Selling, general and administrative expenses   (26.9)   (25.2)   (82.7)   (74.1)
Acquisition and integration related transaction expenses       (0.1)       (0.3)
Depreciation and amortization   (10.3)   (9.2)   (29.8)   (30.1)
Net operating income   12.2    15.3    30.6    34.4 
                     
Other expense                    
Interest expense, net   (6.9)   (6.3)   (20.5)   (18.7)
Gain on disposal of business               0.9 
Other finance income   0.1    0.3    0.3    0.9 
                     
Total other expense, net   (6.8)   (6.0)   (20.2)   (16.9)
                     
Net income before income taxes   5.4    9.3    10.4    17.5 
Income tax expense   (2.0)   (0.1)   (2.8)   (0.4)
Net income   3.4    9.2    7.6    17.1 
                     
Other comprehensive (loss)/income:                    
Foreign currency translation gain (loss)   3.6    8.0    (2.0)   20.5 
Reclassification of loss on hedging instrument to comprehensive income       0.1    0.3    0.5 
Actuarial (losses) gains on pension plan   0.2    0.1    0.7    (0.6)
Other comprehensive income (loss)   3.8    8.2    (1.0)   20.4 
                     
Comprehensive income  $7.2   $17.4   $6.6   $37.5 
                     
Net income per common share – basic  $0.12   $0.33   $0.27   $0.61 
Net income per common share – diluted  $0.12   $0.32   $0.26   $0.58 
                     
Weighted average number of shares outstanding during the period – basic   28,104,365    27,856,920    28,088,901    28,237,874 
Weighted average number of shares outstanding during the period – diluted   29,105,267    28,921,246    29,149,285    29,374,460 
                     
Supplemental disclosure of stock-based compensation expense                    
Stock-based compensation included in:                    
Selling, general and administrative expenses  $(3.3)  $(2.5)  $(9.3)  $(7.9)

 

(1) Excluding depreciation and amortization

 

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

 

2
 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

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

(in millions, except share data)

(Unaudited)

 

   Shares   Amount   capital   income   deficit   deficit 
   Common stock  

Additional

paid in

  

Accumulated

other

comprehensive

   Accumulated  

Total

stockholders’

 
   Shares   Amount   capital   income   deficit   deficit 
                         
Balance as of January 1, 2023, as restated   25,909,516   $   $378.2   $50.8   $(514.6)  $(85.6)
Foreign currency translation adjustments               (2.9)       (2.9)
Actuarial gains on pension plan               0.2        0.2 
Reclassification of loss on hedging instrument to comprehensive income               0.2        0.2 
Issuances under stock plans   353,554                     
Stock-based compensation expense           3.0            3.0 
Net loss                   (1.4)   (1.4)
Balance as of March 31, 2023, as restated   26,263,070   $   $381.2   $48.3   $(516.0)  $(86.5)
Foreign currency translation adjustments               (2.7)       (2.7)
Actuarial loss on pension plan               0.3        0.3 
Reclassification of loss on hedging instrument to comprehensive income               0.1        0.1 
Repurchase of common stock   (3.931)               (0.1)   (0.1)
Issuances under stock plans   4,282        (0.2)           (0.2)
Stock-based compensation expense           3.1            3.1 
Net income                   5.6    5.6 
Balance as of June 30, 2023, as restated   26,263,421   $   $384.1   $46.0   $(510.5)  $(80.4)
Foreign currency translation adjustments               3.6        3.6 
Actuarial loss on pension plan               0.2        0.2 
Reclassification of loss on hedging instrument to comprehensive income                        
Repurchase of common stock   (121,847)               (1.5)   (1.5)
Issuances under stock plans   73,165        (1.1)           (1.1)
Stock-based compensation expense           3.3            3.3 
Net income                   3.4    3.4 
Balance as of September 30, 2023   26,214,739   $   $386.3   $49.8   $(508.6)  $(72.5)

 

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

 

3
 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD JANUARY 1, 2022 TO SEPTEMBER 30, 2022

(in millions, except share data)

(Unaudited)

 

   Common stock  

Additional

paid in

  

Accumulated

other

comprehensive

   Accumulated  

Total

stockholders’

