ITEM 1A. RISK FACTORS
RISK FACTORS RELATING TO OUR BUSINESS AND
INDUSTRY
We operate in highly competitive industries
and our success depends on our ability to effectively compete with numerous worldwide businesses.
We face competition from a number of worldwide
businesses, some of which have substantially greater financial resources and operating scale than we do. Such competition could
impact our ability to win new contracts and renew existing contracts. We continue to operate in a period of intense price-based
competition in some key markets, which could affect the profitability of the contracts we do win.
Moreover, our businesses in certain markets
also face competition from suppliers or operators who offer products for internet gaming in illegal, unregulated or lightly regulated
markets, but are still permitted to supply products in certain regulated markets. As we generally operate only with regulated products
in regulated markets, these competitors often have substantially greater financial resources which could impact our ability to
win new contracts and renew existing contracts that can affect our future profitability.
Our business is subject to evolving technology.
The markets for all of our products and services
are affected by changing technology, new regulations and evolving industry standards. Our ability to anticipate or respond to such
changes and to develop and introduce new and enhanced products and services on a timely basis will be a significant factor in our
ability to expand, remain competitive, attract new customers and retain existing contracts.
There can be no assurance that we will achieve
the necessary technological advances, have the financial resources, introduce new products or services on a timely basis or otherwise
have the ability to compete effectively in the markets we serve.
We are heavily dependent on our ability
to renew our long-term contracts with our customers and we could lose substantial revenue if we are unable to renew certain of
these contracts.
Generally, our Virtual Sports contracts are
for initial terms of three to five years, with renewals at the customer’s option. SBG terminal contracts typically are for
terms of four to six years, but certain customers have options for early termination under certain circumstances and there may
be competitive pressure to renew or upgrade terminals during the life of these contracts. This can adversely affect revenues and
/ or return on capital and leave us with surplus terminals. Certain key contracts in the United Kingdom and Italy are subject to
renewal or early termination options during the next two years.
There can be no assurance that our current
contracts will be extended or that we will be awarded new contracts as a result of competitive bidding processes in the future.
The termination, expiration or failure to renew one or more of our contracts could cause us to lose substantial revenue.
Changes in applicable gambling regulations
or taxation regimes may affect the revenues or profits generated by the contracts which we enter into with our customers. Many
of the contracts which we have with our customers are on revenue-sharing terms, and therefore changes which adversely affect our
customers may also adversely affect us. In addition, such changes may cause our customers to seek to renegotiate our contracts
or may alter the terms on which such customers are prepared to renew their contracts.
We rely on a relatively small number of
customers for a significant portion of our sales, and the loss of or material reduction in sales to any of our top customers could
have a material adverse effect on our business, results of operations, financial condition and cash flows.
During the six months ended March 31, 2017,
there were two customers that represented at least 10% of our revenues, accounting for 29% and 12% of the Company’s revenues
respectively. We expect that these customers will continue to represent a significant portion of our net sales in the future. A
decision by any of our top customers to significantly decrease the volume of products purchased from us could substantially reduce
revenues and may have a material adverse effect on our business, results of operations, financial condition and cash flows.
We are dependent on our relationships with
key suppliers to obtain equipment and other supplies for our business on acceptable terms.
We have achieved significant cost savings through
our centralization of equipment and non-equipment purchases. However, as a result, we depend on and are exposed to the credit risk
of a group of key suppliers. While we make every effort to evaluate our counterparties prior to entering into long-term and other
significant procurement contracts, we cannot predict the impact on our suppliers of the current economic environment and other
developments in their respective businesses. Insolvency, financial difficulties or other factors may result in our suppliers not
being able to fulfill the terms of their agreements with us. Further, such factors may render suppliers unwilling to extend contracts
that provide favorable terms to us, or may force them to seek to renegotiate existing contracts with us. Although we believe we
have alternative sources of supply for the equipment and other supplies used in our business, termination of our relationship with
any of our key suppliers could have a material adverse effect on our business, financial condition or results of operations in
the unlikely event that we were unable to obtain adequate equipment or supplies from other sources in a timely manner or at all.
Our ability to bid on new contracts is dependent
upon our ability to fund any required up-front capital expenditures through our cash from operations, incurrence of indebtedness
or raising additional equity capital.
Our SBG terminal contracts in the United Kingdom
and Italy often require significant up-front capital expenditures for terminal assembly, software customization and implementation,
systems and equipment installation and telecommunications configuration. Historically, we have funded these up-front costs through
cash flows generated from operations, available cash on hand and borrowings under our credit facilities. Our ability to continue
to procure new contracts will depend on, among other things, our liquidity levels at the time or our ability to obtain additional
debt or equity funding at commercially acceptable terms to finance the initial up-front costs. If we do not have adequate liquidity
or are unable to obtain other funding for these up-front costs on favorable terms or at all, we may not be able to bid on certain
contracts, which could restrict our ability to grow and have a material adverse effect on our ability to retain existing contracts
and therefore on future profitability.
Our business depends on the protection of
our intellectual property and proprietary information.
We believe that our success depends, in part,
on protecting our intellectual property in the United Kingdom and in other countries. Our intellectual property includes certain
patents and trademarks relating to our systems, as well as proprietary or confidential information that is not subject to patent
or similar protection. Our intellectual property protects the integrity of our games, systems, products and services, which is
a core value of the industries in which we operate. Competitors may independently develop similar or superior products, software,
systems or business models. In cases where our intellectual property is not protected by an enforceable patent, or other intellectual
property protection, such independent development may result in a significant diminution in the value of its intellectual property.
There can be no assurance that we will be able
to protect our intellectual property. We enter into confidentiality or license agreements with our employees, vendors, consultants
and, to the extent legally permissible, our customers, and generally controls access to, and the distribution of, our game designs,
systems and other software documentation and other proprietary information, as well as the designs, systems and other software
documentation and other information we license from others. Despite our effort to protect these proprietary rights, unauthorized
parties may try to copy our gaming products, business models or systems, use certain of our confidential information to develop
competing products, or develop independently or otherwise obtain and use our gaming products or technology, any of which could
have a material adverse effect on our business. Policing unauthorized use of our technology is difficult and expensive, particularly
because of the global nature of our operations. The laws of other countries may not adequately protect our intellectual property.
There can be no assurance that our business
activities, games, products and systems will not infringe upon the proprietary rights of others, or that other parties will not
assert infringement claims against it. Any such claim and any resulting litigation, should it occur, could subject us to significant
liability for damages and could result in invalidation of our proprietary rights, distract management, and/or require it to enter
into costly and burdensome royalty and licensing agreements. Such royalty and licensing agreements, if required, may not be available
on terms acceptable to us, or may not be available at all. In the future, we may also need to file lawsuits to defend the validity
of our intellectual property rights and trade secrets, or to determine the validity and scope of the proprietary rights of others.
