Inspired Entertainment, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Inspired supplies gaming content, platforms, terminals and related services to regulated gaming, betting and lottery operators. The business reports four segments: Gaming, Virtual Sports, Interactive and Leisure. Amounts below are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $66.0 million | $60.6 million; up 8.9% reported, or 20.2% at constant currency |
| Operating income | $6.1 million | $6.9 million; operating margin 9.2% versus 11.4% |
| Net income (loss) | $(0.2) million; $(0.01) per share | $1.5 million; $0.06 per share basic |
| Adjusted EBITDA | $21.1 million | $20.1 million; non-GAAP measure |
| Cash from operating activities | $14.8 million | $5.1 million |
| Cash used in investing activities | $(11.5) million | $(10.9) million |
| Cash and cash equivalents | $27.8 million at March 31 | $25.0 million at December 31, 2022 |
| Debt and liquidity | $285.5 million long-term debt; $24.7 million undrawn revolver | RCF leverage covenant compliant at 2.6x against a 5.75x maximum |
Current assets were $128.4 million and current liabilities $73.2 million, implying $55.2 million of working capital, including $5.1 million of deferred income. Management separately cited $27.4 million of working capital in addition to cash. Total assets were $316.5 million and total liabilities $370.9 million; stockholders’ deficit was $54.4 million. Interest expense, net, was $6.3 million. The company reported no share repurchases in the quarter.
Material changes versus Q1 2022
- Revenue increased by $5.4 million as growth in product sales, Virtual Sports and Interactive outweighed lower Leisure revenue. Currency translation reduced reported growth: the pound averaged $1.21 versus $1.34 a year earlier.
- Virtual Sports revenue rose 42% at constant currency, principally from online activity; Interactive revenue rose 38%, supported by customer and content launches. Gaming revenue rose 26%, including higher terminal sales. Leisure revenue declined 4% at constant currency, primarily reflecting fewer machines and withdrawal of lower-margin amusement and prize-vend machines.
- SG&A increased to $34.3 million from $29.6 million, including $2.9 million of restructuring costs, higher non-staff costs and increased staffing. Cost of product sales also rose with product revenue.
- Operating cash flow increased, primarily due to working-capital movements and sales-receipt timing; management cautioned that the prior-year comparison included substantial inventory build to secure components.
- Net results moved from income to a small loss. The comparison also reflects a $0.9 million gain on disposal included in Q1 2022, absent in 2023, and higher net interest expense.
Outlook, risks and notable items
- Management said cash, expected operating cash flows, ability to defer capital projects and available borrowings were expected to fund net cash requirements through May 2024. This is management’s liquidity assessment, not earnings guidance; the filing provides no specific full-year revenue or profit forecast.
- Planned business developments included a Vantage terminal rollout to two major UK customers expected to be completed by year-end 2023, and delivery of refreshed Greek terminals by year-end for installation in early 2024. The Vantage trial showed 13% growth versus existing estate terminals. These are expectations, not completed outcomes.
- The company identifies regulation, competition, technology changes, customer and contract retention, suppliers, cybersecurity, acquisitions, seasonality, working-capital needs, capital access, international operations, economic conditions and foreign exchange as risks. The UK accounts for about 75% of revenue; one customer represented 15% of quarterly revenue.
- Senior debt was fixed-rate, but foreign-exchange exposure remains material. A hypothetical 10% weakening of sterling against the U.S. dollar was estimated to reduce trading results by about $0.2 million and cause an unfavorable translation adjustment of about $6.4 million in other comprehensive loss.
- Management concluded disclosure controls were not effective at the reasonable-assurance level because of material weaknesses previously disclosed in the 2022 Form 10-K. Remediation work was underway, but had not operated long enough to conclude the weaknesses were fully remediated.
- The UK defined-benefit pension scheme had a funding shortfall under its 2021 actuarial valuation; a recovery plan targets elimination by October 2026. The company expected $1.1 million of deficit-reduction contributions and $0.3 million of expense contributions in 2023.
- Deferred tax assets remained fully reserved. Management said sufficient positive evidence might emerge within 12 months to support release of a significant portion, but timing and amount depend on actual profitability. Ordinary-course legal matters were not considered material by the company at filing.
- Q1 included $3.0 million of restructuring costs excluded from Adjusted EBITDA and $2.9 million of stock-based compensation. Adjusted EBITDA is a company-defined non-GAAP measure and may not be comparable to similarly named measures at other issuers.
Important facts for investors to verify
- Whether revenue growth in Virtual Sports and Interactive and the planned terminal rollouts translate into sustained earnings and cash generation.
- Cash conversion and working-capital volatility, particularly inventory, receivables, supplier payments and the cash held as machine operating floats ($5.5 million at quarter-end).
- Debt service capacity, revolver availability, covenant compliance and the large scheduled principal repayment shown for years three to five in contractual obligations.
- Progress and effectiveness of remediation of the disclosed material weaknesses in disclosure controls.
- The assumptions supporting the May 2024 liquidity assessment, including capital spending, operating performance and access to borrowings.
- Potential pension funding needs, foreign-exchange effects and the timing and likelihood of any deferred-tax valuation-allowance release.