Inspired Entertainment, Inc. — Transition Report Summary
Reporting period: The filing is a Form 10-QT covering October 1 through December 31, 2018, following the company’s change to a calendar-year fiscal year. Although the request labels this 2019 Q1, the filing’s financial period is the three months ended December 31, 2018. Comparative results are for the three months ended December 31, 2017. Amounts below are U.S. dollars unless indicated.
Business context
Inspired is a global business-to-business gaming technology company serving regulated operators. It reports two segments: Server Based Gaming (SBG) and Virtual Sports, which includes Interactive.
Financial performance and position
| Metric | Period / amount | Comparison or context |
|---|---|---|
| Revenue | $30.7 million | Down 2.1% reported year over year; up 2.3% at constant functional-currency rates. Service revenue was $30.0 million; hardware revenue was $0.7 million. |
| Operating loss | $2.4 million | Improved from a $4.4 million loss. Lower SG&A, stock compensation and acquisition costs more than offset higher service costs. |
| Net loss | $4.7 million; $0.23 per share | Compared with a $4.2 million loss and $0.20 per share in the prior-year quarter. |
| Adjusted EBITDA | $10.5 million | Non-GAAP measure, up from $9.8 million; the filing’s reconciliation includes adjustments such as stock compensation, restructuring, transaction expenses and prior-year Italian tax costs. |
| Operating cash flow | $0.9 million provided | Compared with $0.1 million used in the prior-year quarter. |
| Investing cash flow | $6.6 million used | Included $3.2 million of property and equipment purchases and $3.4 million of capital software purchases. |
| Cash | $16.0 million at December 31 | Down $6.5 million from September 30; included $1.2 million held in Greece. |
| Liquidity | $6.6 million working capital; $9.3 million undrawn revolver | Management noted that working capital includes non-cash earnout and deferred-revenue balances. |
| Debt | $140.0 million senior debt principal | Due in 2023; book value was $131.5 million after deferred financing charges. No revolving-credit borrowings were outstanding. |
| Stockholders’ deficit | $18.4 million | Total liabilities were $205.0 million and total assets were $186.6 million. |
Changes versus the prior comparable period
- Reported revenue declined $0.7 million, mainly from adverse currency translation; constant-currency revenue increased $0.7 million. SBG constant-currency revenue grew 3.0%; Virtual Sports revenue was broadly flat.
- SBG participation revenue increased 10.6% in pounds sterling, and recurring revenue rose to 87.4% of SBG revenue from 81.6%. The installed base grew 15.3% to 34,578 terminals, while customer gross win per unit per day fell 5.4%.
- Virtual Sports live customers increased to 100 from 86, but revenue per customer per day decreased 13.1%. Recurring revenue increased 6.0% in pounds sterling.
- SG&A declined to $15.3 million from $16.4 million. Stock-based compensation declined to $1.6 million from $3.2 million, partly because the prior-year period included a $2.1 million award-modification charge.
- Interest expense decreased to $4.1 million from $4.9 million following the August 2018 refinancing. However, other finance costs and the smaller earnout fair-value credit contributed to the higher net loss.
Outlook, commentary and risks
- Management said cash on hand, expected operating cash flows, control over capital spending and available borrowings were expected to cover net cash requirements. The filing is inconsistent on the time horizon: the notes say through February 2020, while MD&A says through March 2020.
- The company expected approximately $6.2 million of UK office consolidation costs and investment, including about $1.9 million of capital investment and $4.3 million of one-time costs, mostly during 2019.
- The UK government’s planned reduction in maximum permitted bets on B2 gaming machines, effective April 2019, was identified as a risk. Other cited risks include competition, regulation, customer and contract retention, technology change, financing needs, currency movements and execution of growth plans.
- Cash transfers from Greece may be delayed or restricted by local capital controls. Three customers each represented at least 10% of quarterly revenue; together they accounted for 52%.
- The senior debt bears a floating rate; the filing states a 10.87% rate after the cross-currency swaps. The debt is secured, and the company reported compliance with its covenants. Minimum liquidity under the facilities was $5.0 million.
- The company recorded $0.9 million of prior-year Italian tax-related costs in the quarter and excluded them from Adjusted EBITDA. It reported no currently material legal matters and no material changes to risk factors since its 2018 Form 10-K.
Important facts for investors to verify
- Confirm the period being analyzed: this filing covers October–December 2018, not January–March 2019.
- Reconcile management’s cash-sufficiency horizon of February versus March 2020 and assess cash availability, including the funds held in Greece and the undrawn revolver.
- Review the $140 million senior debt’s cash interest burden, currency swaps, 2023 maturity, covenants and refinancing capacity.
- Monitor the effects of the UK B2 betting-limit change, especially on SBG terminal performance and customer economics.
- Track whether Greek rollout growth and Virtual Sports customer additions translate into revenue and operating profit, given lower SBG win metrics and lower Virtual Sports revenue per customer.
- Assess the non-GAAP Adjusted EBITDA reconciliation, including restructuring and tax adjustments, alongside GAAP losses and cash generation.