Such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources.
We also rely on certain products and technologies
that we license from third parties. There can be no assurance that these third-party licenses, or the support for such licenses,
will continue to be available to us on commercially reasonable terms.
Our business competes on the basis of the
stability, security and integrity of our software, networks, systems, games and products.
We believe that our success depends, in part,
on providing secure products and systems to our vendors and customers with high levels of uptime, quality and availability. Attempts
to penetrate security measures may come from various combinations of customers, retailers, vendors, players, employees and others.
Our ability to monitor and ensure quality of our products is periodically reviewed and enhanced. There can be no assurance that
our business might not be affected by a security breach, virus, Denial of Service attack, or technical error, failure or lapse
which could have a material adverse impact on our business.
Additionally, we maintain a large number of
games and terminals and jackpot systems, which rely on algorithms and software designed to pay out winnings to players at certain
ratios. Our systems, testing and processes to monitor and ensure the payout of games are periodically reviewed and enhanced, and
are additionally reviewed and tested by third-party expert test houses. There can be no assurance that our business might not be
affected by a malicious or unintentional breach or technical error, failure or lapse which could have a material adverse impact
on payout ratios which would consequently have a material adverse effect on our business in the form of lost revenues or penalty
payments to players or customers. Gaming regulators may take enforcement action against us (including the imposition of significant
fines) where the payout ratios fall below the ratios advertised to customers, or our software, networks, systems, games and/or
products otherwise suffer from technical error, failure or lapse.
Our industry may be subject to strict government
regulations that could limit our existing operations and have a negative impact on our ability to grow.
In certain jurisdictions, forms of wagering,
betting and lottery may be expressly authorized and governed by law and in other jurisdictions forms of wagering, betting and lottery
may be expressly prohibited by law. If expressly authorized, such activities are typically subject to extensive and evolving governmental
regulation. Gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore, we are subject to a wide range of
complex gaming laws, rules and regulations in the jurisdictions in which we are licensed or may seek to be licensed. Most jurisdictions
require that we are licensed and/or authorized, or that our key personnel and certain of our security holders are found to be suitable
or are licensed, and that our products are reviewed, tested and certified or approved before placement. If a license, approval,
certification or finding of suitability is required by a regulatory or national authority and we fail to seek or do not receive
the necessary approval, license, certification or finding of suitability, then we may be prohibited from distributing our products
for use in the respective jurisdiction. Additionally, such prohibition could trigger reviews of our Company by regulatory bodies
in other jurisdictions.
The regulatory environment in any particular
jurisdiction may change in the future, and any such change could have a material adverse effect on our results of operations or
business in general. Moreover, there can be no assurance that the operation of Server Based Gaming terminals, Video Lottery Terminals,
Virtual Sports Betting, Gaming or Lottery, Internet or Mobile gaming, betting, lottery or other forms of wagering systems will
be approved, certified or found suitable by additional jurisdictions or that those jurisdictions in which these activities are
currently permitted will continue to permit such activities in their existing forms or at all. While we believe that we have the
means to continue to develop procedures and policies designed to comply with and monitor the requirements of evolving laws, there
can be no assurance that law enforcement agencies, governmental agencies or gaming regulatory authorities, whether in existing
or new jurisdictions will not seek to restrict our business or otherwise institute enforcement proceedings or other legal claims
against the Company. Moreover, in addition to the risk of such enforcement actions or claims, we are also at risk from loss of
business reputation in the event of any potential legal or regulatory investigation whether or not we are ultimately accused of
or found to have committed any violations.
We supply certain of our products to operators
who operate gaming websites. Some of those operators may take bets from customers in markets where no gaming laws or regulations
exist and where the provision of online gaming is effectively unregulated. Whilst the Company seeks to ensure its customers only
take best in markets where online gaming is legal, if any of those operators is subjected to investigatory or enforcement action
by local regulatory or police authorities that may result in the operator withdrawing from such market which may adversely affect
such operator’s revenues. The Company may itself be subject to investigatory or enforcement action (if and to the extent
that local laws or other jurisdictions in which the Company operates imposes liability on suppliers for the activities of the customers
that they supply or for receiving funds that are deemed to be illegal because of such activities). We seek to protect ourselves
against any such liability for the activities of the operators that we supply, including contractually requiring those operators
not to operate in certain territories and only supplying operators who we have reviewed to determine whether they uphold the requisite
standards of regulatory and legal compliance. Nonetheless, there is a risk that we may fail to undertake sufficient due diligence
or become subject to investigatory or enforcement action should we or any of our customers be accused of breaching any regulations
or laws. Such action may adversely impact the time of our management, and impact our standing with its own gaming regulators.
We may be required to obtain and maintain licenses
from various state and local jurisdictions in order to operate certain aspects of our business and may be subject to extensive
background investigations and suitability standards. We may also become subject to regulation in any other jurisdiction where our
customers are permitted to operate in the future. There can be no assurance that we will be able to obtain new licenses or renew
any of our existing licenses, and the loss, denial or non-renewal of any of our licenses could have a material adverse effect on
our business. Generally, regulatory authorities have broad discretion when granting, renewing or revoking approvals and licenses.
Our failure, or the failure of any of our key personnel, systems or machines, in obtaining or retaining a required license or approval
in one jurisdiction could negatively impact our ability (or the ability of any of our key personnel, systems or gaming machines)
to obtain or retain required licenses and approvals in other jurisdictions. The failure to obtain or retain a required license
or approval in any jurisdiction would decrease the geographic area where we may operate and generate revenues, decrease our share
in the gaming marketplace and put us at a disadvantage compared with our competitors.
Some jurisdictions also require extensive personal
and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically
5% or more) of equity securities of licensed or regulated businesses. The failure of beneficial owners of our common stock to submit
to such background checks and provide required disclosure could jeopardize our business. In light of these regulations and the
potential impact on our business, our second restated certificate of incorporation provides for the prohibition of stock ownership
by persons or entities who fail to comply with informational or other regulatory requirements under applicable gaming law, who
are found unsuitable to hold our stock by gaming authorities or whose stock ownership adversely affects our ability to obtain,
maintain, renew or qualify for a license, contract, franchise or other regulatory approval from a gaming authority. The licensing
procedures and background investigations of the authorities that regulate our businesses and the proposed amendment may inhibit
potential investors from becoming significant stockholders or inhibit existing stockholders from retaining or increasing their
ownership.
