Inspired Entertainment, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Inspired is a global gaming technology company serving regulated online and land-based lottery, betting and gaming operators. Amounts below are U.S. dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / prior balance |
|---|---|---|
| Revenue | $60.6 million | $22.8 million |
| Operating income (loss) | $6.9 million | $(12.2) million |
| Net income (loss) | $1.5 million; diluted EPS $0.05 | $(16.7) million; diluted EPS $(0.74) |
| Operating margin | 11.4% | Negative |
| Operating cash flow | $5.1 million | $(2.0) million |
| Investing cash flow | $(10.9) million | $(4.8) million |
| Cash | $40.8 million | $47.8 million at December 31, 2021 |
| Working capital | $49.2 million | Not provided as a comparable figure |
| Long-term debt on balance sheet | $302.2 million | $309.0 million at December 31, 2021 |
| Adjusted EBITDA (non-GAAP) | $20.1 million | $3.9 million |
Revenue grew 166% on a constant-currency basis. Management attributes much of the year-over-year improvement to venues reopening after COVID-19 restrictions had suppressed Q1 2021 results; online growth also contributed. The comparison is therefore not a like-for-like measure of underlying growth. Service revenue rose to $57.0 million from $17.1 million, while product sales declined to $3.6 million from $5.7 million.
Operating cash flow improved, but working-capital movements used cash, including a $11.9 million inventory increase in the cash-flow statement. Capital expenditures were $10.7 million, with cash spending on property and equipment and capitalized software totaling $10.3 million. Cash declined $7.0 million during the quarter. The company also reported $26.3 million of undrawn revolving credit availability.
The company had a $70.5 million stockholders’ deficit. The filing reports working capital of $49.2 million, including $7.2 million of non-cash-settled deferred income. Current assets were $131.9 million and current liabilities $82.7 million.
Segments and material changes
- Gaming: Revenue was $24.1 million versus $10.8 million; segment operating income was $5.8 million versus a $3.6 million loss. Growth reflected reopened venues and the addition of Dominican Republic lottery operations; product sales were lower.
- Virtual Sports: Revenue was $11.6 million versus $6.3 million; operating income rose to $8.7 million from $3.7 million. Online revenue and retail reopening supported growth.
- Interactive: Revenue was $5.3 million versus $5.2 million; operating income declined to $2.1 million from $2.6 million as expenses increased.
- Leisure: Revenue was $19.6 million versus $0.5 million; the operating loss narrowed to $1.4 million from $7.7 million. The prior-year quarter included extensive closures.
- Corporate functions recorded an $8.3 million operating loss, compared with $7.2 million in Q1 2021. Consolidated SG&A increased to $29.6 million from $15.2 million, mainly as furloughed employees returned and full pay resumed.
In January 2022, Inspired sold its Italian VLT business for approximately $1.2 million and recognized a $0.9 million gain; it continues to supply platform and games in Italy. The Sportech Lotteries acquisition contributed lottery revenue and a customer contract. A $0.8 million hedge-related amount in accumulated other comprehensive income is expected to be amortized as interest expense over time; the filing estimates a further $0.8 million reclassification over the next 12 months.
Outlook, risks and other notable items
- Management expects cash on hand, operating cash flows, capital-spending controls and borrowing availability to fund net cash requirements. The filing gives two different runway dates: through May 2023 in the liquidity note and through June 2023 in MD&A.
- The company reported compliance with its revolving-credit leverage covenant. The maximum senior secured net leverage threshold was 6.0x for the March 31, 2022 test date. Senior Secured Notes are not subject to covenant testing, according to the filing.
- Senior borrowings are described as fixed-rate following the May 2021 refinancing. The filing identifies foreign-exchange exposure, particularly GBP/USD translation risk.
- Management notes continued uncertainty about COVID-related restrictions, including social distancing in venues in Greece and Italy. It also identifies supply-chain disruptions and inflation, including increased goods and wage costs, as risks that could harm sales and results.
- The business is seasonal, and management cautions that historical seasonality has been affected by pandemic disruptions. No specific earnings or revenue guidance is provided.
- Disclosure controls and procedures were assessed as ineffective at the reasonable-assurance level because of a previously reported material weakness. Remediation controls had been implemented but had not operated long enough to conclude the weakness was fully remediated. Management nevertheless stated that the interim financial statements fairly present the company’s position and results in all material respects.
- The board authorized up to $25 million in share repurchases through May 10, 2025, at management’s discretion; there is no assurance purchases will occur. The company also expects $1.1 million of contingent pension contributions and $0.3 million of expense contributions during 2022. Management reported no currently material legal matters.
Important facts for investors to verify
- Reconcile the stated liquidity runway dates of May 2023 and June 2023, and assess cash needs against debt maturities, interest obligations and planned capital spending.
- Review the material weakness, its underlying cause and evidence that remediation controls are operating effectively.
- Assess the sustainability of Q1 growth and margins after separating reopening-related recovery, acquisition effects, currency movements and recurring organic growth.
- Monitor inventory, working-capital requirements, supply-chain constraints and inflation, which may pressure cash conversion and margins.
- Confirm covenant calculations and headroom, and distinguish the balance-sheet debt carrying amount from the filing’s principal and fair-value debt disclosures.