Inspired Entertainment, Inc. — Form 10-Q Summary
Business and period: Inspired supplies gaming technology and services to regulated operators worldwide. Its two segments are Server Based Gaming (SBG) and Virtual Sports. This unaudited filing covers the quarter and six months ended March 31, 2018; amounts below are USD millions unless stated otherwise. The six-month comparison is affected by different period lengths: 182 days in 2018 versus 188 days in 2017.
Financial performance
| Metric | Three months ended March 31, 2018 | Three months ended March 31, 2017 | Six months ended March 31, 2018 | Six months ended March 31, 2017 |
|---|---|---|---|---|
| Revenue | $37.5 | $28.1 | $68.8 | $55.1 |
| Operating loss | $(0.9) | $(2.1) | $(5.3) | $(11.4) |
| Net loss | $(0.5) | $(9.1) | $(4.7) | $(31.5) |
| Adjusted EBITDA, non-GAAP | $12.4 | $8.6 | $22.2 | $17.1 |
| Operating cash flow | Not stated separately for the quarter | Not stated separately for the quarter | $6.6 | $(12.3) |
- Quarterly revenue rose 33.5% as reported and 18.2% on a constant-currency basis. Six-month revenue rose 24.9% as reported; management cited 16.4% like-for-like growth after currency and period-length adjustments.
- Quarter revenue growth reflected SBG expansion, especially in Greece, and Flex 4K terminal sales. SBG revenue was $27.8 million for the quarter; Virtual Sports revenue was $9.7 million.
- For the six months, net cash used in investing activities was $13.9 million, primarily property, equipment and software investment. Financing activities provided $1.2 million. Cash fell $6.6 million from September 30, 2017.
- Segment operating profit for the quarter was $6.2 million in SBG and $4.2 million in Virtual Sports. Virtual Sports profit declined on a constant-currency basis despite more live customers.
Financial position and liquidity
- At March 31, 2018, cash was $13.4 million, total assets $212.7 million and total liabilities $218.0 million; stockholders’ deficit was $5.2 million.
- Working capital deficit was $20.9 million. Management noted it includes $8.3 million of earnout liability and $9.7 million of deferred revenue.
- Senior bank debt was $133.7 million; capital leases and hire-purchase obligations were $0.8 million. The balance sheet classified $17.3 million of long-term debt as current. The term loan matures September 30, 2019; the revolver matures June 30, 2019. The company reported compliance with debt covenants and no breaches.
- Cash included $6.4 million held in Greece, where capital controls may delay or prevent transfers. Management believes cash, operating cash flows, deferred or controlled capital projects and available credit facilities will fund net cash requirements through May 2019.
- Cash interest paid in the six-month period was $6.4 million. The term loan’s stated cash interest rate was 10.0%, plus 7.0% PIK interest; the revolver rate was 5.5%.
Material changes, outlook and risks
- The improvement in net loss versus 2017 reflects higher revenue, lower prior-year merger expenses and reduced interest expense, as well as favorable noncash fair-value changes. The six-month results included an $8.4 million gain from the earnout liability valuation and a $1.9 million gain from derivative revaluation; these are not recurring operating cash earnings.
- Management reported continued Greek SBG rollout, with approximately 3,900 terminals installed and a further 2,035 awarded for delivery during 2018. The SBG installed base grew 16.4% at period end, while customer gross win per unit per day fell 3.1% for the six-month period, partly because Greek terminals produce lower daily win than UK terminals.
- Virtual Sports had 94 live customers at period end, up from 78, including 22 Mobile RGS customers. Management cited growth in Greece, Poland and new markets, while a major customer renewal timing difference and the end of some licenses weighed on reported growth.
- No specific revenue or earnings guidance was provided. The company identified UK regulatory changes as a significant uncertainty: a reduction in the maximum B2 gaming-machine stake could materially affect SBG revenue, particularly if reduced substantially. Management expected any effects to begin no earlier than fiscal 2019.
- Other key risks include high customer concentration (top ten customers generated 70% of revenue), contract renewals, gaming regulation and taxation, competition, foreign exchange, Greece’s capital controls, and the need to fund terminal deployments. Management also cited debt refinancing and access to capital as potential constraints.
- Subsequent to quarter-end, the company announced a new Office of Executive Chairman, appointed Brooks Pierce President and COO, and announced CEO Luke Alvarez’s departure. The filing also disclosed $10,000 per month in consulting fees paid to Mr. Pierce’s former consulting firm from May 2017 through March 2018. A former general counsel’s lawsuit was settled in March 2018.
- The company recorded a full $50.8 million valuation allowance against deferred tax assets. Its stated adoption date for the new revenue-recognition standard was October 1, 2019; the impact was still under evaluation.
Important facts for investors to verify
- Liquidity and refinancing: available borrowing capacity, cash needs, debt maturities in 2019, and the ability to transfer Greek-held cash.
- UK gaming regulation: final stake limits and their effects on operators, revenue-share arrangements and terminal demand.
- Underlying operating trends: Greek rollout economics, SBG win per unit, customer contract renewals, and Virtual Sports customer revenue and renewal timing.
- Quality of earnings: the extent to which reported loss improvement depends on noncash earnout and derivative fair-value gains, and the definition and reconciliation of Adjusted EBITDA.
- Leadership transition and related-party arrangements disclosed after quarter-end, including the terms of Mr. Pierce’s employment and equity award.