Inspired Entertainment, Inc. current report, 23 December 2016

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Business Context and Reporting Period

Company: Inspired Entertainment, Inc. (formerly Hydra Industries Acquisition Corp.)
Filing Type: Form 8-K (Current Report)
Date of Report: December 23, 2016
Event: Consummation of a business combination (reverse merger) with Inspired Gaming Group ("Inspired").
Reporting Period: The filing details the closing of the transaction on December 23, 2016, and provides historical financial data for Inspired Gaming Group for the fiscal years ended September 24, 2016, September 26, 2015, and September 27, 2014.

Key Financial Metrics

Historical Performance (Inspired Gaming Group - Fiscal Year Ended Sept 24, 2016):

  • Net Revenues: $119.8 million (Decrease of 6% from prior year).
  • Net Operating Loss: $1.3 million.
  • Net Loss from Continuing Operations: $59.9 million.
  • Total Assets: $189.9 million.
  • Total Liabilities: $485.9 million.
  • Stockholders' Deficit: $(296.1) million.
  • Cash and Cash Equivalents: $1.5 million.
  • Debt: Total long-term debt (including PIK notes) was approximately $414.0 million principal, with a book value of $412.8 million.

Transaction Consideration:

  • Base Consideration: Approximately £100.4 million ($132.5 million).
  • Payment Method: Paid in newly issued shares of Inspired Entertainment common stock valued at $10.00 per share.
  • Redemptions: 1,860,681 shares of Hydra Industries common stock were redeemed for approximately $18.7 million.
  • Post-Closing Capitalization: 20,199,391 shares of common stock outstanding immediately after closing.

Material Changes vs. Prior Period

  • Revenue Decline: Total revenue decreased by $7.8 million (6%) compared to the prior fiscal year. This was driven by a $13.9 million decline in Server Based Gaming (SBG) revenue, partially offset by an $8.5 million increase in Virtual Sports revenue.
  • Operating Loss: Net operating loss remained relatively flat at $1.3 million compared to $1.3 million in the prior year, despite revenue declines, due to reduced depreciation and amortization expenses.
  • Segment Performance:
    • Server Based Gaming: Revenue declined 14% to $86.5 million; Operating profit decreased slightly to $24.6 million.
    • Virtual Sports: Revenue increased 22% to $33.3 million; Operating profit increased 30% to $15.5 million.
  • Debt Structure: The transaction resulted in a significant reduction of shareholder loan notes (PIK notes) from approximately $291.0 million to $115.6 million, with the remainder converted to equity or settled.

Guidance, Outlook, and Risks

Management Commentary: The company is a global gaming technology supplier focusing on Virtual Sports and Server Based Gaming (SBG). Strategic priorities include extending leadership in these segments, investing in content/technology, and expanding into underpenetrated markets. Management noted that the decline in SBG revenue was due to the exit of an analogue contract and lower hardware sales, while Virtual Sports growth was driven by new customers and increased activity on the Virgo remote gaming server.

Risks and Contingencies:

  • Legal Proceedings: An ongoing claim from the Performing Rights Society regarding alleged copyright infringement in UK Fixed Odds Betting Terminals. A provision of $0.3 million has been recorded.
  • Debt Covenants: The company is subject to leverage and interest cover covenants. No breaches were reported as of September 24, 2016.
  • Foreign Exchange: Results are impacted by GBP/USD fluctuations, as the functional currency is GBP but reporting is in USD.
  • Customer Concentration: One customer represented approximately 29% of total revenue in fiscal 2016.

Investor Verification Checklist

  • Debt Maturity: Verify the extension of the senior bank debt maturity date to September 30, 2019, contingent on the successful acquisition.
  • Share Ownership: Confirm the post-closing ownership structure where Landgame S.a.r.l. holds approximately 49.7% and Hydra Industries Sponsor LLC holds 18.3%.
  • Pro Forma Adjustments: Review the unaudited pro forma financial statements to understand the combined entity's financial position, noting the elimination of historical accumulated deficit.
  • Legal Exposure: Monitor the status of the Performing Rights Society litigation and the adequacy of the $0.3 million provision.
  • Revenue Mix: Assess the sustainability of Virtual Sports growth versus the decline in SBG hardware sales.