We are continually developing and implementing
our internal compliance programs in an effort to ensure that we comply with all known legal requirements imposed in connection
with our business activities. The compliance program is run on a day-to-day basis by our Chief Legal Officer with compliance and
technical advice provided by our Compliance Manager and outside experts. There can be no assurance that such steps will prevent
the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of
administrative, civil and even criminal sanctions, monetary fines or suspension or revocation of one or more of our licenses.
Gaming opponents persist in their efforts
to curtail legalized gaming, which, if successful, could limit our existing operations.
Legalized gaming is subject to opposition from
gaming opponents, including in the United Kingdom, Italy and other markets where we are active. There can be no assurance that
this opposition will not succeed in preventing the legalization of gaming in jurisdictions where these activities are presently
prohibited or prohibiting or limiting the expansion or continuance of gaming where it is currently permitted, in either case to
the detriment of our business, financial condition, results and prospects.
Our industry is subject to taxation by government
and by regulations that set parameters for levels of gaming or wagering duty, tax, stake, prize and return to player.
In most jurisdictions in which we operate or
expect to seek to operate, the level of duty and/or taxation and the stake, prize and return to player of wagering, betting and
lottery games, and the speed at which players can participate in gaming, are defined in government regulations which are subject
to change. Those regulations may also affect the premises in which gaming activities may take place (i.e., by limiting the number
of gaming machines which may be housed in licensed gaming premises, or by restricting the locations in which licensed gaming premises
may be situated). Once authorized, such parameters are subject to extensive and evolving governmental regulation. Moreover, such
gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore, we are subject to a wide range of complex gaming
parameters in the jurisdictions in which we are licensed. If a key parameter is changed, such as the level of taxation or duty
or the maximum stake or prize or return to player of a game, then it may be to the detriment of our business, financial condition,
results and prospects and/or we may be unable to distribute our products profitably for use in the prospective jurisdiction or
existing products in which we have invested may become economically unviable.
Our inability to complete future acquisitions
of gaming and related businesses and integrate those businesses successfully could limit our future growth, if any.
We expect to pursue expansion and acquisition
opportunities in gaming and related businesses and we could face significant challenges in managing and integrating the expanded
or combined operations including acquired assets, operations and personnel. There can be no assurance that acquisition opportunities
will be available on acceptable terms or at all or that we will be able to obtain necessary financing or regulatory approvals to
complete potential acquisitions. Our ability to succeed in implementing our strategy will depend to some degree upon the ability
of our management to identify, complete and successfully integrate commercially viable acquisitions. Acquisition transactions may
disrupt our ongoing business and distract management from other responsibilities. Any future acquisition transactions involving
the use of company stock have the potential of dilution to our existing stockholders and earnings per share.
Our business may be affected by changes
in general and local economic and political conditions.
The demand for our services is sensitive to
general and local economic conditions over which we have no control, including changes in the levels of consumer disposable income
and geographical exposure to macro-economic trends and taxation. In addition, the economic stability of certain Eurozone countries
where we conduct or intend to conduct business may become affected by sovereign debt crises. Adverse changes in economic conditions
may affect our business generally or may be more prevalent or concentrated in particular markets in which we operate. Any deterioration
in economic conditions or the continuation of uncertain economic conditions could have a material adverse effect on our business,
financial condition, results of operations and prospects. Other economic risks which may adversely impact our performance include
high interest rates, inflation and volatile foreign exchange markets.
The performance of our business may also be
subject to political risks in certain jurisdictions where we operate, including change of government, political unrest, war or
terrorism.
Our revenues fluctuate due to seasonal,
weather and other variations and you should not rely upon its periodic operating results as indications of future performance.
Our revenues are subject to seasonal and other
variations. Wagering equipment sales and software license revenues usually reflect a limited number of large transactions, which
may not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period to period as
a result of the timing of revenue recognition for major equipment sales and software license revenue. In addition, revenues may
vary depending on the season and timing of contract awards, changes in customer budgets and general economic conditions. Revenues
may also vary based on adverse sequences of payouts of prizes, unusual jackpot wins, and other variations in game margin.
Our business could also be impacted by natural
or man-made disasters such as floods, storms or terrorist attacks. We have taken steps to have disaster recovery plans in place
but there can be no assurance that such an event would not have a significant adverse impact on our business.
We are dependent on our suppliers and contract
manufacturers, and any failure of these parties to meet its performance and quality standards or requirements or unexpected price
raises could cause us to incur additional costs or lose customers.
We are dependent on a select group of suppliers
and manufacturers. In addition, our business has signed a number of significant contracts whose performance depends on third party
suppliers delivering equipment on schedule for us to meet its contract commitments. Failure of the suppliers to meet their delivery
commitments could result in us being in breach of and subsequently losing those contracts, which loss could have a material adverse
effect on our revenue.
We have operations in a variety of countries,
which subjects us to additional risks.
Our business in foreign markets subject us
to risks customarily associated with such operations, including:
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foreign withholding taxes on our subsidiaries’
earnings that could reduce cash flow available to meet our required debt service and its other obligations;
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the complexity of foreign laws, regulations
and markets;
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the impact of foreign labor laws and disputes;
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potential risks relating to our ability to manage our foreign operations, monitor our customers’
activities or our partners’ activities which may subject us to risks involving such other entities’ financial condition
or to inconsistent interests or goals;
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the impact of price controls, capital controls or increased difficulties in collecting accounts receivables in Greece or other jurisdictions;
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other economic, tax and regulatory policies
of local governments; and
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the ability to attract and retain key
personnel in foreign jurisdictions.
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Our consolidated financial results are significantly
affected by foreign currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions
and anticipated transactions denominated in currencies other than GBP or US Dollars, and from the translation of foreign currency
balance sheet accounts into GBP-denominated or US Dollar-denominated balance sheet accounts. Exposure to currency exchange rate
fluctuations exists and will continue because a significant portion of our revenues are denominated in currencies other than the
US Dollar, particularly GBP and the Euro. Exchange rate fluctuations have in the past adversely affected operating results and
cash flows and may continue to adversely affect results of operations and cash flows and the value of assets.
There can be no assurance that we will be able
to operate successfully in any foreign market.
Our business is capital intensive and the
retention of customers may be influenced by our ability to deploy additional capital.
