14.

Derivative Liability

As discussed in Note 16, certain members of the Company’s management entitled to cash bonuses agreed to accept 50% of their bonuses due in cash on the Closing Date of the Merger and 50% in restricted stock units (“RSUs”) under the Inspired Entertainment, Inc. Second Long-Term Incentive Plan (the “Second Plan”). However, the Second Plan is subject to approval by the Company’s stockholders, of which such approval had not been obtained as of December 31, 2016. Accordingly, the Company agreed that if the stockholders approve the Second Plan, the 50% balance due to management will be paid in RSUs. If the Second Plan is not approved, the balance due will be paid in cash on the three year anniversary of the Merger based on the average stock price of the Company’s common stock over the prior 30 day period. The obligation to settle the 50% balance due to management was deemed to be a derivative liability due to a potential cash settlement provision which is not within the Company’s control and as a result, the obligation is accounted for as a derivative liability with fair value changes being recorded in the condensed consolidated statements of operations and comprehensive loss. The fair value of the liability is calculated based on the value of the underlying common stock.

The following table provides a reconciliation of the beginning and ending balances for the derivative liability measured using significant unobservable inputs (Level 3):

Balance – September 24, 2016	$	-
Initial value of derivative liability		930
Change in fair value of derivative liability		(124)
Balance – December 31, 2016	$	806