Business context and reporting period
This is Hydra Industries Acquisition Corp.’s unaudited Form 10-Q for the quarter ended June 30, 2016. Hydra was a blank-check company and had not begun operating-business activities or generated operating revenue by period-end. The filing reports Hydra’s pre-acquisition finances, not Inspired Entertainment’s operating results. Although the request identifies Inspired Entertainment, the registrant named in the filing is Hydra Industries Acquisition Corp.
Financial results and position
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Operating revenue | None | None |
| Operating costs / loss from operations | $1.211 million | $1.492 million |
| Net loss | $1.176 million | $1.423 million |
| Interest income | $37,147 | $58,321 |
| Basic and diluted loss per share | $0.39 | $0.47 |
| Cash used in operating activities | $586,791 for the six months |
For the comparable 2015 periods, net losses were $1.891 million for the quarter and $2.077 million for six months; loss per share was $0.71 and $0.78, respectively. Operating costs also declined year over year. The filing reports no operating revenue, so operating margins are not meaningful.
At June 30, 2016, total assets were $80.299 million, including $80.031 million in restricted Trust Account assets and $216,796 in cash outside the trust. Total liabilities were $6.838 million, comprising $4.038 million of current liabilities and $2.8 million of deferred underwriting fees payable upon a completed business combination. Current liabilities included $500,000 of non-interest-bearing sponsor notes due at a business-combination closing. Stockholders’ equity was $5.0 million; $68.461 million of shares were classified as subject to possible redemption. The company reported a $3.771 million working-capital deficit.
Material changes, transaction, and outlook
- On July 13, 2016, after quarter-end, Hydra signed an agreement to acquire London-based Inspired Gaming Group and affiliates. The stated transaction value was £200 million (approximately $264 million), plus a potential earn-out of up to $25 million payable in shares. The filing estimated approximately £96 million (approximately $126 million) of equity value after specified debt and liability adjustments.
- Consideration was to be funded with available trust cash, a contemplated $20 million Macquarie private placement and other available funds, with the remaining completion payment paid in newly issued shares valued at $10 each. The agreement also provides for retaining £5 million of cash on the post-transaction balance sheet. Final amounts depend on transaction costs, adjustments and financing repayment requirements.
- Completion was subject to stockholder approval, gaming regulatory approvals and other customary conditions. Macquarie’s forward-purchase commitment was conditional on its approval of the transaction.
- The earn-out depends on Inspired’s performance in specified jurisdictions through September 30, 2018. The filing provides no operating guidance or financial forecasts for the combined company.
Liquidity, risks, and unusual items
Management stated that available operating cash was limited, trust funds generally could not be used for operating liabilities before a business combination, and current liabilities primarily represented unpaid professional-adviser costs. Additional sponsor or third-party financing was not assured. Management concluded these conditions raised substantial doubt about Hydra’s ability to continue as a going concern. If no business combination is completed within 24 months of the October 2014 IPO closing, the company must wind up and redeem public shares under the described terms; trust assets are not available to repay sponsor loans in that scenario.
Potential transaction-related fees were approximately $811,000: about $60,000 paid, $495,000 accrued in accounts payable, and $256,000 not accrued because payment was contingent on closing. A prior transaction was terminated in October 2015, and its contingent fees were no longer payable. Other notable obligations include the $2.8 million deferred underwriting fee payable only if a business combination closes and a $10,000 monthly administrative-services fee to a sponsor affiliate. The filing reported no legal proceedings, no material changes to previously disclosed risk factors, and no material market-risk exposure identified for the short-term government investments.
Forward-looking statements are subject to risks, including inability to complete the acquisition, obtain required approvals or financing, meet transaction conditions, and manage dilution or debt-related constraints. Disclosure controls were reported effective at quarter-end, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing and issuer: this 10-Q is for Hydra Industries Acquisition Corp.; it does not present Inspired’s standalone operating results.
- Review the definitive transaction documents and subsequent filings for final purchase consideration, transaction costs, financing, debt repayments, closing conditions and approval status.
- Verify the availability and use of trust funds, the Macquarie private-placement commitment, and the effect of public-share redemptions on cash available at closing.
- Assess the going-concern warning, unpaid adviser liabilities, sponsor-note repayment or conversion terms, and the consequences if the transaction does not close.
- Evaluate potential share dilution from stock consideration, the up-to-$25 million share-based earn-out, warrants and other transaction financing.