Inspired Entertainment, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone Q4 filing. Inspired supplies gaming technology, content, platforms and equipment to regulated operators across Gaming, Virtual Sports, Interactive and Leisure. Approximately 73% of revenue was attributed to the UK, 8% to Greece and 19% to the rest of the world.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $285.4 million | $208.9 million |
| Operating income (loss) | $48.9 million | $(0.6) million |
| Net income (loss) | $22.3 million | $(36.7) million |
| Adjusted EBITDA | $99.6 million | $64.0 million |
| Net cash from operating activities | $34.7 million | $6.2 million |
Revenue increased 36.6% as reported, or 52.6% on management’s functional-currency constant-rate basis. Service revenue was $251.8 million and product revenue $33.6 million. Calculated from reported figures, operating margin was approximately 17.1%, net margin 7.8%, and Adjusted EBITDA margin 34.9%; Adjusted EBITDA is a non-GAAP measure.
Segment revenue and Adjusted EBITDA were: Gaming $111.7 million and $41.6 million; Virtual Sports $55.1 million and $46.3 million; Interactive $23.1 million and $12.3 million; and Leisure $95.5 million and $24.4 million. Segment EBITDA figures are non-GAAP.
Cash and cash equivalents were $25.0 million at year-end, down from $47.8 million; $2.5 million was held as operational cash floats. The company had $24.1 million of undrawn revolving credit capacity. Current assets were $128.6 million and current liabilities $74.7 million. Total assets were $309.4 million, total liabilities $367.1 million and stockholders’ deficit $57.7 million.
Senior secured notes had £235.0 million ($282.9 million translated) principal outstanding, carry 7.875% fixed interest and mature June 1, 2026. Long-term debt’s reported carrying value was $277.6 million. The company reported compliance with its revolver covenant at year-end and no covenant breaches in 2022 or 2021. Investing activities used $40.4 million, including $21.2 million for property and equipment and $18.6 million for capitalized software; financing activities used $11.0 million, including $10.4 million for share repurchases.
Material changes versus FY2021
- Revenue rose in all four segments, supported by reopened land-based venues following COVID-related closures and restrictions in the prior-year period, alongside growth in online businesses.
- Virtual Sports was a major growth driver: online Virtual Sports revenue rose to $43.4 million from $26.1 million. Interactive revenue increased more modestly.
- Operating income improved by $49.5 million and net income improved by $59.0 million, moving from losses to profits. Lower depreciation and amortization and lower net interest expense also contributed to the improvement.
- SG&A increased to $115.6 million from $97.2 million, reflecting staff returning from furlough or reduced pay and wage inflation. Inventory rose to $31.0 million from $16.9 million, and operating cash flow benefited from trading recovery but was partly offset by working-capital needs.
- The company sold its Italian VLT operating business in January 2022 for approximately $1.2 million and recorded a $0.9 million gain; it continued supplying content and platforms in Italy. The acquired Dominican Republic lottery business contributed $5.1 million of participation revenue.
Outlook, risks and unusual matters
Management stated that cash on hand, expected operating cash flows, the ability to control or defer capital projects and available borrowing capacity were expected to fund net cash requirements through March 2024, absent a long-term COVID-19 impact. The filing provides no quantified revenue or earnings guidance. Management described North American expansion, digital gaming and new content as growth opportunities.
Key risks include customer concentration (the top ten customers generated approximately 56% of revenue and one customer 13%), contract renewal and regulatory risk, competition, supply-chain and labor-cost pressures, foreign-exchange exposure, cybersecurity and data privacy, and the company’s substantial debt and capital requirements. A 10% weakening of GBP against the U.S. dollar was estimated to reduce trading operating results by approximately $2.2 million and create an unfavorable $7.4 million translation adjustment in other comprehensive loss.
Controls are a significant concern: management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2022. The auditor issued an adverse opinion on internal control, citing material weaknesses involving IT program changes and user access/segregation of duties, holiday-park cash collections, and contract approvals. Management reported no known resulting financial-statement misstatements and planned remediation during 2023; the weaknesses were not yet considered remediated. The auditor gave an unqualified opinion on the financial statements.
Other notable items include a full valuation allowance against deferred tax assets of $79.1 million; management said a significant release might become supportable within 12 months, depending on profitability. The UK defined-benefit pension scheme had a £8.2 million funding shortfall at its March 2021 valuation, with scheduled deficit-reduction contributions. No material ordinary-course legal matters or off-balance-sheet arrangements were reported. The company does not expect to pay cash dividends.
Important facts for investors to verify
- Whether the three disclosed control weaknesses are remediated and whether control improvements operate effectively.
- Cash conversion, inventory and receivables growth, capital spending, and the assumptions supporting liquidity through March 2024.
- Debt service capacity, covenant headroom and refinancing options ahead of the 2026 notes maturity.
- Sustainability of post-reopening revenue and margin performance, particularly Virtual Sports growth and Gaming/Leisure participation revenue.
- Exposure to major customers, contract renewals, UK regulatory changes, currency movements and the potential timing or amount of any deferred-tax valuation-allowance release.