Customers of our server based gaming products
frequently request us to incur capital expenditures to provide gaming terminals to support their land-based operations. While we
seek to obtain what we believe to be satisfactory rates of return on such investments, these capital expenditures can be meaningful
and may be concentrated within short periods of time. To the extent that we have insufficient access to capital and/or liquidity
at the time that a customer, or prospective customer, makes such a request, we may be at a competitive disadvantage in retaining
or attracting such customer. Such a circumstance could have a material adverse effect on our business, financial condition, results
of operations or prospects.
We may be adversely affected by disruptions
in our transaction gaming and lottery systems, as well as internal enterprise and information technology systems.
Our operations are dependent upon our transactional
gaming, lottery and information technology systems. We rely upon such systems to manage customer systems on a timely basis, to
coordinate our sales and installation activities across all of our locations and to manage invoicing. A substantial disruption
in our transactional gaming, lottery and information technology systems for any prolonged time period (arising from, for example,
system capacity limits from unexpected increases in our volume of business, outages, computer viruses, unauthorized access or delays
in its service) could result in delays in serving our customers, which could adversely affect our reputation and customer relationships.
Our systems might be damaged or interrupted by natural or man-made events or by computer viruses, physical or electronic break-ins,
or similar disruptions affecting the Internet and our disaster recovery plan may be ineffective at mitigating the effects of these
risks. Such delays, problems or costs could have a material adverse effect on our financial condition, results of operations and
cash flows.
We may be subject to claims arising from
the operations of our various businesses for periods prior to the dates we acquired them.
Since 2010 and prior to the Merger, we consummated
two acquisitions. We may be subject to claims or liabilities arising from the ownership or operation of acquired businesses for
the periods prior to our acquisition of them, including environmental, employee-related and other liabilities and claims not covered
by insurance. These claims or liabilities could be significant. Our ability to seek indemnification from the former owners of our
acquired businesses for these claims or liabilities may be limited by various factors, including the specific time, monetary or
other limitations contained in the respective acquisition agreements and the financial ability of the former owners to satisfy
their indemnification claims. In addition, insurance companies may be unwilling to cover claims that have arisen from acquired
businesses or locations, or claims may exceed the coverage limits that our acquired businesses had in effect prior to the date
of acquisition. If we are unable to successfully obtain insurance coverage of third-party claims or enforce our indemnification
rights against the former owners, or if the former owners are unable to satisfy their obligations for any reason, including because
of their current financial position, we could be held liable for the costs or obligations associated with such claims or liabilities,
which could adversely affect our financial condition and results of operations.
Our success depends on our key personnel.
Our business results depend largely upon the
continued contributions of our chief executive officer and other members of our management team, as well as certain key technical
specialists, game designers, operational experts and other developers and operators of key intellectual property and processes.
If we lose the services of one or more members of our management team or key employees, our business, financial condition and results
of operations, as well as the market price of our securities, could be adversely affected.
The long-term performance of our businesses
relies on our ability to attract, develop and retain talented personnel and our labor force while controlling our labor costs.
To be successful, we must attract, develop
and retain highly qualified and talented personnel who have the experience, knowledge and expertise to successfully implement our
key business strategies. We also must attract, develop and retain our labor force while maintaining labor costs. We compete for
employees, including sales people, regional management, executive officers and others, with a broad range of employers in many
different industries, including large multinational firms, and we invest significant resources in recruiting, developing, motivating
and retaining them. The failure to attract and retain key employees, or to develop effective succession planning to assure smooth
transitions of those employees and the knowledge, customer relationships and expertise they possess, could negatively affect our
competitive position and our operating results. Further, if we are unable to cost-effectively recruit, train and retain sufficient
skilled personnel, we may not be able to adequately satisfy increased demand for our products and services, which could impact
our operating results.
The obligations associated with being a
public company requires significant resources and management attention.
We currently face legal, accounting, administrative
and other costs and expenses applicable to a U.S. public company that Inspired did not incur as a private company. In addition,
Inspired had been a private company with limited accounting personnel and other related resources and will need to add personnel
in areas such as accounting, financial reporting, investor relations and legal that are needed in connection with our operations
as a public company. We expect to incur incremental costs related to operating as a public company of approximately $3.9 million
annually, although there can be no assurance that these costs will not be higher, particularly when we no longer qualify as an
emerging growth company. Our company is subject to the reporting requirements of the Exchange Act, which requires us to file annual,
quarterly and current reports with respect to our business and financial condition and proxy and other information statements,
and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, the Public Company Accounting
Oversight Board and the NASDAQ, each of which imposes additional reporting and other obligations on public companies. Our senior
management may not be able to implement programs and policies in an effective and timely manner that adequately respond to such
increased legal, regulatory compliance and reporting requirements, including establishing and maintaining internal controls over
financial reporting. Our compliance with existing and evolving regulatory requirements results in increased administrative expenses
and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
We depend upon a limited number of customers
in any given period to generate a substantial portion of our revenue, the loss of any of which may adversely affect our business
or results of operations.
Certain key customers, including certain United
Kingdom and Italian SBG Terminal customers and certain Virtual Sports customers make a significant contribution to our revenues
and profitability. Our top ten customers generated 69% of total revenues and 81% of recurring revenues in our most recently ended
fiscal year. The loss of any of these customers, whether through contract expiry and non-renewal, exercise of change of control
rights, breach of contract or other adverse factors may materially adversely affect revenues and/or return on capital and leave
us with surplus terminal and or software assets. If any of these customers’ experience reduced sales or revenue, such reduction
may materially impact any revenue-share arrangements we have with those customers.
Restrictions in our existing credit agreement,
or any other indebtedness we may incur in the future, could adversely affect our business, financial condition, results of operations,
and our ability to make distributions to stockholders and the value of our common stock.
Our existing credit agreement, or any future
credit facility or other indebtedness it enters into, may limit its, or our, ability to, among other things:
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incur or guarantee additional debt;
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make distributions or dividends on or
redeem or repurchase shares of common stock;
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make certain investments and acquisitions;
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make capital expenditures;
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incur certain liens or permit them to
exist;
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enter into certain types of transactions
with affiliates;
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acquire, merge or consolidate with another
company; and
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transfer, sell or otherwise dispose of
all or substantially all of our assets.
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The provisions of our existing credit agreement
or other debt instruments may affect our ability to obtain future financing and pursue attractive business opportunities and our
flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions
of our credit agreement, any future credit facility or other debt instruments could result in a default or an event of default
that could enable our lenders or other debt holders to declare the outstanding principal of that debt, together with accrued and
unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, its assets may be insufficient to
repay such debt in full, and we or you could experience a partial or total loss of our investment.
We may have future capital needs and may
not be able to obtain additional financing on acceptable terms.
