Filing identity and reporting period
Important identity mismatch: The supplied filing is Hydra Industries Acquisition Corp.’s Form 10-Q for the quarter ended September 30, 2016—not an operating-company filing for Inspired Entertainment, Inc. Hydra was a blank-check company pursuing the proposed acquisition of Inspired Gaming Group. Accordingly, the financial results below are Hydra’s pre-combination results, not Inspired’s operating results.
Financial results and liquidity
| Metric | Three months ended Sep. 30, 2016 | Nine months ended Sep. 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Operating revenue | None | None | None |
| Operating costs / loss from operations | $522,752 | $2,014,721 | $715,863 / $2,805,920; $2,805,920 / $2,805,920, respectively |
| Net loss | $478,933 | $1,901,714 | $720,771 / $2,797,680 |
| Basic and diluted loss per share | $0.15 | $0.62 | $0.25 / $1.02 |
| Operating cash used | Not separately presented | $842,379 | $717,421 |
The filing’s operating-cost and loss-from-operations figures are the same. Profit margins are not meaningful because Hydra had no operating revenue. Net loss improved year over year, while operating cash use increased.
At September 30, 2016, Hydra had $218,358 of cash outside the trust account and $80,017,988 in restricted trust assets, primarily U.S. Treasury bills. Current assets were $242,108; current liabilities were $4,477,991, resulting in a $4,235,883 working-capital deficit. Total liabilities were $7,277,991, including $500,000 of related-party convertible notes, $200,000 of related-party notes, and $2,800,000 of deferred underwriting fees payable upon a business combination. Stockholders’ equity was $5,000,001. The trust balance was not available to pay ordinary liabilities before a business combination.
Cash used in operations was partly offset by $700,000 of sponsor financing and $104,498 of trust interest withdrawn; cash outside the trust declined by $37,881 to $218,358. No long-term debt was reported for Hydra.
Material changes and transaction developments
- For the nine months, net loss fell to $1.90 million from $2.80 million in 2015; operating costs fell to $2.01 million from $2.81 million. Interest income rose to $106,534 from $14,520.
- On July 13, 2016, Hydra agreed to acquire Inspired Gaming Group for a stated transaction value of £200 million (about $264 million at the stated exchange rate), plus a potential earn-out of up to $25 million in shares. The purchase price and cash-versus-stock mix were subject to specified adjustments and available funds.
- A $20 million contingent forward purchase by the Macquarie sponsor was intended to support transaction funding, subject to transaction conditions and sponsor approval. Closing also required stockholder and gaming-regulatory approvals and other customary conditions.
- After quarter-end, stockholders approved extending Hydra’s business-combination deadline to December 29, 2016. Holders redeemed 3,415,392 shares for $34,153,920; sponsors subsequently contributed $229,230 to the trust, increasing the stated amount for remaining public shares from about $10.00 to about $10.05 per share.
Outlook, risks and unusual items
- Management stated that Hydra had not begun operations and expected no operating revenue until a business combination. It expected continuing public-company, due-diligence and transaction expenses.
- The filing concluded that conditions raised substantial doubt about Hydra’s ability to continue as a going concern: limited operating cash, a working-capital deficit, substantial accrued obligations, and no binding commitment for additional funding beyond specified sponsor loans. Management said it might need to curtail operations or suspend transaction efforts if further financing was unavailable.
- As of September 30, Hydra reported approximately $1.3 million of fees incurred in connection with the proposed Inspired transaction, approximately $650,000 included in payables, and $973,000 not accrued because payment was contingent on closing. These stated amounts do not clearly reconcile and should be checked against the underlying disclosures.
- The transaction included an accruing negative-consideration adjustment of £21,500 per day from July 2 through closing, a minimum £5 million cash retention provision, and a performance-based earn-out payable in shares. The final consideration and dilution were therefore uncertain.
- Other risks include transaction failure before the extended deadline, redemption-driven reduction in available cash, potential dilution from stock consideration or warrants, and reliance on sponsor funding. Hydra reported no material change to its previously disclosed risk factors, no legal proceedings, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Confirm the intended issuer: this filing is Hydra Industries Acquisition Corp.’s, despite the request identifying Inspired Entertainment, Inc.
- Check whether the Inspired acquisition closed, its final consideration and financing, and any subsequent operating results; this 10-Q does not report Inspired’s standalone financial performance.
- Reconcile the transaction-fee disclosures, including the approximately $1.3 million incurred, $650,000 accrued, and $973,000 contingent amounts.
- Verify the effects of the post-quarter redemptions, sponsor contribution, remaining trust funds, and final share count and dilution.
- Assess Hydra’s going-concern warning, outstanding adviser liabilities, and availability of funding if the transaction did not close by the extended deadline.