Inspired Entertainment, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; interim financial statements are unaudited. Amounts are in U.S. dollars unless stated otherwise. Inspired is a global business-to-business gaming technology company serving regulated gaming, betting and lottery operators. Results include the Gaming Technology Group acquired from Novomatic UK on October 1, 2019; the prior-year comparison does not include that business.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $52.3 million | $33.7 million; up 55.4% reported |
| Operating loss | $7.2 million | $0.7 million loss |
| Net loss | $17.4 million; $0.78 per diluted share | $5.0 million; $0.24 per diluted share |
| Adjusted EBITDA (non-GAAP) | $10.1 million | $13.7 million; prior period excludes acquired business |
| Cash from operations | $11.1 million | $8.3 million |
| Cash used in investing | $11.0 million | $5.2 million |
| Cash and working capital at March 31 | $48.5 million cash; $5.5 million working capital | Cash was $29.1 million at December 31, 2019 |
| Debt | $283.2 million total current and long-term debt on the balance sheet; $258.4 million long-term and $24.8 million current | Debt table reports net debt of $259.2 million after cash and other listed items |
Revenue growth primarily reflects $27.4 million from the acquired business, which contributed $21.4 million of service revenue and $6.0 million of hardware revenue. Excluding it, SBG revenue declined 28.5% on management’s constant-currency basis and Virtual Sports revenue declined 8.4%. The company reported an operating margin of approximately negative 13.8% (operating loss divided by revenue). SG&A rose to $29.1 million from $14.7 million, principally reflecting the acquisition. Interest expense was $6.1 million, versus $4.4 million; other finance expense included adverse foreign-exchange effects on debt.
Cash from operations was supported by working-capital timing, including supplier payments and accruals; accounts receivable used $10.0 million of cash. Investing outflows included $8.4 million for property and equipment and $3.6 million for capitalized software. Financing inflows included a $22.3 million revolver draw, which increased cash while adding debt. The company’s $5.5 million working-capital figure includes $10.0 million of non-cash-settled deferred income.
Material changes and operating trends
- COVID-19: Government-mandated venue closures began in key markets during March. Inspired attributed $2.1 million of the quarter’s SBG service-revenue decline to closures and said some acquired-business venue revenue fell to almost zero during the final two weeks of the quarter.
- SBG: UK regulatory changes under the Triennial Implementation, Italy’s higher gaming taxes and player-card requirement, and closures weighed on results. The SBG installed base was down 7.1%; customer gross win per unit per day fell 37.9% and net win per unit per day fell 33.8%.
- Virtual Sports: Retail revenue declined amid closures, partly offset by growth in Scheduled Online Virtuals and Interactive. Live customers increased to 110 from 101, while average revenue per customer per day decreased.
- Acquired Businesses: Added significant revenue and operating costs. The segment recorded a $2.2 million operating loss for the quarter. Pub digital Category C machines increased as a share of the pub estate, but shutdowns reduced machine revenue late in the quarter.
- Reported earnings: Net loss widened by $12.4 million. Alongside lower legacy-segment revenue and acquired-business costs, the comparison included higher interest and other finance expense; Q1 2019 had a $2.3 million earnout-liability charge.
Outlook, risks and unusual items
- Management stated that, absent an unanticipated COVID-19 impact, cash, expected operating cash flows, external borrowing availability, and control or deferral of capital projects were expected to fund requirements through May 2021. This statement should be assessed in light of the subsequent interest-payment default and lender amendment.
- Inspired drew the remaining £18.0 million (approximately $22.3 million) available on its revolving facility on March 13. It also deferred 2019 bonuses, waived second-quarter Board retainer cash payments, and furloughed over 80% of its workforce, with remaining employees on reduced time and/or pay.
- Subsequent debt event: The company did not pay interest due April 1 of £5.7 million and €3.1 million, triggering a default under the senior facilities agreement. On April 6, lenders agreed to extend the applicable grace period to 75 calendar days and imposed additional reporting, a minimum-liquidity covenant, and restrictions on disposals, new debt and security. The agreement contemplated further debt amendments; failure to remedy the default could allow qualifying lenders to accelerate obligations. The amendment also increased applicable margins by 100 basis points.
- The senior term loans mature October 1, 2024; the revolving facility matures September 1, 2024. Term debt is floating-rate. The company estimated that a 1% increase in floating rates would add about $0.7 million in interest expense. New interest-rate swaps hedge portions of floating-rate debt through October 2023.
- Management cited uncertainty over the pandemic’s duration and effects on venues, customer demand and collections, product supply and development, alongside regulatory, foreign-exchange, interest-rate, customer-retention and funding risks. No specific revenue or earnings guidance is provided.
- Disclosure controls were assessed as ineffective at March 31, 2020 because of a previously reported material weakness; remediation controls had not operated long enough to conclude the weakness was resolved.
- The company impaired its Innov8 investment by $0.7 million and disposed of its 40% interest in April. It reported no currently material legal proceedings and no off-balance-sheet arrangements.
Investor verification priorities
- Check the status and terms of the April interest default, grace-period conditions, lender negotiations, minimum-liquidity compliance and any acceleration or refinancing risk.
- Verify cash availability, near-term cash requirements, collections and the effects of venue reopening or continued closures; distinguish cash generation from working-capital timing and revolver borrowing.
- Assess post-acquisition segment profitability and integration costs, and compare Adjusted EBITDA cautiously because Q1 2019 excludes the acquired business.
- Track customer machine activity and revenue recovery in SBG and acquired venues, alongside online and Interactive growth in Virtual Sports.
- Review progress in remediating the material weakness in disclosure controls and the effect of floating-rate debt and currency movements.