 
   Shares   Amount   capital   income   deficit   deficit 
                         
Balance as of January 1, 2022, as restated   26,433,562   $   $372.3   $43.8   $(524.8)  $(108.7)
Foreign currency translation adjustments               3.5        3.5 
Actuarial gains on pension plan               0.1        0.1 
Reclassification of loss on hedging instrument to comprehensive income               0.2        0.2 
Issuances under stock plans   447,060                     
Stock-based compensation expense           2.7            2.7 
Net income                   1.5    1.5 
Balance as of March 31, 2022, as restated   26,880,622   $   $375.0   $47.6   $(523.3)  $(100.7)
Foreign currency translation adjustments               9.0        9.0 
Actuarial loss on pension plan               (0.8)       (0.8)
Reclassification of loss on hedging instrument to comprehensive income               0.2        0.2 
Repurchase of common stock   (477,643)               (5.1)   (5.1)
Issuances under stock plans   45,594        (0.2)           (0.2)
Stock-based compensation expense           2.6            2.6 
Net income                   6.4    6.4 
Balance as of June 30, 2022, as restated   26,448,573   $   $377.4   $56.0   $(522.0)  $(88.6)
Foreign currency translation adjustments               8.0        8.0 
Actuarial gains on pension plan               0.1        0.1 
Reclassification of loss on hedging instrument to comprehensive income               0.1        0.1 
Repurchase of common stock   (539,952)               (4.9)   (4.9)
Issuances under stock plans   4,160                     
Stock-based compensation expense           2.5            2.5 
Net income                   9.2    9.2 
Balance as of September 30, 2022, as restated   25,912,781   $   $379.9   $64.2   $(517.7)  $(73.6)

 

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

 

4
 

 

INSPIRED ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

 

   2023   2022, as restated 
  

Nine Months Ended

September 30,

 
   2023   2022, as restated 
Cash flows from operating activities:          
Net income  $7.6   $17.1 
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Depreciation and amortization   29.8    30.1 
Amortization of right of use asset   2.8    2.7 
Profit on disposal of trade and assets       (0.9)
Stock-based compensation expense   9.3    7.9 
Contract cost expense   (7.7)   (4.7)
Reclassification of loss on hedging instrument to comprehensive income   0.5    0.5 
Non-cash interest expense relating to senior debt   1.0    1.1 
Changes in assets and liabilities:          
Accounts receivable   11.7    (1.3)
Inventory   (9.4)   (12.1)
Prepaid expenses and other assets   (5.0)   (3.1)
Corporate tax and other current taxes payable   (9.6)   (6.6)
Accounts payable and accrued expenses   4.6    8.8 
Deferred revenues and customer prepayment   2.9    (2.9)
Operating lease liabilities   (2.8)   (2.7)
Other long-term liabilities   (0.4)   (2.1)
Net cash provided by operating activities   35.3    31.8 
           
Cash flows from investing activities:          
Purchases of property and equipment   (20.1)   (16.8)
Acquisition of subsidiary company assets       (0.6)
Acquisition of third-party company trade and assets   (0.6)    
Disposal of trade and assets       1.3 
Purchases of capital software   (11.0)   (9.4)
Net cash used in investing activities   (31.7)   (25.5)
           
Cash flows from financing activities:          
Repurchase of common stock   (1.6)   (10.0)
Repayments of finance leases   (1.0)   (0.5)
Net cash used in financing activities   (2.6)   (10.5)
           
Effect of exchange rate changes on cash   0.4    (6.2)
Net increase (decrease in) cash   1.4    (10.4)
Cash, beginning of period   25.0    47.8 
Cash, end of period  $26.4   $37.4 
           
Supplemental cash flow disclosures          
Cash paid during the period for interest  $12.1   $11.9 
Cash paid (received) during the period for income taxes  $4.8   $(0.2)
Cash paid during the period for operating leases  $4.9   $6.0 
           
Supplemental disclosure of non-cash investing and financing activities          
Lease liabilities arising from obtaining right of use assets  $(0.4)  $ 
Property and equipment transferred to inventory  $   $0.8 
Property and equipment acquired through finance lease  $1.2   $ 
Additional paid in capital from net settlement of RSUs  $(1.3)  $(0.2)

 

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

 

5
 

 

1. Nature of Operations, Management’s Plans and Summary of Significant Accounting Policies

 

Company Description and Nature of Operations

 

We are a global gaming technology company, supplying content, platform, gaming terminals and other products and services to online and land-based regulated lottery, betting and gaming operators worldwide through a broad range of distribution channels, predominantly on a business-to-business basis. We provide end-to-end digital gaming solutions (i) on our own proprietary and secure network, which accommodates a wide range of devices, including land-based gaming machine terminals, mobile devices and online computer applications and (ii) through third party networks. Our content and other products can be found through the consumer-facing portals of our interactive customers and, through our land-based customers, in licensed betting offices, adult gaming centers, pubs, bingo halls, airports, motorway service areas and leisure parks.

