Inspired Entertainment, Inc. — Q3 2021 Form 10-Q
Business context and period: The company supplies gaming content, platforms, machines and related services to regulated online and land-based operators. This unaudited report covers the three and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods. Results reflect the reopening of many venues after COVID-19 closures, with some restrictions still in place in Greece and Italy.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $77.6 million | $60.1 million | $141.9 million | $128.0 million |
| Operating income (loss) | $14.9 million | $8.2 million | $(7.0) million | $(12.9) million |
| Operating margin | 19.2% | 13.6% | (4.9)% | (10.1)% |
| Net income (loss) | $25.0 million | $0.5 million | $(35.5) million | $(35.5) million |
| Operating cash flow | Not separately provided | Not separately provided | $7.0 million | $31.5 million |
| Adjusted EBITDA | $30.1 million | $25.0 million | $42.0 million | $37.2 million |
- Q3 revenue increased 29.0% as reported; management’s constant-currency comparison showed growth of 20.6%. Nine-month revenue increased 10.8% as reported, or 2.5% on a constant-currency basis.
- Q3 net income included a noncash $17.3 million gain from the change in fair value of warrant liabilities. The nine-month net loss included $14.4 million of noncash debt fees expensed when the prior financing was repaid.
- Cash was $37.1 million at September 30, down from $47.1 million at December 31, 2020. Working capital was $14.7 million; the company notes this includes $8.5 million of deferred income and a $9.0 million warrant liability, neither expected to be cash-settled in the ordinary way described.
- Nine-month operating cash flow fell to $7.0 million from $31.5 million, mainly reflecting higher cash interest payments ($17.6 million versus $0.6 million) and working-capital movements. Investing cash outflow was $18.2 million, including $8.5 million of property and equipment purchases and $9.7 million of capital software purchases.
- Senior secured notes had $316.9 million principal outstanding, carry 7.875% fixed interest and mature June 1, 2026. The company also had a $27.0 million undrawn revolving facility. Total liabilities were $424.7 million versus assets of $303.8 million, leaving a stockholders’ deficit of $120.9 million.
- Q3 segment performance was led by Leisure, with revenue of $33.4 million and operating income of $9.0 million, and Virtual Sports, with revenue of $10.5 million and operating income of $7.6 million. Interactive revenue rose to $6.1 million from $3.5 million. Gaming revenue declined to $27.6 million from $30.9 million, primarily reflecting the prior-year VAT-related revenue benefit.
Material changes and notable items
- In May 2021, the company refinanced its prior sterling- and euro-denominated term loans with the £235 million senior secured notes and established a £20 million super-senior revolving facility. The notes are fixed-rate; the revolver has a leverage covenant and was undrawn at quarter-end. The company reported compliance with applicable debt covenants.
- Q3 operating income improved as venues reopened and Leisure, Interactive and online Virtual Sports grew. The nine-month operating loss narrowed, but Gaming and retail Virtual Sports remained affected by COVID-related closures and restrictions during part of the period.
- Adjusted EBITDA is a non-GAAP measure. Q3 was $30.1 million versus $25.0 million; nine-month Adjusted EBITDA was $42.0 million versus $37.2 million. The measure excludes specified items and is not a substitute for GAAP income or operating cash flow.
- The company restated prior-period warrant accounting following SEC guidance that certain SPAC warrants be classified as liabilities and remeasured through earnings. The 2020 comparative results shown reflect that restatement. Segment reporting was also reorganized into Gaming, Virtual Sports, Interactive and Leisure.
Outlook, risks and contingencies
- Management believed cash on hand, expected operating cash flows, ability to control or defer capital projects and external borrowing capacity would fund net cash requirements through November 2022, absent unanticipated COVID-19 impacts. This is a liquidity expectation, not earnings guidance.
- Management warned that renewed venue restrictions or closures could occur and that their timing and duration were uncertain. It described continued efforts to manage capital expenditure and working capital.
- The filing identifies supply-chain disruption and inflation, including higher costs of goods and wages, as risks; disruption was affecting North American and Greek Gaming sales and could cause unrecovered lost sales.
- Disclosure controls and procedures were not effective at the reasonable-assurance level as of September 30, 2021 because of a previously reported material weakness. Remediation controls had been implemented but had not operated long enough to establish that the weakness was fully remediated.
- The company reported no currently material legal matters, while cautioning that ordinary-course proceedings could adversely affect results. It also disclosed a $1.2 million provision related to settlement of an Italian tax audit for 2015–2017.
Investor verification priorities
- Assess the quality and repeatability of Q3 earnings, particularly the $17.3 million noncash warrant-liability gain and the contribution from venue reopenings.
- Track operating cash conversion, interest payments and working-capital movements against the company’s liquidity expectations through November 2022.
- Review debt terms, refinancing costs, the 2026 maturity, revolver availability and covenant headroom as leverage tests become applicable.
- Monitor whether supply-chain constraints, inflation and any renewed COVID-related restrictions affect machine sales, venue activity and margins.
- Follow remediation of the material weakness and confirm the warrant-accounting restatement and revised segment comparisons are understood when evaluating trends.