Inspired(INSE) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Presents the company's financial position, operations, and cash flows, showing decreased assets and widened net loss year-over-year Condensed Consolidated Balance Sheets | Balance Sheet Items (in millions USD) | Sep 30, 2019 (Unaudited) | Sep 30, 2018 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $58.0 | $58.6 | | Total assets | $175.4 | $207.9 | | Liabilities & Stockholders' Deficit | | | | Total current liabilities | $51.2 | $52.3 | | Long-term debt | $132.8 | $131.2 | | Total liabilities | $207.2 | $220.4 | | Total stockholders' deficit | $(31.8) | $(12.5) | - Total assets decreased from $207.9 million to $175.4 million year-over-year, primarily due to decreases in property and equipment. Total liabilities decreased slightly, but the total stockholders' deficit widened from $(12.5) million to $(31.8) million[9] Condensed Consolidated Statements of Operations and Comprehensive Loss | Metric (in millions USD, except per share) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $26.6 | $35.6 | $87.0 | $110.0 | | Net operating loss | $(5.7) | $(3.7) | $(10.9) | $(2.9) | | Net loss | $(8.5) | $(11.9) | $(24.2) | $(16.4) | | Net loss per common share – basic and diluted | $(0.38) | $(0.57) | $(1.11) | $(0.79) | - For the nine months ended September 30, 2019, revenue declined by 20.9% YoY to $87.0 million, and net loss widened to $24.2 million from $16.4 million in the prior-year period[12] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (in millions USD) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $22.4 | $34.4 | | Net cash used in investing activities | $(16.5) | $(36.1) | | Net cash provided by financing activities | $9.0 | $12.9 | | Net increase in cash | $13.6 | $11.5 | - Cash from operations decreased to $22.4 million for the nine-month period, down from $34.4 million YoY. Cash used in investing activities significantly decreased to $16.5 million from $36.1 million, primarily due to lower purchases of property and equipment[19] Notes to Condensed Consolidated Financial Statements Provides details on operating segments, a significant acquisition, fiscal year-end change, and customer concentration - The company operates in two segments: Server Based Gaming (SBG) and Virtual Sports, providing omni-channel gaming solutions to regulated operators worldwide[20][130] - On October 1, 2019, the company completed the acquisition of Novomatic UK's Gaming Technology Group (NTG) and entered into a new Senior Facilities Agreement to finance the transaction and refinance existing debt[21][144][148] - The Board of Directors approved a change in the company's fiscal year end from September 30 to December 31, commencing with the year ending December 31, 2019[24] - For the nine months ended September 30, 2019, three customers accounted for 20%, 16%, and 10% of total revenues, indicating significant customer concentration[141] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Discusses financial performance, attributing revenue decline to regulatory changes and detailing liquidity post-acquisition Results of Operations Analyzes the 20.9% revenue decline and increased net loss, primarily due to UK regulatory impacts on the SBG segment | Metric (in millions USD) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $87.0 | $110.0 | (20.9)% | | Net Operating Loss | $(10.9) | $(2.9) | 275.6% | | Net Loss | $(24.2) | $(16.4) | 47.5% | - The decrease in SBG service revenue was primarily due to a $11.4 million decline in the UK LBO market, with $10.7 million of that driven by the Triennial Implementation which reduced maximum permitted bets on B2 gaming machines[261] - Virtual Sports revenue remained flat on a functional currency basis, with growth from UK and new customers offset by the rephasing of a major contract and the full amortization of some long-term licenses[263][312] - Acquisition and integration related transaction expenses increased to $4.9 million for the nine-month period, related to the acquisition of Novomatic UK's Gaming Technology Group[268] Non-GAAP Financial Measures Reconciles net loss to non-GAAP Adjusted EBITDA, which decreased to $31.3 million for the nine-month period | Reconciliation (in millions USD) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net loss | $(24.2) | $(16.4) | | Costs of group restructure | $3.1 | $2.1 | | Acquisition and integration related transaction expenses | $4.9 | $0.3 | | Stock-based compensation expense | $6.6 | $4.2 | | Impairment expense | - | $7.7 | | Depreciation and amortization | $27.1 | $32.3 | | Total other expense, net | $13.2 | $13.4 | | Income tax | $0.1 | $0.1 | | Adjusted EBITDA | $31.3 | $44.3 | Liquidity and Capital Resources Details cash position, operating cash flow, and new financing facilities secured for the Novomatic UK acquisition - On October 1, 2019, the company refinanced its debt to fund the Novomatic acquisition, entering into new term loans totaling £140.0 million and €90.0 million, and a £20.0 million revolving credit facility[346][347][348] - Net cash provided by operating activities decreased by $12.0 million YoY, while net cash used in investing activities decreased by $19.6 million due to lower capital expenditures on machines[327][333] - Management believes cash on hand, cash from operations, and the new financing facilities will be sufficient to fund net cash requirements through November 2020[337] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Addresses market risks from interest rate fluctuations on floating-rate debt and foreign currency exchange rate exposures - The company is exposed to interest rate risk on its £113.6 million ($140.0 million) of senior bank debt, which has a floating interest rate tied to 3-month LIBOR. A 1% increase in rates would add approximately $1.1 million in annual interest charges[361] - Significant foreign currency exchange rate risk exists due to operations in multiple currencies, with the British Pound (GBP) as the functional currency and the U.S. Dollar (USD) as the reporting currency. The company uses cross-currency swaps to mitigate some of this risk, particularly related to its USD-denominated debt[363][366] ITEM 4. CONTROLS AND PROCEDURES Confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls - The company's Certifying Officers concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[369] - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[370] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS States that the company is not currently involved in any material legal proceedings - As of the filing date, the company reports no material legal proceedings[373] ITEM 1A. RISK FACTORS Highlights risks including customer concentration, regulatory changes, acquisition integration challenges, and restrictive debt covenants - The company is heavily dependent on renewing long-term contracts and relies on a small number of customers for a significant portion of its revenue, with the top ten customers generating approximately 75% of total revenues in the first nine months of 2019[375][378] - The business is subject to strict and evolving government regulations in the gaming industry, and changes in laws or taxes could adversely affect customer revenues and, consequently, the company's revenue-sharing agreements[377][381] - Significant risks are associated with the recent acquisition of Novomatic's Gaming Technology Group, including substantial integration costs and the challenge of combining different corporate cultures, systems, and operations[409][410] - The company's new debt facilities, entered into for the acquisition, contain restrictive covenants that could limit its operational and financial flexibility, including restrictions on incurring additional debt, making distributions, and capital expenditures[399][400][405] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Reports no unregistered sales of equity securities during the period - None[412]