Inspired(INSE) - 2019 Q4 - Annual Report

PART I Business Inspired Entertainment, Inc. is a global B2B gaming technology company providing Virtual Sports and SBG products, with 2019 marked by a significant acquisition and COVID-19 disruption - The company operates two primary business segments: Virtual Sports (including Interactive) and Server Based Gaming (SBG) As of December 31, 2019, its Virtual Sports products were in over 44,000 retail channels and 300+ websites, while its SBG products were offered through over 32,000 digital terminals[27][28][35] - On October 1, 2019, the company acquired the "Acquired Businesses" from Novomatic (UK) Limited, adding approximately 19,000 gaming machines and 35,000 amusement devices to its operations, primarily in the UK pubs, arcades, and holiday resorts sectors[30][47] - The business has been severely disrupted by the COVID-19 pandemic, which forced the closure of customer retail venues in key markets In response, the company drew down its full £20.0 million revolving credit facility, implemented furloughs, and reduced compensation to lower cash expenditures[21][22][24] - The company's growth strategy focuses on developing new products, investing in technology to grow existing customer revenues, expanding into underpenetrated markets like North America, and pursuing targeted mergers and acquisitions[49][50][51][52] - Geographically, the UK is the company's largest market, contributing over half of its revenues Other significant markets include Italy and Greece[32][237] Risk Factors The company faces significant risks from the COVID-19 pandemic, regulatory changes, customer concentration, and international operations, impacting financial controls and business continuity - The COVID-19 pandemic is a primary risk, causing the closure of all land-based gaming venues in key jurisdictions (UK, Greece, Italy), which generate a substantial portion of income This has also led to the identification of a material weakness in financial controls due to office closures and remote work[98][99] - The company is highly dependent on a small number of customers In 2019, the top ten customers generated approximately 60% of total revenues, with two customers accounting for 14% and 13% respectively[105] - Regulatory changes pose a significant risk The UK Government's reduction of maximum permitted bets on B2 Gaming Machines to £2, effective April 1, 2019, has had and is expected to continue to have a material negative impact on the business[110] - The business is subject to cybersecurity risks, including attacks that could lead to service interruptions, data breaches, and significant liability or reputational harm[112] - Operating internationally exposes the company to risks such as foreign currency fluctuations, complex foreign laws, and changes in local economic and political conditions, including Brexit[150][194] Unresolved Staff Comments The company reports no unresolved staff comments - None[195] Properties As of December 31, 2019, the company leased 400,000 sq ft in the UK and smaller international spaces, with 2020 plans for UK consolidation and new offices - As of year-end 2019, the company occupied approximately 400,000 sq. ft. of leased space in the UK, with smaller offices in Italy, India, and New York[197] - In the first half of 2020, the company plans to reduce its UK estate by 130,000 sq. ft. and open new, consolidated offices in Burton-on-Trent (40,000 sq. ft.) and Kochi, India (17,000 sq. ft.)[197][198] Legal Proceedings The company is involved in legal matters from time to time in the ordinary course of business, but believes none are currently material - The company states that while it is involved in ordinary course legal matters, it believes none are currently material[198] Mine Safety Disclosures This item is not applicable to the company - Not applicable[199] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq (INSE), with public warrants on OTC markets, and reported 64 holders of record as of March 25, 2020 - Common stock is listed on the Nasdaq Capital Market (INSE) and public warrants trade on OTC markets (INSEW)[202] - As of March 25, 2020, there were 64 holders of record of common stock[203] Selected Financial Data This section is not required for the company - Not required[206] Management's Discussion and Analysis of Financial Condition and Results of Operations 2019 financial performance was shaped by the NTG acquisition and UK regulatory changes, with post-period COVID-19 disruption leading to liquidity preservation measures Consolidated Results of Operations (2019 vs. 2018) | Metric (In millions) | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $153.4 | $140.7 | 9.0% | | Net Operating Loss | $(13.0) | $(5.3) | 147.0% | | Net Loss | $(37.0) | $(21.1) | 75.2% | | Adjusted EBITDA | $49.0 | $54.7 | (10.4)% | - The COVID-19 pandemic has caused severe disruption post year-end, with retail venue closures halting revenues from land-based operations In response, the company drew down its full £20.0 million revolving credit facility in March 2020 to ensure near-term liquidity[212][213][215] - The acquisition of the NTG business from Novomatic UK was completed on October 1, 2019, and is reported as a new segment, "Acquired Businesses" This segment contributed $32.9 million in revenue for the fourth quarter of 2019[223][255] - SBG segment revenue decreased by 18.2% to $84.5 million, primarily due to a $16.2 million revenue decline in the UK LBO sector driven by the Triennial Implementation, which reduced maximum betting stakes[294][296] - Virtual Sports revenue decreased slightly by $0.4 million to $37.0 million on a reported basis, but increased by 3.5% on a constant currency basis, driven by growth in online virtuals and new customer launches[332] - The company refinanced its debt in connection with the NTG acquisition, entering into new senior secured term loans of £140.0 million and €90.0 million, and a £20.0 million revolving credit facility[380][381] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from floating interest rates on its debt and foreign currency fluctuations, particularly GBP, Euro, and USD - The company is exposed to interest rate risk on its floating-rate senior bank debt of £140.0 million and €90.0 million A hypothetical 1% increase in floating interest rates would result in an additional annual interest charge of approximately $1.8 million[480] - The company is exposed to foreign currency exchange rate risk as its functional currency is GBP but it reports in USD and has operations in other currencies like the Euro A hypothetical 10% adverse change in the value of the Euro and USD relative to GBP would result in translation adjustments of approximately $7.7 million and $0.0 million, respectively[481] Financial Statements and Supplementary Data This section refers to the full consolidated financial statements and related notes, which are presented starting on page F-1 of the report - The company's audited consolidated financial statements are included from page F-1 onwards[485][511] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[486] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2019, due to a material weakness in internal control over financial reporting, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019[489] - A material weakness was identified in internal control over financial reporting, stemming from misstatements in draft year-end footnote disclosures This was attributed to unusual events like the COVID-19 outbreak, a significant acquisition, and new accounting standard adoption[493] - Despite the material weakness, management believes the consolidated financial statements included in the report fairly present the company's financial condition in all material respects[490] - Remediation plans include ensuring all internal reviews are completed before issuing draft financials to auditors and adding a third-party external review to the process[496] Other Information Executive Chairman Lorne Weil withdrew his employment agreement, and executive pay was temporarily reduced as a cost-saving measure amid business disruptions - On March 26, 2020, Executive Chairman Lorne Weil voluntarily withdrew his new employment agreement from consideration at the upcoming annual meeting[498] - The Office of the Executive Chairman consented to temporary reductions in base pay, including a 25% reduction for the Executive Chairman and a 21% reduction for the President and COO[499][500] PART III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders PART IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the report, including the consolidated financial statements and various exhibits such as material contracts, governance documents, and certifications - This section contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K[509][510] Form 10-K Summary The company provides no summary for this item - None[797]