Inspired Entertainment, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Inspired supplies gaming content, platforms, machines and related services to regulated online and land-based operators. Its four segments are Gaming, Virtual Sports, Interactive and Leisure.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $22.8 million | $52.3 million |
| Operating loss | $12.2 million | $7.2 million |
| Net loss | $16.7 million | $9.8 million, restated |
| Adjusted EBITDA, non-GAAP | $3.9 million | $10.1 million |
| Cash from operating activities | $(2.0) million | $11.1 million |
| Cash and cash equivalents, at quarter-end | $41.2 million | $47.1 million at December 31, 2020 |
Revenue fell 56.4% year over year as pandemic-related closures sharply curtailed land-based activity. Service revenue was $17.1 million, down from $42.8 million; product sales were $5.7 million, down from $9.5 million. Operating expenses declined, including SG&A, but not enough to offset the revenue decline. The filing does not present a single consolidated gross-margin figure.
At March 31, current assets were $92.6 million and current liabilities were $91.2 million, yielding working capital of $1.4 million. The company reported $27.6 million available on an undrawn revolving facility. Long-term debt on the balance sheet was $295.9 million; the debt discussion lists $310.6 million of senior debt principal. The filing reports cash interest paid of $6.8 million in the quarter.
Material changes and operating drivers
- COVID-19 impact: Gaming and Leisure revenue were severely affected by venue closures. Leisure revenue fell from $17.5 million to $0.5 million; its major UK venue categories were closed throughout the quarter. Gaming revenue declined to $10.8 million from $24.9 million.
- Digital growth: Interactive revenue increased to $5.2 million from $2.1 million, supported by new customers, territories and content. Virtual Sports online revenue grew, partly offsetting a steep decline in retail revenue.
- Cost measures: Management cited furloughs, pay reductions, staffing changes and other savings. Consolidated SG&A, excluding stock-based compensation, declined to $13.8 million from $28.0 million.
- Cash flow and investment: Operating cash flow moved from $11.1 million provided to $2.0 million used. Investing cash outflow was $4.8 million, including $2.0 million for property and equipment and $2.8 million for capital software.
- Segment reporting: The company now reports four segments, versus a prior three-segment structure. Comparative segment and certain expense classifications were recharacterized; the recharacterization did not affect prior-period operating or net loss.
Outlook, risks and unusual items
- Management said cash, expected operating cash flows, capital-spending controls and borrowing availability were expected to fund net cash requirements through May 2022, absent unanticipated COVID-19 effects. It could not estimate the pandemic’s future financial impact. Venue reopenings remained subject to restrictions and timing uncertainty.
- After quarter-end, the company announced a planned £235 million ($324.2 million) private offering of 7.875% senior secured notes due 2026, intended primarily to refinance existing term loans, pay related costs and support general corporate purposes. A new 4.5-year £20 million ($27.6 million) revolving facility was also planned. The offering was expected to close around May 20, 2021, subject to conditions.
- The company recorded a $3.0 million warrant fair-value loss in Q1 2021, versus a $7.6 million gain in Q1 2020. The filing restated 2020 comparative financial information following SEC guidance on accounting for certain SPAC warrants; the restated Q1 2020 net loss was $9.8 million, rather than the previously reported $17.4 million.
- Disclosure controls were assessed as ineffective at March 31, 2021 because of a material weakness described in the company’s amended 2020 annual report. Remediation controls had been implemented but had not operated long enough to establish that the weakness was fully remediated.
- Management reported no debt covenant breaches for the periods presented. Risks include continuing pandemic effects, substantial debt and interest obligations, foreign-exchange and floating-rate exposure, customer concentration, and ordinary-course legal contingencies. Two customers represented 16% and 14% of Q1 2021 revenue.
- Interest-rate swaps covered approximately two-thirds of debt and were effective through October 2023. The filing estimated that a 1% increase in floating rates would add about $0.8 million of interest before considering the swaps.
Important facts for investors to verify
- Whether venue reopenings and operating restrictions translated into a sustained recovery in Gaming and Leisure revenue and cash generation.
- Whether Interactive and online Virtual Sports growth continued, and how much of it offset land-based weakness.
- The final terms, completion and use of proceeds of the announced 2026 notes offering and new revolving facility.
- Debt balances, covenant headroom, interest costs and liquidity after the refinancing.
- Progress in remediating the material weakness in disclosure controls and the consistency of subsequent filings.
- The filing contains differing net-loss figures in its liquidity discussion ($16.4 million for Q1 2021 and $10.2 million for Q1 2020) compared with the financial statements ($16.7 million and $9.8 million); confirm the intended figures. The financial statements are used above.