Inspired(INSE) - 2024 Q2 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) The company reported a net loss and revenue decline for the six months ended June 30, 2024, with a significant reversal in operating cash flow compared to the prior year Condensed Consolidated Balance Sheets Balance Sheet Summary (as of June 30, 2024 vs. December 31, 2023) | Balance Sheet Items | June 30, 2024 (in millions) | December 31, 2023 (in millions) | | :--- | :--- | :--- | | Assets | | | | Cash | $23.5 | $40.0 | | Total current assets | $135.5 | $152.5 | | Total assets | $326.6 | $340.9 | | Liabilities & Stockholders' Deficit | | | | Total current liabilities | $87.7 | $100.7 | | Long-term debt | $294.0 | $295.6 | | Total liabilities | $404.0 | $418.9 | | Total stockholders' deficit | $(77.4) | $(78.0) | Condensed Consolidated Statements of Operations Statement of Operations Summary (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $75.6 | $79.4 | $138.7 | $144.3 | | Net Operating Income | $9.4 | $13.8 | $8.0 | $18.4 | | Net Income (Loss) | $2.0 | $5.6 | $(3.7) | $4.2 | | Diluted EPS | $0.07 | $0.19 | $(0.13) | $0.14 | Condensed Consolidated Statements of Cash Flows Cash Flow Summary for Six Months Ended June 30 (in millions) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(2.1) | $32.5 | | Net cash used in investing activities | $(13.5) | $(16.0) | | Net cash used in financing activities | $(0.5) | $(0.8) | | Net (decrease) increase in cash | $(16.5) | $17.1 | Notes to Financial Statements Key disclosures detail debt covenant compliance, segment performance, and customer concentration, highlighting RCF compliance, mixed segment results, and reduced customer reliance - The company is in compliance with its Revolving Credit Facility (RCF) financial covenant, with a calculated net leverage of 3.1x as of June 30, 2024, well below the maximum requirement of 5.50x[24] - For the six months ended June 30, 2024, one customer accounted for 10% of total revenue, a decrease from 14% in the same period of 2023[49] - The company maintains a full valuation allowance against its deferred tax assets but believes there is a reasonable possibility that a significant portion of this allowance may be reversed within the next twelve months, which would decrease income tax expense[34] Management's Discussion and Analysis (MD&A) Q2 2024 saw a 5% revenue decrease and a significant net income decline, primarily due to segment performance and increased SG&A, though liquidity remains sufficient with debt covenant compliance Overall Company Results Q2 2024 results show a 5% revenue decrease and a 64% net income decline, primarily driven by lower service revenues and increased SG&A expenses including restatement costs Overall Company Performance - Q2 2024 vs Q2 2023 (in millions) | Metric | Q2 2024 | Q2 2023 | Reported Variance % | Functional Currency Variance % | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $75.6 | $79.4 | (5)% | (6)% | | Net Operating Income | $9.4 | $13.8 | (32)% | (35)% | | Net Income | $2.0 | $5.6 | (64)% | (68)% | - SG&A expenses increased by $5.4 million (23% on a functional currency basis) in Q2 2024, primarily due to $2.8 million in costs for the restatement of prior financial statements and $0.7 million in restructuring costs[69] Segment Analysis Q2 2024 segment performance was mixed, with strong growth in Interactive revenue and operating income offsetting declines in Gaming and Virtual Sports, while Leisure remained stable Segment Revenue - Q2 2024 vs Q2 2023 (in millions) | Segment | Q2 2024 Revenue | Q2 2023 Revenue | % Change | | :--- | :--- | :--- | :--- | | Gaming | $27.1 | $31.1 | (13)% | | Virtual Sports | $11.7 | $15.1 | (23)% | | Interactive | $9.4 | $6.7 | +40% | | Leisure | $27.4 | $26.5 | +3% | Segment Operating Income - Q2 2024 vs Q2 2023 (in millions) | Segment | Q2 2024 Op. Income | Q2 2023 Op. Income | % Change | | :--- | :--- | :--- | :--- | | Gaming | $6.4 | $6.2 | +3% | | Virtual Sports | $7.0 | $12.1 | (42)% | | Interactive | $4.8 | $2.5 | +92% | | Leisure | $3.0 | $3.1 | (3)% | Non-GAAP Financial Measures Adjusted EBITDA decreased in Q2 and H1 2024, reflecting lower performance in Virtual