Inspired Entertainment, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars unless otherwise indicated. Inspired supplies gaming content, platforms, terminals and related services to regulated online and land-based operators.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $71.3m | $41.5m | $131.9m | $64.3m |
| Operating income (loss) | $13.4m | $(9.7)m | $20.3m | $(21.9)m |
| Net income (loss) | $7.5m | $(43.8)m | $9.0m | $(60.5)m |
| Operating margin, approximate | 18.8% | (23.4)% | 15.4% | (34.1)% |
| Net margin, approximate | 10.5% | (105.5)% | 6.8% | (94.1)% |
| Adjusted EBITDA, non-GAAP | $26.1m | $8.0m | $46.2m | $11.9m |
Q2 revenue rose 72% as reported; first-half revenue more than doubled. Management’s constant-currency analysis reported increases of 91% and 121%, respectively. Growth was broad-based, particularly in Leisure and Gaming, as venues reopened after prior-year COVID-19 restrictions. Virtual Sports also grew strongly, while Interactive revenue increased modestly. Results are not directly comparable with 2021 because lockdowns and social-distancing measures affected land-based operations.
Q2 net income also benefited from lower interest expense and the absence of the prior-year warrant-liability fair-value loss. The 2021 comparison included a $10.5m Q2 warrant-liability loss and a $14.4m write-off of fees associated with prior debt financing; warrants expired in December 2021. These factors make the earnings improvement larger than operating growth alone suggests.
For the first half, operating cash flow was $15.9m, versus cash used of $12.8m in 2021. Investing activities used $22.0m, including $11.5m for property and equipment and $9.9m for capitalized software. Financing activities used $5.4m, including $5.1m of share repurchases. Cash fell by $16.0m to $31.8m, including a $4.5m adverse foreign-exchange effect. Operating cash flow less property-and-equipment and software purchases was approximately negative $5.5m.
At June 30, cash was $31.8m, working capital was $48.8m, and $24.3m was available under the undrawn revolver. Long-term debt on the balance sheet was $279.2m, compared with $309.0m at December 31, 2021. The company reported $357.4m of total liabilities and a $57.1m stockholders’ deficit. It was in compliance with its revolving-credit financial covenant at June 30; the covenant is conditional on a draw under the facility.
Material changes and operating developments
- Leisure revenue increased 157% in Q2 and 319% in the first half on a constant-currency basis, mainly reflecting reopened venues. Gaming revenue increased 75% and 97%, respectively; Virtual Sports revenue rose about 90% in both periods. Interactive revenue grew 12% in Q2 and 8% in the first half on a constant-currency basis.
- SG&A increased as staff returned from furlough and to full pay. First-half SG&A was $61.5m, versus $43.7m a year earlier. First-half depreciation and amortization declined to $19.9m from $25.0m as software became fully amortized.
- Inventory increased to $25.4m from $16.9m at year-end, partly reflecting component purchases to reduce the risk of production delays.
- In January, the company sold its Italian VLT business for approximately $1.1m and recognized a $0.9m gain; it continues to supply content and platform services in Italy. It also continued to serve lottery markets following its Sportech Lotteries acquisition.
- The Board authorized up to $25.0m of share repurchases through May 2025. The company repurchased 485,848 shares in Q2 for approximately $5.1m; about $19.9m remained available at quarter-end.
Outlook, risks and unusual items
No specific revenue, earnings or EBITDA guidance is provided in the filing. Management said available cash, expected operating cash flows, capital-project controls and borrowing availability were expected to fund net cash requirements through September 2023 in MD&A. A financial-statement note gives a different estimate—through August 2023, absent an unanticipated COVID-19 impact.
Risks highlighted include lingering COVID-19 effects, regulation, competition, technology change, customer and supplier relationships, cybersecurity, acquisition execution, working-capital needs, seasonality, foreign exchange, and global economic and political conditions. The filing specifically notes possible effects from the Russia-Ukraine conflict, sanctions, commodity and raw-material cost volatility, and financing or supply-chain difficulties among customers and suppliers. A 10% weakening of sterling against the U.S. dollar was estimated to reduce trading operating results by approximately $0.7m and cause an approximately $6.9m unfavorable translation adjustment in other comprehensive loss.
The UK defined-benefit pension scheme had a funding shortfall under its March 2021 actuarial valuation. A June 2022 recovery plan aims to eliminate it by October 2026; the company expected to pay $1.1m of deficit-reduction contributions and $0.4m of expense contributions during 2022. The filing reports no currently material legal matters and no off-balance-sheet arrangements.
Disclosure controls and procedures were assessed as not effective at the reasonable-assurance level at June 30, 2022, due to a previously disclosed material weakness. Remediation controls had been implemented but had not operated long enough to conclude the weakness was fully remediated. Management nevertheless stated that the interim financial statements fairly presented the company’s financial condition and results.
Important facts for investors to verify
- Reconcile the differing cash-runway estimates of August versus September 2023 and assess the assumptions behind both.
- Review debt terms, interest costs, maturity profile and covenant headroom; the contractual-obligations table lists $285.4m of senior-debt principal in the three-to-five-year bucket.
- Track whether operating cash generation can cover elevated investment spending and working-capital needs, particularly inventory growth.
- Assess the persistence of post-reopening land-based revenue and the extent to which year-over-year growth reflects the unusually restricted 2021 comparison period.
- Monitor remediation of the material weakness in disclosure controls and any related filings or updates.
- Consider the 13% revenue contribution from one customer, foreign-exchange exposure, pension recovery payments and the remaining share-repurchase authorization.
- Interpret Adjusted EBITDA alongside GAAP results: it is a company-defined non-GAAP measure and excludes specified expenses and other items.