Inspired Entertainment, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2021. Inspired supplies gaming content, platforms, equipment and services to regulated online and land-based operators. Its reporting segments are Gaming, Virtual Sports, Interactive and Leisure. Comparisons are with 2020; prior-period results were restated for warrant accounting, and segment information was reclassified.
Key financial metrics
| Metric | Q2 2021 | Six months 2021 |
|---|---|---|
| Revenue | $41.5m, versus $15.6m | $64.3m, versus $67.9m |
| Operating loss | $9.7m, versus $13.9m | $21.9m, versus $21.1m |
| Net loss | $43.8m, versus $26.2m | $60.5m, versus $36.0m |
| Adjusted EBITDA (non-GAAP) | $8.0m, versus $2.1m | $11.9m, versus $12.1m |
| Operating cash flow | Quarterly figure not provided in the supplied filing text | $(12.8)m, versus $10.2m generated |
| Cash | $24.5m at June 30, 2021, down from $47.1m at December 31, 2020 |
Service revenue was $37.5m and product sales $4.0m in Q2; for the six-month period, they were $54.6m and $9.7m, respectively. The filing does not provide a clear consolidated gross margin figure. Six-month investing cash outflow was $12.2m; financing provided $1.0m. Cash interest paid was $17.5m for the six months.
Material changes versus prior comparable periods
- Q2 revenue rose 166% as land-based venues reopened, with growth in Gaming and Leisure; Interactive also expanded. Favorable currency translation contributed $4.7m. On management’s constant-currency basis, revenue rose 136%.
- Six-month revenue fell 5.3% as COVID-related closures weighed on Gaming, Virtual Sports and Leisure; Interactive growth partly offset declines. Favorable currency translation contributed $5.5m; constant-currency revenue declined 13.3%.
- Q2 operating loss narrowed, but net loss increased, chiefly reflecting higher interest expense and a $10.5m non-cash warrant fair-value charge. Six-month interest expense rose to $30.8m, including a $14.4m write-off of capitalized financing fees; warrant revaluation was a $13.5m charge versus a $5.9m credit in 2020.
- Operating cash flow swung from a $10.2m inflow to a $12.8m outflow, driven by COVID-related trading effects, higher cash interest payments and tax-payment timing.
Debt, liquidity and outlook
In May, the company refinanced prior term loans with £235.0m ($324.7m at period-end) of 7.875% senior secured notes due June 2026. Book value of senior debt was $316.0m after deferred financing costs. The notes are secured and contain restrictive incurrence covenants. A £20m ($27.6m) super-senior revolving facility, undrawn at June 30, was also established; its maturity is November 2025. The company reported compliance with applicable covenants. The revolver’s maximum senior secured net leverage covenant begins at 6.25x and steps down over time; no test was required at June 30 because the facility had not been drawn.
Working capital was negative $17.7m; management notes this includes $9.7m of deferred income and a $26.5m warrant liability not expected to be cash-settled. Management believed cash, expected operating cash flows, capital-spending controls and borrowing availability would cover net cash needs through August 2022, absent unanticipated COVID-19 impacts. This is management’s assessment, not a guarantee. Land-based venues had reopened in major markets, but restrictions remained in Greece and Italy and further closures were uncertain. No formal revenue or earnings guidance is provided in the supplied text.
Management commentary, risks and unusual items
- Q2’s rebound reflected reopened retail venues; management also cited Interactive customer and territory additions and new content. Online Virtual Sports remained above pre-pandemic levels, though Q2 was down from the unusually strong 2020 comparison.
- An Italian tax-authority settlement concerned historic VAT treatment for 2015–2017. It included $1.5m VAT, $0.3m interest and $0.3m penalties; $0.9m had previously been provided. Management described a $1.2m increase in the provision as a Q2 expense.
- COVID-19 could again restrict venue operations and affect consumer demand, customers’ ability to pay, staffing, supply chains and product development. Foreign-exchange movements are also material; GBP is the functional currency and USD the reporting currency.
- The company restated prior financial statements after reassessing SPAC warrant classification. The warrant liability is measured at fair value and changes affect earnings. Disclosure controls were deemed ineffective at June 30 due to an unremediated material weakness related to warrant accounting; additional controls had not operated long enough to establish remediation.
- The company reported no currently material legal proceedings and no off-balance-sheet arrangements. Stockholders’ deficit was $151.7m at June 30.
Most important facts for investors to verify
- Whether venue recovery persists and whether COVID-related restrictions or closures return, particularly in Greece and Italy.
- Cash generation, working-capital movements and liquidity against the stated runway through August 2022; distinguish available revolver commitments from cash on hand.
- Debt-service burden and covenant headroom under the 7.875% notes and revolving facility.
- Progress in remediating the material weakness and the valuation and earnings volatility of warrant liabilities.
- Underlying segment performance excluding temporary reopening effects, VAT-related revenue, foreign-exchange movements and other unusual charges.