Inspired Entertainment, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a quarterly report; the filing text does not provide a clear consolidated standalone fourth-quarter 2019 result. Calendar-year 2018 comparisons are identified as unaudited because the company changed its fiscal year-end.
Business context
Inspired supplies gaming technology and content to regulated operators. Its businesses include Server Based Gaming (SBG), Virtual Sports and Interactive, and, from October 1, 2019, the acquired Novomatic UK gaming technology businesses. The company operates internationally, with approximately 68% of 2019 revenue generated in the UK.
Financial performance and liquidity
| Metric | 2019 | Comparable period / context |
|---|---|---|
| Revenue | $153.4 million | $140.7 million in unaudited calendar 2018; up 9.0% reported and 13.8% at constant currency |
| Operating loss | $13.0 million | $5.3 million loss in unaudited calendar 2018 |
| Net loss | $37.0 million; $1.69 per share | $21.1 million loss in unaudited calendar 2018 |
| Adjusted EBITDA | $49.0 million | $54.7 million in unaudited calendar 2018; non-GAAP measure |
| Operating cash flow | $30.7 million | $35.2 million in the company’s comparison table |
| Investing / financing cash flow | $(133.4) million / $113.5 million | Investing includes $105.9 million net cash paid for the NTG acquisition; financing includes debt refinancing |
| Cash at year-end | $29.1 million | Cash increased $13.1 million during 2019 |
| Debt | $288.6 million principal borrowings; $273.2 million carrying value including finance leases | Term loans mature October 2024; revolving facility matures September 2024 |
| Working capital | $15.7 million in MD&A | A note to the financial statements reports $17.0 million; filing values differ |
Consolidated service and hardware revenue were $134.9 million and $18.5 million, respectively. SBG revenue declined 14.5% at constant currency to $84.5 million, while Virtual Sports revenue increased 3.5% at constant currency. The acquired businesses contributed $32.9 million of revenue and a $0.4 million operating loss for the three months after acquisition. Cost of sales excluding depreciation and amortization was $36.1 million. Reported operating and net margins, calculated from the disclosed figures, were approximately negative 8.5% and negative 24.1%.
Interest expense rose to $27.8 million, including $7.3 million in previously capitalized debt fees written off in the refinancing. The new senior secured term loans carry floating rates; year-end disclosed rates were 8.08% on the sterling loan and 6.75% on the euro loan. Cash and undrawn revolver availability at December 31, 2019 were reported as $29.1 million and $23.8 million, respectively. The company reported no debt covenant breaches during 2019.
Material changes and drivers
- The October 2019 acquisition expanded the business into UK pub, leisure, adult gaming center and motorway service operations. The purchase consideration was reported as $116.6 million; net cash paid, after acquired cash, was $105.9 million.
- SBG service revenue fell primarily due to the UK “Triennial” stake reduction and resulting venue closures. UK LBO customer gross win per unit per day fell 24.9% for the year, while the installed base at year-end declined 5.4%.
- Virtual Sports recurring revenue rose 5.7% in sterling, and live customers increased from 100 to 111 at year-end. The company cited growth in online scheduled virtuals and Interactive, partly offset by weaker retail and certain customer/license declines.
- Higher SG&A included $20.1 million from the acquired businesses; acquisition and integration expenses were $6.7 million. The company reported $9.0 million of stock-based compensation.
- Revenue remained concentrated: the top ten customers generated approximately 60% of revenue, and two customers accounted for 14% and 13%.
Outlook, risks and unusual matters
- COVID-19: The filing describes severe disruption after year-end, including mandated closures of land-based customer venues in the UK, Italy, Greece and the U.S. Online Interactive and Virtual Sports remained operational, with management reporting increased activity but unable to quantify the net effect. Management warned that prolonged closures could materially threaten revenues, liquidity, covenant compliance and the company’s ability to continue as a going concern.
- Liquidity actions: In March 2020, the company drew the remaining £18.0 million of its £20.0 million revolving facility, making the facility fully drawn, and canceled or delayed material capital expenditures. It also implemented furloughs, reduced hours and compensation, delayed accrued executive bonuses, and waived second-quarter board retainer cash payments. Management said available resources were expected to fund needs through March 2021 only absent a long-term COVID-19 impact.
- Controls: Management reported a material weakness in internal control over financial reporting, related to year-end footnote disclosure review amid unusual circumstances including office closures, the acquisition and first-time accounting-standard adoption. Identified errors were corrected; management said the weakness did not result in identified material misstatements in the issued financial statements. Disclosure controls were deemed ineffective at December 31, 2019. Remediation includes additional review, but success is not assured.
- Debt and interest-rate exposure: The facilities include a maximum net leverage covenant of 4.1x, stepping down to 3.0x from June 30, 2021, and capital expenditure limits. A 1% increase in floating rates was estimated to add approximately $1.8 million in annual interest expense. The company entered interest-rate swaps in January 2020.
- Other risks: Key exposures include regulated-market changes and gaming taxes, customer and supplier concentration, contract renewals, foreign exchange, acquisition integration, and competition. The UK’s £2 maximum stake on B2 machines took effect in April 2019 and adversely affected SBG performance.
- Other unusual items: Management estimated approximately $8.7 million of UK office consolidation costs, including $3.0 million of capital investment and $5.7 million of one-time costs. A UK pension funding review resulted in $1.1 million of contingent contributions payable in 2020. The auditor issued an unqualified opinion on the financial statements but did not audit internal control effectiveness.
Investor verification priorities
- Confirm current cash, revolver utilization, cash burn, covenant calculations and available headroom after the March 2020 draw and venue closures.
- Track the material weakness remediation and whether subsequent filings or audits identify further reporting-control issues.
- Assess the duration and financial impact of COVID-related closures, customer payment risk and the recovery of land-based operations versus online growth.
- Evaluate the sustainability of SBG revenue after UK stake-limit changes, including venue closures, customer contract renewals and Italian tax effects.
- Review acquisition integration, realized cost synergies, capital needs and the discrepancy in reported working capital ($15.7 million versus $17.0 million).