Sports and Gaming segments alongside increased corporate costs Adjusted EBITDA Reconciliation Summary (in millions) | Period | Net Income (Loss) | Adjustments* | Adjusted EBITDA | | :--- | :--- | :--- | :--- | | Q2 2024 | $2.0 | $23.5 | $25.5 | | Q2 2023 | $5.6 | $21.6 | $27.2 | | H1 2024 | $(3.7) | $45.4 | $41.7 | | H1 2023 | $4.2 | $43.1 | $47.3 | - Adjustments to Net Income to calculate Adjusted EBITDA include depreciation & amortization, interest, taxes, stock-based compensation, and other non-recurring items like costs for group restructure ($0.8 million in Q2'24) and restatement ($2.8 million in Q2'24)[124][128] Liquidity and Capital Resources As of June 30, 2024, the company maintains sufficient liquidity with $23.5 million in cash and RCF availability, despite a significant decrease in operating cash flow due to timing of receipts - Cash and cash equivalents stood at $23.5 million as of June 30, 2024, down from $40.0 million at the start of the year[7][143] - Net cash from operating activities saw a significant decrease of $34.6 million for the six months ended June 30, 2024, compared to the same period in 2023, primarily due to the timing of invoicing and receipts related to a large terminal rollout in the prior year[136][137] - The company has a share repurchase program authorized up to $25.0 million, with $12.0 million used to repurchase 1,193,118 shares to date and no repurchases in the first six months of 2024[149] Critical Accounting Policies and Estimates Critical accounting policies involve significant management judgment, particularly in revenue recognition, goodwill impairment testing, and the capitalization of software development costs - Revenue recognition requires significant judgment in identifying performance obligations and determining stand-alone selling prices (SSP) for bundled products and services[154] - Goodwill is tested for impairment annually or when trigger events occur, with the last qualitative assessment as of December 31, 2023, concluding that reporting unit fair values substantially exceeded their carrying values[156][160] - The company capitalizes certain software development costs after technological feasibility is established, amortizing them over an estimated useful life of two to five years[163][164][165] Market Risk Disclosures The company's primary market risks are foreign currency exchange rate fluctuations, mainly GBP to USD translation, and interest rate risk, which is mitigated by fixed-rate borrowings - The company's primary market risk is foreign currency exchange rate fluctuations, particularly between its functional currency (GBP) and reporting currency (USD)[167][169] - Interest rate risk is considered low as the company's main external borrowings of £235.0 million ($297.1 million) are at a fixed rate[168] Controls and Procedures Disclosure controls and procedures were deemed ineffective as of June 30, 2024, due to previously identified material weaknesses, though management asserts fair presentation of financial statements - The company's disclosure controls and procedures were concluded to be ineffective as of June 30, 2024, due to previously disclosed material weaknesses[174] - Notwithstanding the material weaknesses, management asserts that the interim financial statements included in the report are fairly presented in all material respects[175] Part II. Other Information Legal Proceedings The company is cooperating with an SEC subpoena received on March 12, 2024, regarding its restated financial statements, with the ultimate outcome and financial impact currently uncertain - On March 12, 2024, the company received an SEC subpoena concerning its restated financial statements and is cooperating with the inquiry[176] - The outcome of the SEC investigation is uncertain and cannot be estimated at this time, but could result in substantial monetary penalties[177] Risk Factors and Other Items No new risk factors are presented in this quarterly report, with investors directed to the 2023 Annual Report on Form 10-K for detailed risk discussions - There are no updates to the risk factors; the company refers to the discussion in its 2023 Annual Report on Form 10-K[178]