 

Management Liquidity Plans

 

As of September 30, 2023, the Company’s cash on hand was $26.4 million, and the Company had working capital in addition to cash of $29.1 million. The Company recorded net income of $7.6 million and $17.1 million for the nine months ended September 30, 2023 and 2022, respectively. Net income includes non-cash stock-based compensation of $9.3 million and $7.9 million for the nine months ended September 30, 2023 and 2022, respectively. Working capital of $55.5 million includes $8.7 million of deferred income.

 

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 $35.3 million and $31.8 million for the nine months ended September 30, 2023 and 2022, respectively.

 

Management currently believes that the Company’s cash balances on hand, cash flows expected to be generated from operations, ability to control and defer capital projects and amounts available from the Company’s external borrowings will be sufficient to fund the Company’s net cash requirements through November 2024.

 

Basis of Presentation

 

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

 

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended December 31, 2022 and 2021. The financial information as of December 31, 2022 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K/A filed with the SEC on February 27, 2024. The interim results for the nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any future interim periods.

 

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.

 

The adoption of ASC 326 did not have a material impact. Disclosures with respect to allowances for credit losses are given in footnote 4 to these financial statements.

 

6
 

 

2. Restatement of Previously Issued Financial Statements

 

Restatement Background

 

On November 2, 2023, the Company in concurrence with the Company’s audit committee, concluded that our 2023 and 2022 consolidated financial statements and our unaudited consolidated financial statements as of and for each of the first two quarterly periods in 2023 and all quarterly periods in 2022, included in our Quarterly Reports on Form 10-Q for the respective periods, (collectively the “Prior Period Financial Statements”) should no longer be relied upon due to misstatements that are described below, and that we would restate such financial statements to make the necessary accounting corrections. Details of the restated consolidated financial statements for the three and nine months ended September 30, 2022 are provided below (“Restatement Items”). Details of the restated consolidated financial statements as of December 31, 2022 are provided in the amendment to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2022, filed with the SEC as of the date of this report.

 

The Restatements Items reflect adjustments to correct errors in certain financial statement areas including capitalized software and costs to fulfill a contract, revenue and costs to obtain a contract, inventory, goodwill and intangibles, leasing, pension, and other reclassifications and immaterial errors identified. The nature and impact of these adjustments are described below and also detailed in the tables below.

 

The Company issued a revision for capitalized software and related amortization expense in the quarterly report on Form 10-Q filed on August 11, 2023 for the period ended June 30, 2023 (the “Revision”). This revision related to certain completed software development projects that were, but should not have been, delayed in the shift from work in progress to completed projects. Consequently, the commencement of amortization for certain projects was delayed and the reported amortization was lower than the actual amortization. The Revision covers the period ended September 30, 2023 and the year ended December 31, 2022 and is distinct from the capitalized software restatements below. The tables below have been updated to separate the impact of the Restatement Items from the Revision.

 

Restatement Items

 

Capitalized software and Costs to fulfill a contract – The Company historically assessed and applied incorrectly the accounting frameworks for developing external use software under ASC 985-20, Costs of Software to Be Sold, Leased or Marketed, and internal-use software under ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software and ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers. In addition, the Company determined routine software updates and certain minor software enhancements were inappropriately capitalized and capitalized labor rates inappropriately included, certain indirect costs including overhead and non-development activities. Consequently, certain amortization was inappropriate. The corrections resulted in an increase to Selling, general and administrative expenses of $0.9 million and $2.7 million as well as a decrease in Depreciation and amortization of $0.7 million, and $1.7 million for the three and nine months ended September 30, 2022, respectively. Refer to reference “a” below.

