Inspired Entertainment, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The report, signed February 27, 2024, includes restated comparative 2022 financial statements. The company supplies gaming content, platforms, terminals and services to regulated gaming, betting and lottery operators. Figures below are in U.S. dollars unless indicated otherwise.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022, restated | Nine months 2023 | Nine months 2022, restated |
|---|---|---|---|---|
| Revenue | $97.5 million | $74.2 million | $241.8 million | $205.0 million |
| Operating income | $12.2 million | $15.3 million | $30.6 million | $34.4 million |
| Net income | $3.4 million | $9.2 million | $7.6 million | $17.1 million |
| Diluted EPS | $0.12 | $0.32 | $0.26 | $0.58 |
| Adjusted EBITDA (non-GAAP) | $26.7 million | $27.3 million | $74.0 million | $73.2 million |
- Q3 revenue rose 31% as reported; nine-month revenue increased 18%. Growth was driven chiefly by Gaming hardware sales. Excluding $22.7 million of low-margin hardware sales in Q3 and $27.1 million year to date, the company’s non-GAAP adjusted revenue was $74.8 million for Q3 and $214.7 million for nine months. In reported U.S. dollars, those amounts were up approximately 1% and 5%, respectively.
- Calculated operating margin fell to approximately 12.5% in Q3 from 20.6% a year earlier; nine-month margin was approximately 12.7%, versus 16.8%. Management attributed lower operating income to weaker gross margin and higher expenses. Net income also declined, reflecting operating results, higher interest and tax expense, and, year to date, the absence of the prior-year Italian business disposal gain.
- Operating cash flow was $35.3 million for nine months, compared with $31.8 million. Investing cash outflow was $31.7 million, including $20.1 million for property and equipment and $11.0 million for capitalized software. Financing cash outflow was $2.6 million, including $1.6 million of share repurchases. Cash increased $1.4 million to $26.4 million.
- At September 30, cash was $26.4 million, current assets were $133.3 million and current liabilities were $77.8 million, implying working capital of $55.5 million. The filing also describes $29.1 million of working capital excluding cash. Undrawn revolver availability was $24.4 million. Management reported $6.0 million of cash held as operating floats in machines.
- Long-term debt on the balance sheet was $282.7 million. The MD&A describes senior debt principal of $286.9 million; the filing text does not clearly reconcile this difference. The RCF was undrawn, and the company reported covenant compliance, with 2.7x net leverage. Senior notes are fixed-rate; foreign exchange is a key market risk.
Material changes and operating developments
- Gaming revenue increased substantially, principally from UK terminal sales, including the Vantage rollout; most of these hardware sales were identified as low margin. Over 4,500 Vantage terminals were deployed during the quarter, with approximately 6,300 expected to be live by year-end 2023.
- Virtual Sports revenue declined in Q3, mainly due to lower online activity at a major customer, but grew over the nine-month period. Interactive revenue rose in both periods, supported by customer launches, new content and promotional activity. Leisure revenue declined slightly, with lower pub and amusement activity partly offset by holiday park additions.
- At September 30, the company had $39.9 million of inventory, up from $30.3 million at year-end 2022. One customer accounted for 23% of Q3 revenue; two customers accounted for 13% and 12% of nine-month revenue.
Restatement, outlook and risks
- Restatement: The Audit Committee determined that previously issued financial statements for 2020–2022 and Q1–Q2 2023 should no longer be relied upon. Errors included software development cost capitalization and amortization, contract costs and revenue recognition, inventory, impairment, leases, pension accounting and other items. Q3 2022 comparative results in this report are restated. The company separately describes a prior revision involving delayed commencement of software amortization.
- Controls: Management concluded disclosure controls were not effective at the reasonable-assurance level as of September 30, 2023, due to material weaknesses. It said controls were being redesigned and implemented. The restatement may result in additional costs, reputational harm, reduced investor confidence, litigation or regulatory inquiries.
- Outlook: No specific revenue or earnings guidance is provided. Management believed cash, expected operating cash flows, the ability to control or defer capital projects and external borrowings would fund net cash requirements through November 2024. This is a forward-looking assessment, not a guarantee.
- Debt and obligations: Contractual obligations totaled $386.4 million, including $286.9 million of senior debt principal, $67.8 million of interest on long-term debt and $14.0 million for Vantage machine purchases. The debt is secured by charges over company assets. The filing states no covenant breaches; a delayed quarterly reporting requirement was met concurrently with filing this report.
- Other risks and contingencies: Business risks include regulation, competition, technology change, customer and supplier retention, acquisitions, working-capital needs, seasonality, cybersecurity, international operations and currency movements. The company reported no currently material legal matters, but said ordinary-course matters could adversely affect results. Its UK defined-benefit pension scheme had a funding shortfall under its latest actuarial valuation; a recovery plan targets elimination by October 2026.
Key facts for investors to verify
- Review the restatement disclosures and amended prior filings, especially the effects of software capitalization and amortization on historical earnings, assets and cash-flow classifications.
- Reconcile the $282.7 million balance-sheet debt amount with the $286.9 million senior principal cited in MD&A, and confirm maturity, interest and refinancing requirements.
- Assess whether revenue growth and earnings can persist without unusually high low-margin terminal sales; compare reported results with adjusted revenue and Adjusted EBITDA, which are non-GAAP measures.
- Monitor remediation of material weaknesses, the company’s liquidity through November 2024, RCF covenant headroom and the impact of capital spending and working-capital volatility.
- Track reliance on large customers, foreign-exchange exposure, pension recovery contributions and progress on Vantage deployments and new customer contracts.