Economic and credit market conditions, the
performance of the gaming industry, and our financial performance, as well as other factors, may constrain our financing abilities.
Our ability to secure additional financing, if available, and to satisfy our financial obligations under indebtedness outstanding
from time to time will depend upon our future operating performance, the availability of credit, economic conditions and financial,
business and other factors, many of which are beyond our control.
We may be unable to identify sufficient
new products and product lines and integrate them into our existing business, which may impact our ability to compete; our
expansion into new markets may present competitive and regulatory challenges that differ from current ones.
Our business depends in part on our ability
to identify future products and product lines that complement existing products and product lines and that respond to our customers’
needs. We may not be able to compete effectively unless our product selection keeps up with trends in the markets in which it competes
or trends in new products. In addition, our ability to integrate new products and product lines into our existing business could
affect our ability to compete. Furthermore, the success of new products and product lines will depend on market demand and there
is a risk that new products and product lines will not deliver expected results, which could negatively impact our future sales
and results of operations. Our expansion into new markets may present competitive, distribution and regulatory challenges that
differ from current ones. We may be less familiar with new product categories and may face different or additional risks, as well
as increased or unexpected costs, compared to existing operations.
RISK FACTORS RELATING TO OUR STATUS AS A
PUBLIC COMPANY
We may not be able to timely and effectively
implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002 that are now applicable to us subsequent
to the Merger.
Prior to the Merger, we were not subject to
Section 404 of the Sarbanes-Oxley Act of 2002. However, following the Merger, we are required to provide management’s attestation
on internal controls commencing with our annual report for the year ending September 30, 2017. The standards required for a public
company under Section 404 of the Sarbanes-Oxley Act of 2002 are significantly more stringent than those previously required of
Inspired as a privately held company. Management may not be able to effectively and timely implement controls and procedures that
adequately respond to the regulatory compliance and reporting requirements that are now applicable to us subsequent to the Merger.
If we are not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, we may
not be able to assess whether our internal controls over financial reporting are effective, which may subject us to adverse regulatory
consequences and could harm investor confidence and the market price of our common stock.
Certain material weaknesses in our internal
control over financial reporting were identified in connection with the audits of the consolidated financial statements of Inspired
presented in accordance with US GAAP as of the periods ended September 24, 2016, September 26, 2015 and September 27, 2014. Material
weaknesses in our internal control over financial reporting could result in a failure to prevent, or to detect or correct on a
timely basis, material misstatements in the financial statements of our Company, and could have a material adverse effect on the
price of our common stock.
We enter into transactions that are complex
and whose accounting treatment under US GAAP requires extensive knowledge of US GAAP and financial reporting disclosure requirements.
In connection with the audits of the consolidated financial statements of Inspired in accordance with US GAAP, adjustments to the
Inspired accounts and the disclosures in the notes to the financial statements were identified and proposed, and recorded by Inspired,
which were necessary in order for the Inspired financial statements to be in conformity with US GAAP. Inspired had not previously
had the occasion to prepare its financial statements in accordance with US GAAP. The identification, in connection with the recent
US GAAP audit process, of certain adjustments required in order to present those financial statements in accordance with US GAAP
suggested less complete internal technical knowledge of US GAAP which was characterized as a material weakness in internal control
over financial reporting from a US GAAP perspective. We retained a person with the requisite technical accounting knowledge of
US GAAP in order to address the identified material weaknesses and assist in compliance with US GAAP on an ongoing basis. However,
no assurance can be given that internal control will be sufficient to prevent potential material weaknesses from occurring in future
periods. If additional material weaknesses are discovered in the future, we may fail to meet our future reporting obligations in
a timely and reliable manner and our financial statements may contain material misstatements. Any such failure could also adversely
affect the results of our periodic management evaluations and annual auditor attestation reports regarding the effectiveness of
our internal control over financial reporting. Further, it could cause our investors to have less confidence in the financial information
we report, which could adversely affect the price of our common stock.
We may be required to recognize impairment
charges related to goodwill, identified intangible assets and property and equipment or to take write-downs or write-offs, restructuring
or other charges that could have a significant negative effect on our financial condition, results of operations and stock price,
which could have an adverse effect on your investment.
We are required to test goodwill and any other
intangible asset with an indefinite life for possible impairment on the same date each year and on an interim basis if there are
indicators of a possible impairment. We are also required to evaluate amortizable intangible assets and property and equipment
for impairment if there are indicators of a possible impairment. There is significant judgment required in the analysis of a potential
impairment of goodwill, identified intangible assets and property and equipment. If, as a result of a general economic slowdown,
deterioration in one or more of the markets in which we operate or impairment in our financial performance and/or future outlook,
the estimated fair value of our long-lived assets decreases, we may determine that one or more of our long-lived assets is impaired.
An impairment charge would be determined based on the estimated fair value of the assets and any such impairment charge could have
a material adverse effect on our financial condition and results of operations.
Even though these charges may be non-cash items
and would not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative
market perceptions about the Company or our securities. In addition, charges of this nature may cause us to be unable to obtain
future financing on favorable terms or at all.
We may be unable to obtain Debt Financing
if necessary to fund our operations and growth.
We may require additional financing to fund
our operations and growth. The failure to secure additional financing could have a material adverse effect on our continued development
or growth. None of our officers, directors or stockholders is required to provide any financing to us.
There is no guarantee that the public warrants
will ever be in the money, and they may expire worthless and the terms of our warrants may be amended.
The exercise price for our public warrants
is $5.75 per one-half of one share ($11.50 per whole share), subject to adjustment. Warrants may be exercised only for a whole
number of shares of our common stock. No fractional shares will be issued upon exercise of the warrants. There is no guarantee
that the public warrants will ever be in the money prior to their expiration and they may expire worthless.
In addition, the warrant agreement between
Continental Stock Transfer & Trust Company, as warrant agent, and us provides that the terms of the warrants may be amended
without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders
of at least 65% of the then outstanding public warrants to make any change that adversely affects the interests of the registered
holders. Accordingly, we may amend the terms of the warrants in a manner adverse to a holder if holders of at least 65% of the
then outstanding public warrants approve of such amendment. Examples of such amendments could be amendments to, among other things,
increase the exercise price of the warrants, shorten the exercise period or decrease the number of shares of our common stock purchasable
upon exercise of a warrant.
Concentration of ownership of the Company
may have the effect of delaying or preventing a change in control.
Our largest stockholder holds approximately
45% of the Company and has the ability to strongly influence the outcome of corporate actions of the Company requiring stockholder
approval. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely
affect the market price of our common stock.