 

Revenue and Costs to obtain a contract – The Company identified several corrections related to ASC 606, Revenue from Contracts with Customers. The Company identified certain performance obligations were delivered and therefore should have been recognized at a specific point in time (rather than over time). Additionally, we identified that (i) for certain Interactive Aggregator contracts, revenue should have been reported on a net, rather than gross, basis and (ii) certain parts the Company acquired and sold to its contract manufacturer should have not been reported as revenue. These two items have no impact to profit. The Company also identified an immaterial contract that should have been recognized as a sales type lease rather than an operating lease. Items reported on a gross, rather than net basis are corrected with no impact to profit. Lastly, the Company had historically expensed certain commissions in the period incurred instead of capitalizing and amortizing them under the accounting framework for costs to obtain contracts with customers pursuant to ASC 606, Revenue from Contracts with Customers, and ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers. The corrections also resulted in a decrease in Revenue - service of $0.6 million and $2.3 million for the three and nine months ended September 30, 2022, respectively and a $0.1 million decrease and $0.5 million increase in Revenue – product sales for the three and nine months ended September 30, 2022, respectively, a decrease in Cost of sales – service of $1.7 million and $5.0 million for the three and nine months ended September 30, 2022, respectively, and as a $0.5 million increase in Cost of sales – product sales for the nine months ended September 30, 2022. The corrections also resulted in an increase in Depreciation and amortization increased by $1.2 million and $3.2 million for the three and nine months ended September 30, 2022, respectively as well as a $0.1 increase in Interest expense, net for the three months ended September 30, 2022. Refer to reference “b” below. Note 7, “Contract Liabilities and Other Disclosures” and Note 19, “Segment Reporting and Geographic Information” have also been corrected.

 

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Inventory The Company identified an error in the amount capitalized for field inventory, repair and consumable items. Refer to reference “c” below. Note 5, “Inventory” has also been corrected.

 

Goodwill and intangiblesThrough review of the appropriate reporting units and asset groups to assess impairments at under ASC 350, Intangibles – Goodwill and Other and ASC 360, Property, Plant and Equipment, the Company identified a triggering event in the first quarter of 2020, related to the beginning of the COVID-19 pandemic, for which impairment assessment was required for (i) Server Based Gaming (“SBG”) and Acquired Business reporting units and (ii) all landbased asset groups. Based on the assessment, we determined that an impairment of goodwill and long-lived assets occurred in the first quarter of 2020. Additionally, we determined that a significant number of synergies existed from the acquisition in the fourth quarter of 2019 and therefore a portion of the acquisition goodwill should have been reallocated to other reporting units upon acquisition. The corrections resulted in a decrease of Depreciation and amortization of $0.1 million for both the three and nine months ended September 30, 2022. Refer to reference “d” below.

 

Leasing – The Company had not historically included in-substance fixed payments related to certain leases according to the accounting framework in ASC 842, Leases. Refer to reference “f” below. Note 16, “Leases” has also been corrected.

 

Basic and diluted net income (loss) per share – An error to shares outstanding primarily relates to the Company not including deferred settlement equity awards that had vested in the number of outstanding shares used in the calculation of basic and diluted weighted average number of shares outstanding pursuant to ASC 260, Earnings Per Share. Refer to reference “h” below. Note 12, “Net earnings (loss) per share” has also been corrected.

 

Pension – The Company had corrections to pension that primarily related to no longer updating the plan liability/ asset quarterly to comply with US GAAP. In addition, the Company corrected the benefit obligation and fair value of plan assets for the buy-in contract.  The Company corrected the measurement of the plan assets and the estimated fair value of the buy in contract. Note 18, “Pension Plan” has also been corrected. Refer to reference “g” below.

 

Other errors identified – Through the restatement process, the Company has reclassified certain costs for salaries of service employees and recorded an adjustment related to foreign currency impacts on an intangible. In addition to the reclassification and intangible adjustment, the Company has corrected other adjustments that are quantitatively immaterial, individually and in aggregate, because we are correcting for these material errors, we have decided to correct these other adjustments. Refer to reference “f” below.

 

Income tax – The Company updated the income tax effects for the Restatement Items. Note 14, “Income Taxes” has also been updated.

