Inspired Entertainment, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2020. The company supplies gaming technology and services through Server Based Gaming (SBG), Virtual Sports (including Interactive), and Acquired Businesses. Unless otherwise noted, amounts are U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $15.6 million | $26.7 million | $67.9 million | $60.4 million |
| Operating loss | $13.9 million | $4.5 million | $21.1 million | $5.2 million |
| Net loss | $24.5 million | $10.7 million | $41.9 million | $15.7 million |
| Net loss per share, diluted | $1.09 | $0.48 | $1.87 | $0.73 |
| Adjusted EBITDA, non-GAAP | $2.1 million | $8.9 million | $12.1 million | $22.5 million |
- Q2 revenue fell 41.7% year over year, chiefly because COVID-19 closures sharply reduced land-based gaming. Six-month revenue rose 12.4%, reflecting the October 2019 acquisition of Novomatic UK’s Gaming Technology Group; the acquired business contributed $29.2 million in the first half.
- For Q2, service revenue was $15.2 million and hardware revenue $0.4 million. For the first half, they were $58.4 million and $9.5 million, respectively.
- Q2 SBG revenue declined 77.1% on a constant-currency basis; Virtual Sports revenue increased 10.5% on that basis, as online and Interactive gains offset weaker retail activity. Six-month Virtual Sports revenue was nearly flat on a constant-currency basis; SBG revenue declined 49.0%.
- Operating expenses included depreciation and amortization of $13.3 million in Q2 and $25.9 million in the first half. Interest expense was $8.1 million in Q2 and $14.2 million in the first half, per the financial statements. The MD&A gives a different first-half interest-expense figure; see investor verification points below.
- Six-month operating cash flow was positive $10.2 million, down from $19.7 million. Investing cash flow was negative $15.5 million, including $8.8 million of property and equipment purchases and $6.7 million of capitalized software. Financing cash flow was positive $18.6 million, principally reflecting $22.3 million of revolver proceeds and $3.1 million of lender fees. Cash increased $10.8 million to $39.9 million.
- At June 30, cash was $39.9 million and working capital was $1.3 million; the company notes working capital includes $9.2 million of non-cash-settled deferred income. Cash included $2.6 million of operational floats and $2.4 million in a restricted account. Total assets were $303.3 million and total liabilities $395.1 million, leaving a stockholders’ deficit of $91.8 million.
- Senior bank debt principal was $309.5 million, before unamortized financing charges; its reported book value was $293.1 million. The company also reported $1.1 million of finance lease liabilities. The term loans mature in October 2024, and the revolver in September 2024.
Material changes, outlook, and risks
- COVID-19 venue closures and operating restrictions severely affected land-based gaming during the quarter. The company reported that most venues had reopened by the filing date, with some still closed and social-distancing limits reducing capacity. A renewed outbreak could lead to further restrictions or closures.
- Online activity partly offset the retail downturn: Q2 Scheduled Online Virtuals revenue grew 114.4% and Interactive revenue grew 145.1% in pounds, while retail Virtual Sports revenue declined 76.0%. Virtual Sports added customers and launched new products; management said new Interactive customers had not yet reached their full revenue potential.
- On June 25, 2020, the company amended and restated its senior facilities agreement. Changes included capitalizing certain interest due April 1, resetting leverage and capital-expenditure covenants, increasing facility margins by 1%, adding a 0.75% payment-in-kind margin on Facility B after September 24, 2021, and a potential 0.75% exit fee on qualifying repayments after that date. The company paid $3.1 million in lender amendment fees. It reported no covenant breaches through June 30.
- The company had drawn the full £20 million revolver during the pandemic. After quarter-end, it repaid £10 million ($12.4 million) on July 14, 2020. Management stated that cash, anticipated operating cash flow, access to borrowings, and control or deferral of capital projects were expected to fund requirements through August 2021, absent unanticipated COVID-19 impacts.
- Management could not estimate the future financial effect of the pandemic. Risks include renewed closures, weaker consumer demand, permanent venue closures, customer payment difficulties, supply-chain disruption, and broader economic impacts. Other exposures include floating interest rates, foreign exchange movements, debt restrictions, customer and supplier retention, regulation, and acquisition integration.
- Q2 comprehensive loss was $33.3 million, including an $8.7 million actuarial pension loss. The first-half results also included a $0.7 million impairment of the Innov8 investment, which was disposed of in April 2020.
- Disclosure controls and procedures were deemed ineffective at the reasonable-assurance level due to a previously identified material weakness. Remediation controls had not operated long enough for management to conclude that the weakness was fully remediated.
Important facts for investors to verify
- Reconcile first-half interest expense: the financial statements report $14.2 million, while the MD&A describes $13.9 million.
- Confirm debt balances and current maturities across the balance sheet, debt note, and MD&A; reported current-portion amounts differ in the filing.
- Track actual covenant headroom, interest and principal obligations, and the effect of the amended loan pricing and subsequent £10 million revolver repayment.
- Assess the pace and durability of venue reopenings, land-based recovery, online growth, and whether new Interactive customers ramp as expected.
- Monitor cash generation and management’s stated liquidity runway through August 2021, particularly if COVID-19 restrictions return.
- Review progress in remediating the material weakness in disclosure controls.