Our ability to successfully operate our
business is largely dependent upon the efforts of certain key personnel. The loss of such key personnel could negatively impact
the operations and profitability of our business.
Our ability to successfully operate our business
is dependent upon the efforts of certain key personnel. Although we expect all of such key personnel to remain with our company
going forward, it is possible that we will lose some key personnel, the loss of which could negatively impact the operations and
profitability of our business. Furthermore, some of our key employees do not have prior experience operating a company regulated
by the SEC, which could cause us to have to expend time and resources helping them become familiar with such requirements.
If our results do not meet expectations,
a market for our securities may not continue, which would adversely affect the liquidity and price of our securities.
The price of our securities may fluctuate significantly
due to general market and economic conditions. An active trading market for our securities may never develop or, if developed,
it may not be sustained. In addition, the price of our securities can vary due to general economic conditions and forecasts, our
general business condition and the release of our financial reports. Additionally, if our securities, such as our warrants, are
not listed on, or become delisted from, NASDAQ for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated
quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may
be more limited than if we were quoted or listed on NASDAQ or another national securities exchange. You may be unable to sell your
securities unless a market can be established or sustained.
NASDAQ has delisted our warrants and may
delist our common stock from quotation on its exchange which could limit investors’ ability to make transactions in our
securities and subject us to additional trading restrictions.
Our common stock is listed on the NASDAQ
Capital Market. On March 21, 2017, we received written notice from the NASDAQ Staff of the Listing Qualifications Department
that the Company’s common stock and warrants were not in compliance with the minimum 300 and 400 round lot holder
requirements set forth in NASDAQ Listing Rules 5505(a)(3) and 5515(a)(4), respectively, and, therefore, the Company’s
securities would be subject to delisting. We requested a hearing before a NASDAQ Hearings Panel (the “Panel”). On
April 26, 2017, we received notice that the Panel had determined to grant our request for the continued listing of our common
stock on NASDAQ, pursuant to an extension to evidence compliance with the minimum 300 round lot shareholder requirement by
September 17, 2017. The continued listing of our common stock through September 17, 2017 is subject to our compliance with
certain interim milestones evidencing our progress towards compliance with such rule. In addition, the notice informed us
that the warrants would be delisted due to our having less than 400 round lot warrant holders. On April 28, 2017, our
warrants were delisted from NASDAQ and transitioned to the over-the-counter markets operated by OTC Markets Group.
We cannot assure you that our common stock
will continue to be listed on NASDAQ in the future. If NASDAQ delists our common stock from trading on its exchange, we could face
significant material adverse consequences, which already apply to our warrants, including:
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a limited availability of market quotations
for our securities;
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reduced liquidity with respect to our
securities;
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a determination that our securities are
a “penny stock,” which requires brokers trading in our securities to adhere to more stringent rules, possibly resulting
in a reduced level of trading activity in the secondary trading market for our securities;
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a limited amount of news and analyst coverage
for our company; and
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a decreased ability to issue additional
securities or obtain additional financing in the future.
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Pursuant to the Jumpstart Our Business Startups
Act of 2012 (the “JOBS Act”), our independent registered public accounting firm will not be required to attest to the
effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 for so
long as we are an “emerging growth company.”
Section 404 of the Sarbanes-Oxley Act of 2002
requires annual management assessments of the effectiveness of our internal control over financial reporting, and generally requires
in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over
financial reporting. The Company will be required to provide management’s attestation on internal controls effectiveness
with respect to the year ending September 30, 2017. However, under the JOBS Act, our independent registered public accounting firm
will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of
the Sarbanes-Oxley Act of 2002 until we are no longer an “emerging growth company.” We could be an “emerging
growth company” until the earlier of (1) the last day of the fiscal year (a) following October 29, 2019, the fifth anniversary
of our IPO, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large
accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the
last business day of our prior second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible
debt during the prior three-year period.
In addition, Section 107 of the JOBS Act also
provides that an “emerging growth company” can take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company”
can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have chosen not to “opt out” of such extended transition period, which means that when a standard is issued or revised
and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or
revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements
with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using
the extended transition period difficult or impossible because of the potential differences in accounting standards used.
If the results of operations do not meet
the expectations of investors, stockholders or financial analysts, the market price of our securities may decline.
If our results do not meet the expectations
of investors or securities analysts, the market price of our securities may decline. In addition, fluctuations in the price of
our securities could contribute to the loss of all or part of your investment. Any of the factors listed below could have a material
adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid
for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors affecting the trading price of the
Company’s securities may include:
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market conditions affecting the gaming
industry;
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quarterly variations in our results of
operations;
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changes in government regulations;
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the announcement of acquisitions by us
or our competitors;
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changes in general economic and political
conditions;
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volatility in the financial markets;
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results of our operations and the operations
of others in our industry;
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changes in interest rates;
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threatened or actual litigation and government
investigations;
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the addition or departure of key personnel;
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actions taken by our stockholders, including
the sale or disposition of their shares of our common stock; and
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differences between our actual financial
and operating results and those expected by investors and analysts and changes in analysts’ recommendations or projections.
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Broad market and industry factors may materially
harm the market price of our securities irrespective of our operating performance. The stock market in general, and NASDAQ in particular,
have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance
of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable.
A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar
to the Company could depress our stock price regardless of our business, prospects, financial conditions or results of operations.
A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our
ability to obtain additional financing in the future.
Our business and stock price may suffer
as a result of our lack of public company operating experience and if securities or industry analysts do not publish or cease publishing
research or reports about the Company, our business, or our market, or if they change their recommendations regarding our common
stock adversely, the price and trading volume of our common stock could decline.
The Company’s lack of public company
operating experience may make it difficult to forecast and evaluate our future prospects. If the Company is unable to execute its
business strategy, either as a result of its inability to manage effectively its business in a public company environment or for
any other reason, the Company’s business, prospects, financial condition and operating results may be harmed.
The trading market for our common stock will
be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market,
or our competitors. Securities and industry analysts do not currently, and may never, publish research on the Company. If no securities
or industry analysts commence coverage of the Company, our stock price and trading volume would likely be negatively impacted.
If any of the analysts who may cover the Company change their recommendation regarding our stock adversely, or provide more favorable
relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover
the Company were to cease coverage of the Company or fail to regularly publish reports on the Company, we could lose visibility
in the financial markets, which could cause our stock price or trading volume to decline.
The future exercise of further registration
rights may adversely affect the market price of our common stock.
