Business context and reporting period
Inspired Entertainment, Inc. is a global business-to-business gaming technology provider, with Gaming, Virtual Sports, Interactive and Leisure segments. This Form 10-K covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter filing. The company’s land-based operations were heavily disrupted by COVID-19 closures and restrictions, while Interactive operated throughout the year.
Year-over-year comparisons are affected by the October 2019 NTG Acquisition: 2020 includes a full year of acquired operations, whereas 2019 includes only the post-acquisition period. The company also changed its segment reporting, recasting 2019 segment results.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $199.8 million | $153.4 million |
| Operating income (loss) | $6.4 million | $(13.0) million |
| Net loss | $(29.2) million | $(37.0) million |
| Adjusted EBITDA | $72.1 million | $49.0 million |
| Cash from operating activities | $52.9 million | $30.7 million |
| Cash and cash equivalents at year-end | $47.1 million | $29.1 million |
Revenue increased 30.2% as reported, but included $42.2 million of unusual UK VAT-related revenue. Excluding that item, underlying revenue performance was materially affected by venue closures; management said Gaming service revenue excluding the VAT benefit declined primarily because of COVID-19. 2019 revenue was $256.9 million on an unaudited pro forma basis for the NTG Acquisition, underscoring the limits of the reported comparison.
Calculated from reported figures, 2020 operating margin was approximately 3.2% versus negative 8.5% in 2019; Adjusted EBITDA margin was approximately 36.1% versus 31.9%. These comparisons are not like-for-like and the 2020 Adjusted EBITDA includes adjustments defined by the company, not U.S. GAAP.
Segment revenue and Adjusted EBITDA for 2020 were: Gaming $110.5 million and $57.9 million; Virtual Sports $32.4 million and $25.1 million; Interactive $13.3 million and $7.5 million; and Leisure $43.6 million and $1.3 million. Interactive revenue grew 181% as reported (82% versus 2019 pro forma), while online Virtual Sports revenue grew as retail revenue fell. Leisure reported an operating loss of $15.8 million.
Net cash used in investing was $29.9 million, including $15.4 million for property and equipment and $14.5 million for capitalized software. Net cash used in financing was $8.2 million. Year-end working capital was $27.1 million; the company also reported a $10.9 million working-capital cash inflow for the year. Total assets were $324.1 million, total liabilities $412.8 million and stockholders’ deficit $88.7 million.
Material changes, debt and liquidity
At December 31, 2020, senior bank debt principal was $313.3 million, with a reported book value of $297.5 million after unamortized financing costs. The company’s liquidity disclosure was $47.1 million cash plus $27.3 million of undrawn revolver availability. Some cash was restricted or operationally held: the filing reports $7.2 million ring-fenced and $1.5 million in machine floats.
A June 2020 debt amendment capitalized certain interest, reset financial covenants and increased loan margins by 1 percentage point. It also provides for an additional 0.75% payment-in-kind margin on specified debt after September 24, 2021, and a 0.75% exit fee for certain repayments after that date. Term loans mature October 1, 2024. The company reported no covenant breaches at year-end. Approximately two-thirds of floating-rate debt was covered by interest-rate swaps through October 2023. Management’s liquidity outlook was that available cash, expected operating cash flows and control over capital projects would fund net cash requirements through March 2022, conditional on no long-term COVID-19 impact.
Outlook, risks and unusual items
- Management expected land-based venues in the UK, Greece and Italy to begin reopening during the second quarter of 2021, subject to government directives. As of the filing, many venues remained closed or restricted.
- COVID-19 mitigation measures—including reduced discretionary spending and capital expenditure, furloughs and salary reductions—temporarily reduced expenses by more than $30 million versus 2019 pro forma. NTG-related synergies generated more than $10.5 million of incremental savings in 2020; management expected approximately $17 million of annualized incremental savings in 2021 versus 2019 pro forma.
- The $42.2 million VAT-related revenue arose from rebates received through two UK customers following a tax ruling; $41.0 million of VAT-reclaim receipts were included in operating cash flow. This was an unusual item and should not be treated as recurring revenue.
- Reported Q4 2020 Adjusted EBITDA was $34.9 million, up 185% year over year; management also reported $25.0 million in Q3 Adjusted EBITDA, up 97%. These are non-GAAP figures.
- Principal risks include further pandemic-related closures, high debt and interest costs, customer and geographic concentration, contract renewal and regulatory risks (including the UK Gambling Act review), foreign-exchange exposure, cyber and data-protection risks, and dependence on suppliers. One customer contributed 22% of 2020 revenue, partly reflecting VAT-related income; the top ten customers represented approximately 60%.
- Management concluded internal control over financial reporting was effective at year-end 2020 and said a material weakness identified in 2019 had been remediated. The independent auditor gave an unqualified opinion on the financial statements, but did not provide an opinion on internal controls. Critical audit matters included revenue recognition and capitalization of software development costs.
Important facts for investors to verify
- How much of 2020 revenue, cash generation and operating improvement is repeatable after excluding the VAT benefit and considering the acquisition-related comparison.
- Current venue reopening, trading and cash-flow trends, and whether liquidity remains adequate through the company’s stated March 2022 horizon.
- Debt covenant headroom, effective borrowing costs, amendment-related PIK and exit-fee provisions, and the company’s ability to refinance or repay debt due in 2024.
- Customer concentration and renewal status, including the exposure represented by the customer contributing 22% of 2020 revenue.
- Progress toward expected synergy savings and the recovery of Leisure and other land-based segments.