 

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Summary impact of Restatement Items to Prior Period Financial Statements

 

The following tables present the effect of the Restatement Items on the Company’s consolidated statement of operations for the periods indicated (in millions, except share and per share amounts):

 

   Reported   Adjustments   As Restated   References
   For Nine Months Ended September 30, 2022 (unaudited)
   As Previously   Restatement       Restatement
   Reported   Adjustments   As Restated   References
Revenue:               
Service  $191.0   $(2.3)  $188.7   b
Product Sales   15.8    0.5    16.3   b
Total Revenue   206.8    (1.8)   205.0    
                   
Cost of sales, excluding depreciation and amortization                  
Cost of Service   (37.7)   (17.2)   (54.9)  b, f
Cost of product sales   (10.4)   (0.8)   (11.2)  b, c
Selling, general and administrative expenses   (93.2)   19.1    (74.1)  a, f
Acquisition and integration related transaction expenses   (0.3)   -    (0.3)   
Depreciation and amortization   (28.7)   (1.4)   (30.1)  a, b, d
Net operating income (loss)   36.5    (2.1)   34.4    
                   
Other (expense) income                  
Interest expense, net   (18.7)   -    (18.7)  b
Gain on disposal of business   0.9    -    0.9    
Other finance income   0.9    -    0.9    
                   
Total other expense, net   (16.9)   -    (16.9)   
                   
Net income before income taxes   19.6    (2.1)   17.5    
Income tax (expense) benefit   (0.4)   -    (0.4)   
Net income   19.2    (2.1)   17.1    
                   
Other comprehensive income:                  
Foreign currency translation (loss) gain   13.0    7.5    20.5    
Reclassification of loss on hedging instrument to comprehensive income   0.5    -    0.5    
Actuarial (losses) gains on pension plan   (2.9)   2.3    (0.6)  g
Other comprehensive (loss) income   10.6    9.8    20.4    
                   
Comprehensive income  $29.8   $7.7   $37.5    
                   
Net income per common share - basic  $0.72   $(0.11)  $0.61    
Net income per common share - diluted  $0.66   $(0.08)  $0.58    
                   
Weighted average number of shares outstanding during the year - basic   26,639,084    1,598,790    28,237,874   h
Weighted average number of shares outstanding during the year - diluted   29,308,455    66,005    29,374,460    
                   
Supplemental disclosure of stock-based compensation expense                  
Stock-based compensation expense included in:                  
Selling, general and administrative expenses  $(7.9)   -   $(7.9)   

 

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   Reported   Adjustments   As Restated   References
   For Three Months Ended September 30, 2022 (unaudited)
   As Previously   Restatement       Restatement
   Reported   Adjustments   As Restated   References
Revenue:               
Service  $69.2   $(0.6)  $68.6   b
Product Sales   5.7    (0.1)   5.6   b
Total Revenue   74.9    (0.7)   74.2    
                   
Cost of sales, excluding depreciation and amortization                  
Cost of Service   (14.2)   (6.1)   (20.3)  b, f
Cost of Product sales   (3.9)   (0.2)   (4.1)  b
Selling, general and administrative expenses   (31.7)   6.5    (25.2)  a, f
Acquisition and integration related transaction expenses   (0.1)   -    (0.1)   
Depreciation and amortization   (8.8)   (0.4)   (9.2)  a, b, d
Net operating income (loss)   16.2    (0.9)   15.3    
                   
Other (expense) income                  
Interest expense, net   (6.2)   (0.1)   (6.3)  b
Gain on disposal of business   -    -    -    
Other finance income (expense)   0.3    -    0.3    
                   
Total other expense, net   (5.9)   (0.1)   (6.0)   
                   
Net income before income taxes   10.3    (1.0)   9.3    
Income tax (expense) benefit   (0.1)   -    (0.1)   
Net income   10.2    (1.0)   9.2    
                   
Other comprehensive income:                  
Foreign currency translation (loss) gain   4.8    3.2    8.0    
Reclassification of loss on hedging instrument to comprehensive income   0.1    -    0.1    
Actuarial (losses) gains on pension plan   (6.2)   6.3    0.1   g
Other comprehensive (loss) income   (1.3)   9.5    8.2    
                   
Comprehensive income  $8.9   $8.5   $17.4    
                   
Net income per common share - basic  $0.39   $(0.06)  $0.33    
Net income per common share - diluted  $0.35   $(0.03)  $0.32    
                   
Weighted average number of shares outstanding during the year - basic   26,247,046    1,609,874    27,856,920   h
Weighted average number of shares outstanding during the year - diluted   28,845,331    75,915    28,921,246    
                   
Supplemental disclosure of stock-based compensation expense