Our common stock is subject to registration
rights agreements. We are obligated to register founder shares, placement warrants and shares issuable upon exercise of placement
warrants pursuant to a registration rights agreement signed in connection with our IPO and we are obligated to register the shares
purchased in the Macquarie Forward Purchase pursuant to a registration rights agreement signed in connection with the private placement.
In addition, pursuant to the Sale Agreement, we are obligated to promptly file a resale “shelf” registration statement
to register the shares of our common stock issued to the Vendors. Sales of restricted securities pursuant to these agreements may
substantially depress the market price of our common stock. The Company filed a registration statement on Form S-3 on April 7,
2017 covering these securities which has not yet become effective.
We may redeem any public warrants prior
to their exercise at a time that is disadvantageous to warrant holders, thereby making their warrants worthless.
We will have the ability to redeem the
public warrants any time prior to their expiration at a price of $0.01 per warrant, provided that (i) the last reported sale price
of our common stock equals or exceeds $24.00 per share for any 20 trading days within the 30 trading-day period ending on the
third business day before we send the notice of such redemption (on May 5, 2017, the last reported sale price for shares of our
common stock was $10.55) and (ii) on the date we give notice of redemption and during the entire period thereafter until the time
the warrants are redeemed, there is an effective registration statement under the Securities Act covering the shares of our common
stock issuable upon exercise of the public warrants and a current prospectus relating to them is available unless warrants are
exercised on a cashless basis. Redemption of the outstanding public warrants could force holders of public warrants:
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to exercise their warrants and pay the
exercise price therefor at a time when it may be disadvantageous for them to do so;
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to sell their warrants at the then-current
market price when they might otherwise wish to hold their warrants; or
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to accept the nominal redemption price
which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value
of their warrants.
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Anti-takeover provisions contained in our
second amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover
attempt.
The Company’s second amended and restated
certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control
or changes in our management without the consent of our board of directors. These provisions include:
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no cumulative voting in the election of
directors, which limits the ability of minority stockholders to elect director candidates;
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the exclusive right of our board of directors
to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death, or removal
of a director with or without cause by stockholders, which prevents stockholders from being able to fill vacancies on our board
of directors;
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the ability of our board of directors
to determine whether to issue shares of our preferred stock and to determine the price and other terms of those shares, including
preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile
acquirer;
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limiting the liability of, and providing
indemnification to, our directors and officers;
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controlling the procedures for the conduct
and scheduling of stockholder meetings; and
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advance notice procedures that stockholders
must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’
meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s
own slate of directors or otherwise attempting to obtain control of the Company.
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These provisions, alone or together, could
delay hostile takeovers and changes in control of the Company or changes in our board of directors and management.
As a Delaware corporation, we are also subject
to provisions of Delaware law, including Section 203 of the DGCL, which prevents some stockholders holding more than 15% of our
outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of
our outstanding common stock. Any provision of our second amended and restated certificate of incorporation or bylaws or Delaware
law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive
a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common
stock.
Our directors and key personnel are subject
to the approval of certain regulatory authorities, which, if withheld, will require us to sever our relationship with non-approved
individuals, which could adversely impact our operations.
Our members, managers, directors, officers
and key employees must also be approved by certain government and state regulatory authorities. If such regulatory authorities
were to find a person occupying any such position unsuitable, we would be required to sever our relationship with that person.
We may thereby lose key personnel which would have a negative effect on our operations. Certain public and private issuances of
securities and certain other transactions by us also require the approval of certain state regulatory authorities. Further, our
gaming regulators can require us to disassociate ourselves from suppliers or business partners found unsuitable by the regulators.
For a summary of some of the significant gaming regulations that affect our business, see ‘‘Risk Factors Relating To
Our Business And Industry” above. The regulatory environment in any particular jurisdiction may change in the future and
any such change could have a material adverse effect on our results of operations. In addition, we are subject to various gaming
taxes, which are subject to increase at any time.
The Company is subject to extensive regulation
at various levels, and licensing and gaming authorities have significant control over its operations, which could have a negative
effect on our business and could cause us to redeem certain shareholders on potentially disadvantageous terms.
The operations of our business are contingent
upon obtaining and maintaining all necessary licenses, permits, approvals, registrations, findings of suitability, orders and authorizations.
The laws, regulations and ordinances requiring these licenses, permits and other approvals generally relate to the responsibility,
financial stability and character of the owners and managers of gaming operations, as well as persons financially interested or
involved in gaming operations. The scope of the approvals required to operate our business is extensive.
Regulatory authorities have broad powers to
request detailed financial and other information, to limit, condition, suspend or revoke a registration, gaming license or related
approval and to approve changes in our operations. Substantial fines or forfeiture of assets for violations of gaming laws or regulations
may be levied. The suspension or revocation of any license which may be granted to us or the levy of substantial fines or forfeiture
of assets could significantly harm our business, financial condition and results of operations. Furthermore, compliance costs associated
with gaming laws, regulations and licenses are significant. Any change in the laws, regulations or licenses applicable to our business
or a violation of any current or future laws or regulations applicable to our business or gaming licenses could require us to make
substantial expenditures or could otherwise negatively affect our gaming operations and results of operations.
Our second amended and restated certificate
of incorporation provides that, to the extent required by the gaming authority making the determination of unsuitability or to
the extent the board of directors determines, in its sole discretion, that a person is likely to jeopardize the Company’s
or any affiliate’s application for, receipt of, approval for, right to the use of, or entitlement to, any gaming license,
shares of our capital stock that are owned or controlled by an unsuitable person or its affiliates are subject to mandatory redemption
by us. The redemption price may be paid in cash, by promissory note, or both, as required, and pursuant to the terms established
by, the applicable gaming authority and, if not, as we elect. Such a redemption could occur on terms that a shareholder believes
to be disadvantageous.
Changes in laws or regulations, or a failure
to comply with any laws and regulations, may adversely affect our business, investments and results of operations.
We are subject to laws and regulations enacted
by national, regional and local governments, including non-U.S. governments. In particular, we are required to comply with certain
SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming
and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes
could have a material adverse effect on our business, investments and results of operations. In addition, a failure to comply with
applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our business and results of
operations.
Certain of our executive officers and directors
are now, and all of them may in the future become, affiliated with entities engaged in business activities similar to those intended
to be conducted by us and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity
should be presented to our company or to another entity.
Our executive officers and directors are, or
may in the future become, affiliated with entities that are engaged in similar businesses to the one which we operate.
