Inspired Entertainment, Inc. — Form 10-Q Summary
Business context and reporting period
Inspired is a global business-to-business gaming technology provider, operating in Server Based Gaming (SBG) and Virtual Sports. This fiscal first-quarter report covers the three months ended December 31, 2017; the comparable 2016 period was six days longer (98 days versus 92). Amounts below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2018 | Prior period |
|---|---|---|
| Revenue | $31.4 | $27.0 |
| Operating loss | $(4.4) | $(9.3) |
| Net loss | $(4.2) | $(22.4) |
| Diluted loss per share | $(0.20) | $(1.79) |
| Adjusted EBITDA (non-GAAP) | $9.8 | $8.5 |
| Operating cash flow | $(0.1) | $(8.9) |
| Cash at period end | $11.0 | $30.9 |
Revenue rose 16.1% as reported and 14.3% on management’s like-for-like basis, which adjusts for currency and the shorter quarter. Service revenue increased to $30.4 million; hardware revenue fell to $1.0 million. Reported operating margin was approximately negative 14.1%, versus negative 34.3% a year earlier. Adjusted EBITDA margin was approximately 31.3% in both periods; this is a company-defined non-GAAP measure and is not a substitute for cash flow.
Net loss improved substantially, primarily reflecting lower acquisition-related transaction costs and interest expense, plus a $4.7 million noncash gain from remeasuring the earnout liability. The prior period included $10.5 million of merger transaction costs and materially higher interest, including legacy PIK loan-note interest. Q1 FY2018 also included $3.2 million of stock-based compensation, including $2.1 million related to modified awards.
Investing cash outflow was $6.8 million, including $2.9 million for property and equipment and $3.9 million for capital software. Financing cash outflow was $1.8 million, including $7.7 million of debt repayments and $6.0 million of borrowings. Cash declined $9.0 million during the quarter.
At December 31, 2017, total assets were $203.4 million, total liabilities $213.5 million and stockholders’ deficit $10.1 million. Cash was $11.0 million and management reported a $23.4 million working-capital deficit, including $12.1 million of earnout liability and $10.9 million of current deferred revenue. Debt and capital leases totaled $124.8 million, including $123.8 million of senior bank debt; the filing states the company was in compliance with its debt covenants.
Material changes and operating trends
- SBG revenue increased 12.2% on a like-for-like basis to $22.8 million. The installed base grew 9.5% to an average 29,310 terminals, primarily from the Greek rollout; gross win per unit per day declined 2.6% in GBP, and the blended participation rate held at 6.1%.
- Virtual Sports revenue rose 20.3% like-for-like to $8.6 million, supported by new customers and broader mobile distribution. Live customers increased to 86 at period end from 74.
- Growth reflected favorable currency translation as well as business performance. Greece contributed 14.0% of revenue, compared with none in the comparable period; UK revenue represented 65.3%.
- SG&A increased to $16.4 million, including higher public-company and restructuring costs. Depreciation and amortization rose to $9.6 million as new platforms and games went live.
Outlook, risks and unusual items
No formal revenue or earnings guidance is provided. Management said cash on hand, expected operating cash flows, control or deferral of capital projects, and available credit facilities should fund net cash requirements through February 2019. This outlook is subject to execution and financing risks. The term loan’s stated cash interest rate was 10.0%, with an additional 7.0% PIK rate; the term facility matures September 30, 2019, and the revolver June 30, 2019. The filing lists $13.5 million of revolver repayment obligations within one year.
A key regulatory uncertainty is the UK consultation on reducing the maximum stake on B2 gaming machines from £100 to one of several proposed levels, including £2. The company warned that a reduction could materially affect SBG revenue; it expected material effects, if any, to arise no earlier than fiscal 2019. Other significant risks include customer and contract concentration, gaming regulation and taxation, competition, foreign-exchange exposure, Greek capital controls, refinancing and liquidity needs, and technology or service disruptions. Three customers each accounted for at least 10% of quarterly revenue.
The earnout liability depends on EBITDA in six jurisdictions through September 2018 and is valued using significant unobservable assumptions. A December 2017 award modification caused certain restricted stock units to be treated as a derivative liability; stockholder approval of the incentive plan remained outstanding. A former executive’s lawsuit seeks unspecified damages the plaintiff estimated at no less than $1 million; dismissal motions were pending. A January 2018 secondary offering sold 4.5 million existing shares at $7.95 per share; the company received no proceeds.
Important facts for investors to verify
- Whether operating cash generation, available borrowing capacity and planned investment controls support management’s liquidity outlook, particularly given the working-capital deficit and debt maturities.
- The effect of any final UK gaming-stake rules on SBG revenue, customer economics and terminal investment returns.
- How Greek cash-transfer restrictions, customer concentration and contract renewals affect cash availability and recurring revenue.
- The assumptions behind the earnout valuation, award-related derivative liability and reported non-GAAP Adjusted EBITDA.
- Debt covenant terms, interest-rate exposure and the company’s ability to refinance facilities due in 2019.