Inspired Entertainment, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited. Inspired is a global business-to-business gaming technology company serving regulated gaming, betting and lottery operators through Server Based Gaming (SBG), Virtual Sports/Interactive and Acquired Businesses. The Acquired Businesses segment reflects the Novomatic UK gaming technology business acquired October 1, 2019, so year-over-year comparisons include a significant acquisition-related change in scope.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $60.1 million | $26.6 million | $128.0 million | $87.0 million |
| Operating income (loss) | $8.2 million | $(5.7) million | $(12.9) million | $(10.9) million |
| Net income (loss) | $0.3 million | $(8.5) million | $(41.6) million | $(24.2) million |
| Net income (loss) per share, basic and diluted | $0.01 | $(0.38) | $(1.86) | $(1.11) |
| Operating margin, calculated from reported figures | 13.6% | (21.4)% | (10.1)% | (12.5)% |
| Net cash provided by operating activities | Not stated for quarter | Not stated for quarter | $31.5 million | $22.4 million |
| Cash used in investing activities | Not stated for quarter | Not stated for quarter | $(22.0) million | $(16.5) million |
| Cash provided by financing activities | Not stated for quarter | Not stated for quarter | $5.4 million | $9.0 million |
- Revenue and segment mix: Q3 revenue rose 125.9%; the company attributed $24.3 million to Acquired Businesses, $9.3 million to a UK customer VAT-related recovery recognized as revenue, and $2.6 million to favorable currency movements. Nine-month revenue rose 47.2%, while the company reported that COVID-19 venue closures significantly affected trading.
- Margins and adjusted results: The Q3 return to operating and net profit included the $9.3 million VAT-related income. Adjusted EBITDA, a non-GAAP measure, was $25.0 million in Q3 versus $8.7 million; for nine months it was $37.2 million versus $31.3 million. The filing cautions that this measure is not a substitute for GAAP results and may not be comparable across companies.
- Balance sheet at September 30: Cash was $43.9 million, current assets $111.0 million, current liabilities $100.7 million and working capital $10.3 million. Cash included $4.2 million of operational floats; a further $6.8 million was held in restricted accounts. The company reported $12.9 million of undrawn revolver capacity.
- Debt: Senior bank debt principal was approximately $310.6 million, with a reported book value of $294.5 million before finance leases. Total liabilities were $415.3 million and stockholders’ deficit was $95.0 million. Nine-month interest expense was $22.5 million, versus $12.9 million. Cash interest paid was $0.6 million versus $12.5 million, reflecting timing and debt interest capitalization, among other factors.
Material changes versus the comparable period
- Q3 operating results improved from a loss to a profit, but the comparison reflects both the acquired business and the unusual $9.3 million VAT-related income. Excluding those items, the filing does not provide a single comparable adjusted GAAP result.
- Q3 Virtual Sports revenue increased 31.5% in reported dollars, driven by online and Interactive growth; retail revenue remained below the prior year. Nine-month Virtual Sports revenue increased 8.0%, as online and Interactive growth partly offset retail declines.
- Nine-month SBG revenue decreased 22.3% to $46.2 million, with COVID-related closures, UK regulatory changes, and Italy market factors cited as pressures; the VAT-related income and growth in Greece partly offset declines.
- Acquired Businesses generated $53.5 million of nine-month revenue and a $12.3 million operating loss. Its leisure and pub operations were affected by closures and continuing social-distancing restrictions.
- Cash increased $14.8 million from year-end 2019. Operating cash flow was positive, while investing outflows increased to $22.0 million, including property, equipment and software spending.
Outlook, risks and unusual items
- COVID-19: Management said most retail venues had reopened during Q3 and recurring revenue had recovered to approximately 90% of pre-pandemic levels, but restrictions limited recovery. At the report date, the majority of retail venues in the UK, Italy and Greece were closed again. Management could not estimate the pandemic’s future financial impact; online revenue had increased during prior closures, but the company gave no assurance that this would recur.
- Liquidity outlook: Management stated that cash, expected operating cash flow, external borrowings and the ability to defer capital projects were expected to fund net cash requirements. The filing gives different runway dates: through February 2022 in the financial statement note and through November 2021 in MD&A, subject to unanticipated COVID-19 impacts.
- Debt amendments: A June 2020 amendment capitalized certain interest, reset leverage and capital expenditure covenants, increased facility margins by 1%, added a 0.75% payment-in-kind margin on Facility B after September 24, 2021, and added a 0.75% exit fee for certain later repayments. The company reported no covenant breaches through September 30, 2020. Debt is secured by liens over company and certain subsidiary assets.
- Interest-rate and currency exposure: Interest-rate swaps covered approximately two-thirds of debt and were effective through October 2023. The filing estimates $2.2 million of additional annual interest for a 1% rise in floating rates before considering the swaps. Foreign exchange movements also affect reported results and equity.
- Subsequent event: On November 10, 2020, the company agreed to contractual income of £24.6 million (approximately $32.5 million) related to revenue-share agreements and previously paid VAT on fixed-odds betting terminals; it received the amount on November 11. This occurred after the September 30 reporting date.
- Controls and contingencies: Management concluded disclosure controls were not effective at the reasonable-assurance level because of a previously disclosed material weakness; remediation controls had not operated long enough to conclude the weakness was fully remediated. The company reported no currently material legal matters and no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the two disclosed liquidity runway estimates—November 2021 and February 2022—and assess assumptions about COVID-19 closures, cash generation and borrowing availability.
- Separate recurring performance from the acquired-business contribution and the $9.3 million Q3 VAT-related income; assess the terms and accounting for the separate $32.5 million post-quarter receipt.
- Review debt principal, cash interest and capitalized interest, amended covenants, future repayment obligations, and the company’s ability to remain compliant under renewed venue restrictions.
- Track recovery in retail revenues and the durability of online/Interactive growth, including the impact of renewed closures and customer concentration.
- Follow remediation of the disclosed material weakness in disclosure controls and the status of the UK pension scheme’s funding and potential contributions.