Inspired Entertainment, Inc. quarterly report, Q1 FY2024

Inspired Entertainment, Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024; compared with Q1 2023. The company supplies gaming content, platforms, terminals and services to regulated operators. Unless otherwise stated, financial amounts are in U.S. dollars.

Financial results and liquidity

Service revenue was $57.1m and product sales $6.0m. Cost of service and product sales, excluding depreciation and amortization, totaled $20.4m; operating expenses also included $34.2m of SG&A and $9.9m of depreciation and amortization. Net operating margin was approximately negative 2.2%. Adjusted EBITDA, a non-GAAP measure, was $16.3m versus $20.1m (approximately 25.8% and 31.0% of revenue, respectively); Q1 2024 included a $5.0m add-back for restatement-related costs.

At March 31, cash was $35.3m, down from $40.0m at year-end. The company reported $6.3m of undrawn revolver capacity and working capital “in addition to cash” of $14.7m. Total debt on the balance sheet was $312.2m, comprising $18.9m current and $293.3m long-term; the company also reports £235.0m ($296.9m) original-principal senior debt and $18.9m drawn on its revolver. The senior debt is fixed-rate. Revolver covenant net leverage was 2.9x against a 5.5x maximum; no covenant breach was reported. Stockholders’ deficit was $81.2m.

Material changes versus Q1 2023

• Revenue declined $1.8m (3% as reported; 7% on management’s constant-currency basis). Gaming revenue fell $4.1m and Virtual Sports fell $3.0m; Interactive grew $1.8m and Leisure grew $0.8m.
• SG&A increased, with management citing $5.0m of restatement work and $0.7m of additional audit and accounting costs; lower prior-year restructuring costs partly offset the increase. Operating results deteriorated by $6.0m, from $4.6m income to a $1.4m loss.
• Operating cash flow decreased $8.0m, which the company attributes to the higher loss and favorable prior-year timing of receipts. Investing cash outflow was $7.7m; cash decreased $4.7m during the quarter.
• Interactive growth reflected new content and operator launches; Virtual Sports weakness was concentrated in online revenue, including customer-base optimization by a major customer. Gaming’s new Vantage terminal had more than 240 installations during the quarter.

Outlook, risks and unusual items

Management believes cash, expected operating cash flows, the ability to defer capital projects and external borrowings should fund net cash requirements through May 2025. No specific revenue or earnings guidance is provided. The company identifies seasonality, with holiday-park activity generally higher in Q2 and Q3, and notes significant UK exposure and foreign-exchange sensitivity. It estimates a 10% weakening of GBP against USD would favorably affect trading results by about $0.1m but cause approximately $9.4m of unfavorable translation adjustments in other comprehensive loss.

The company’s disclosure controls were not effective as of March 31, 2024 because of previously reported material weaknesses; management says remediation is underway. The company received an SEC subpoena on March 12, 2024 seeking documents related, among other matters, to recently restated financial statements. It is cooperating, but says the outcome, timing and potential costs—including possible monetary penalties or settlement costs—cannot currently be estimated. Management also reports a full valuation allowance on deferred tax assets, while stating a significant release may become possible within 12 months depending on profitability. Other risks include regulation, competition, customer and contract retention, cybersecurity, acquisition execution, working-capital needs and access to capital.

Other notable items: the UK defined-benefit pension plan had a funding shortfall, with a recovery plan targeting elimination by October 2026. No material ordinary-course legal matters, subsequent events requiring adjustment or disclosure, or off-balance-sheet arrangements were reported. Contractual obligations totaled $394.7m, including $296.9m of senior-debt principal scheduled in the 3–5 year bucket and $49.6m due within one year.

Key facts for investors to verify

• Progress and financial impact of remediation of material weaknesses, and the status and eventual outcome of the SEC inquiry and financial-statement restatement work.
• Underlying operating performance and cash generation, particularly whether Gaming and Virtual Sports declines persist and Interactive growth offsets them.
• Debt terms, refinancing or repayment plans, revolver availability and covenant headroom; confirm the relationship between reported balance-sheet debt and original-principal debt amounts.
• Liquidity assumptions supporting management’s funding outlook through May 2025, including working-capital requirements, capital spending and operational cash floats.
• Any change in deferred-tax valuation allowance, pension funding requirements, or the company’s share-repurchase authorization.