Inspired Entertainment, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. Although the request identifies 2018 Q4, this filing presents full-year results, not standalone fourth-quarter results. The 2017 comparison covers 371 days versus 365 days in 2018; management also presents like-for-like comparisons adjusted for the six-day difference and currency movements. The company plans to move to a calendar-year fiscal year beginning in 2019.
Business context and performance
Inspired supplies digital gaming products and services to regulated operators, primarily through Virtual Sports (including Interactive) and Server Based Gaming (SBG). Most revenue is generated through participation or service arrangements; the company also sells hardware and licenses software. The UK accounted for 63.4% of FY2018 revenue, Greece 16.6%, Italy 13.2%, and the rest of the world 6.9%.
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Total revenue | $141.4 million | $122.5 million | Up 15.4% reported; up 10.4% like-for-like |
| Service revenue | $130.9 million | $107.5 million | Up 21.8% reported |
| Hardware revenue | $10.5 million | $15.0 million | Down 30.5% reported |
| Operating loss | $7.3 million | $11.9 million | Improved by $4.6 million |
| Net loss | $20.6 million | $49.1 million | Improved by $28.5 million; includes significant fair-value and other items |
| Adjusted EBITDA (non-GAAP) | $54.1 million | $40.7 million | 2017 comparator is adjusted to 365 days; review adjustments and reconciliation |
| Net cash from operations | $34.2 million | $18.3 million | Up $16.0 million |
| Net cash used in investing | $42.9 million | $35.4 million | Higher spending, including terminal rollout and production |
Segment trends: SBG revenue was $103.6 million, up 11.3% like-for-like, while segment operating income fell to $22.7 million from $24.4 million, primarily due to impairment and higher depreciation and amortization. Its average installed base grew 12.8% to 31,198 terminals, but customer net win per unit per day declined 4.3%. Virtual Sports revenue was $37.8 million, up 8.1% like-for-like; segment operating income fell to $16.0 million from $17.3 million. Interactive growth and new customers were partly offset by expired licenses, renewal timing, and other revenue adjustments.
Operating costs included $60.1 million of selling, general and administrative expense, $41.8 million of depreciation and amortization, $7.4 million of stock-based compensation, and a $7.7 million impairment charge. The impairment followed a strategic review and included software and other assets. Interest expense was $20.6 million, down from $29.4 million, principally reflecting the absence of former PIK loan-note interest. The reported net-loss improvement also reflected an $8.7 million credit from the change in earnout fair value, versus a $7.1 million charge in 2017.
Liquidity, debt and capital
At September 30, 2018, cash was $22.5 million and the company reported $6.2 million of working capital. It also had a $9.8 million revolving facility, undrawn at year-end; management reported total available liquidity of $32.0 million. The company generated $34.2 million from operations but used $42.9 million in investing activities. The filing notes that working capital includes an $8.0 million earnout liability and $9.2 million of deferred revenue.
In August 2018, the company refinanced its prior facilities with $140.0 million of five-year senior notes and a £7.5 million revolving facility. The notes mature August 13, 2023 and bear interest at 9% plus three-month LIBOR; the disclosed rate at September 30 was 11.39%, reduced to 10.87% under the cross-currency swaps. The revolver matures in August 2021, with a 4% plus LIBOR rate on drawn amounts. Debt is secured by substantially all assets and subject to leverage, fixed-charge coverage and minimum-liquidity covenants. No covenant breaches were reported. Management said existing cash, expected operating cash flows, spending controls and borrowing availability should fund net cash requirements through December 2019.
Total assets were $207.9 million, total liabilities $220.4 million, and stockholders’ deficit $12.5 million. The company reported a $20.6 million net loss and loss per share of $0.99. It does not currently expect to pay cash dividends.
Material changes, outlook and risks
- UK B2 betting limit: The UK Government confirmed a reduction in the maximum B2 machine stake from £100 to £2, effective April 2019. The company estimated an initial annualized Adjusted EBITDA reduction of approximately £7–8 million ($10–11 million at the exchange rates then prevailing); the actual impact could differ or be greater.
- Refinancing: New debt replaced the previous facilities, including PIK-interest debt. The new notes have substantial cash interest costs and restrictive covenants; the filing identifies refinancing-related swap valuation effects.
- Growth and investment: Continued expansion in Greece supported SBG service revenue, while hardware sales fell. The company reported approximately 5,550 Greek SBG terminals installed and 8,360 contracted at year-end, with phase-two deployment planned by mid-2019. It continued investment in terminals, software and new markets.
- Cost and operating changes: A UK operations consolidation and relocation, with ongoing headcount reductions, was expected to continue through 2019. Exit costs could not be reliably estimated.
- Concentration and regulation: The top ten customers generated approximately 70% of revenue; three customers individually represented 24%, 17% and 13%. Gaming regulation, contract renewal, customer performance and tax changes may materially affect revenue. Greek capital controls could delay transfers of cash held there.
- Other risks: The filing highlights competition, foreign-exchange exposure, cybersecurity and data privacy, technology change, supplier dependence, acquisition execution, and economic and political uncertainty, including Brexit. Ordinary-course legal matters were described as not currently material, with no assurance against future adverse effects.
The company reported effective disclosure controls and effective management-assessed internal control over financial reporting at September 30, 2018; its auditor did not provide an internal-control attestation. The financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Obtain standalone FY2018 fourth-quarter results separately; this filing’s comparisons are annual and the 2017 period is six days longer.
- Assess the realized effect of the UK £2 B2 stake limit against management’s £7–8 million annualized Adjusted EBITDA estimate, including mitigation and customer responses.
- Review debt terms, cash interest, covenant headroom, swap exposure and liquidity after the refinancing; verify whether cash generation supports the stated runway through December 2019.
- Reconcile Adjusted EBITDA to GAAP results and assess the recurring versus exceptional nature of add-backs, impairment, stock compensation and fair-value movements.
- Track customer and geographic concentration, SBG win-per-terminal trends, Greek rollout economics, and the timing and returns of capital spending.
- Confirm the final earnout share settlement and the costs and completion status of the UK restructuring and operational consolidation.