Our officers and directors also may become
aware of business opportunities which may be appropriate for presentation to us and the other entities to which they owe certain
fiduciary or contractual duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business
opportunity should be presented — to our company or to another entity. These conflicts may not be resolved in our favor and
a potential target business may be presented to another entity prior to its presentation to us. Our second amended and restated
certificate of incorporation provides that we renounce our interest in any corporate opportunity offered to any director or officer
unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of our company
and such opportunity is one we are legally and contractually permitted to undertake and would otherwise be reasonable for us to
pursue.
We are a holding company and conduct all
of our operations through our subsidiaries.
We are a holding company and derive all of
our operating income from our subsidiaries. Other than any cash we retain, all of our assets are held by our direct and indirect
subsidiaries. We rely on the earnings and cash flows of our subsidiaries, which are paid to us by our subsidiaries, if and only
to the extent available, in the form of dividends and other payments or distributions, to meet our debt service obligations. The
ability of our subsidiaries to pay dividends or make other payments or distributions to us will depend on their respective operating
results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount
of funds available for the payment of dividends and other distributions to us), the terms of existing and future indebtedness and
other agreements of our subsidiaries and the covenants of any future outstanding indebtedness we or our subsidiaries incur.
RISK FACTORS RELATING TO GLOBAL ECONOMIC
CONDITIONS
Volatility or disruption in the financial
markets could materially adversely affect our business and the trading price of our common stock.
Our business relies on stable and efficient
financial markets. Any disruption in the credit and capital markets could adversely impact our ability to obtain financing on acceptable
terms. Volatility in the financial markets could also result in difficulties for financial institutions and other parties that
we do business with, which could potentially affect the ability to access financing under existing arrangements. We are exposed
to the impact of any global or domestic economic disruption, including any potential impact of the recent vote by the United Kingdom
to exit the European Union (commonly referred to as "Brexit") and the sovereign debt crises in certain Eurozone countries
where we do business. Our ability to continue to fund operating expenses, capital expenditures and other cash requirements over
the long term may require access to additional sources of funds, including equity and debt capital markets, and market volatility
and general economic conditions may adversely affect our ability to access capital markets. In addition, the inability of our vendors
to access capital and liquidity with which to maintain their inventory, production levels and product quality and to operate their
businesses, or the insolvency of our vendors, could lead to their failure to deliver merchandise. If we are unable to purchase
products when needed, our sales could be materially adversely impacted. Accordingly, volatility or disruption in the financial
markets could impair our ability to execute our growth strategy and could have a material adverse effect on the trading price of
our common stock.
Currency exchange rate fluctuations could
result in lower revenues, higher costs and decreased margins and earnings.
We will conduct purchase and sale transactions
in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates globally. Additionally,
there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom's June 23, 2016
referendum in which voters approved the United Kingdom's exit from the European Union, commonly referred to as “Brexit.”
It is possible that sovereign debt crises in certain Eurozone countries could lead to the abandonment of the Euro and the reintroduction
of national currencies in those countries. International revenues and expenses generally are derived from sales and operations
in various foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts
recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies
relative to the U.S. Dollar will adversely affect the U.S. Dollar value of the Company's foreign currency-denominated sales and
earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our
products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations
could have an adverse effect on our results of operations and financial condition.
We may hedge certain foreign currency exposures
to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since
the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or
other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future
financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which
we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon
our hedging activities.
Global economic conditions could have a
material adverse effect on our business, operating results and financial condition.
The uncertain state of the global economy continues
to impact businesses around the world, most acutely in emerging markets and developing economies. If global economic and financial
market conditions do not improve or deteriorate, the following factors could have a material adverse effect on our business, operating
results and financial condition:
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Slower consumer spending may result in
reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts,
increased inventories and lower gross margins;
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In the future, we may be unable to access
financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so;
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We will conduct transactions in various
currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued
volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant
impact on our reported operating results and financial condition;
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Continued volatility in the availability
and prices for commodities and raw materials we use in our products and in our supply chain could have a material adverse effect
on our costs, gross margins and profitability;
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If operators or distributors of our products
experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products,
this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher
accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense;
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If operators or distributors of our products
experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact
the sale of our products to consumers; and
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If contract manufacturers of our products
or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase
raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery
of shipments of our products.
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International hostilities, terrorist or
cyber-terrorist activities, natural disasters, pandemics, and infrastructure disruptions could prevent us from effectively serving
our customers and thus adversely affect our results of operations.
Acts of terrorist violence, cyber-terrorism,
political unrest, armed regional and international hostilities and international responses to these hostilities, natural disasters,
including hurricanes or floods, global health risks or pandemics or the threat of or perceived potential for these events could
have a negative impact on us. These events could adversely affect our customers’ levels of business activity and precipitate
sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our
employees and our physical facilities and operations around the world, whether the facilities are ours or those of our third-party
service providers or customers. By disrupting communications and travel and increasing the difficulty of obtaining and retaining
highly skilled and qualified personnel, these events could make it difficult or impossible for us to deliver products and services
to our customers. Extended disruptions of electricity, other public utilities or network services at our facilities, as well as
system failures at our facilities or otherwise, could also adversely affect our ability to serve our customers. We may be unable
to protect our employees, facilities and systems against all such occurrences. We generally do not have insurance for losses and
interruptions caused by terrorist attacks, conflicts and wars. If these disruptions prevent us from effectively serving our customers,
our results of operations could be adversely affected.
Risk Relating to the Referendum on the United
Kingdom’s Membership in the European Union
The announcement of the United Kingdom’s
advisory referendum vote to exit from the European Union (“Brexit”) could cause disruptions to and create uncertainty
surrounding our business, including affecting our relationships with existing and potential customers, suppliers and employees.
The referendum is non-binding; however, if the United Kingdom’s government initiates the process for the United Kingdom to
leave the European Union, negotiations would then commence to determine the terms of the United Kingdom’s future relationship
with the European Union, including the terms of trade between the United Kingdom and the European Union. The effects of Brexit
will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional
period or more permanently. The measures could potentially disrupt some of our markets and jurisdictions in which we operate, and
adversely change tax benefits or liabilities in these or other jurisdictions. In addition, Brexit could lead to legal uncertainty
and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or
replicate. In addition, the announcement of Brexit has caused significant volatility in global stock markets and currency exchange
rate fluctuations, including the strengthening of the US Dollar against some foreign currencies and the weakening of GBP against
some foreign currencies. The announcement of Brexit also may create global economic uncertainty, which may cause customers and
potential customers to monitor their costs and reduce their budgets for products and services. Any of these effects of Brexit,
among others, could materially adversely affect the business, business opportunities, results of operations, financial condition
and cash flows of our Company.
