NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In this filing, we refer to: (a) our unaudited condensed consolidated financial statements and notes thereto as our “Financial Statements,” (b) our Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income as our “Statements of Operations,” and (c) our Unaudited Condensed Consolidated Balance Sheets as our “Balance Sheets.”
1. BUSINESS
Everi Holdings Inc. (“Everi Holdings,” or “Everi”) is a holding company, the assets of which are the issued and outstanding shares of capital stock of each of Everi Payments Inc. (“Everi FinTech” or “FinTech”) and Everi Games Holding Inc., which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (“Everi Games” or “Games”). Unless otherwise indicated, the terms the “Company,” “we,” “us,” and “our” refer to Everi Holdings together with its consolidated subsidiaries.
Everi is a leading supplier of entertainment and technology solutions for the casino, interactive, and gaming industry. With a focus on both customers and players, Everi develops, sells, and leases games and gaming machines, gaming systems and services, and is an innovator and provider of core financial products and services, self-service player loyalty tools and promotion management software, and intelligence and regulatory compliance solutions. Everi’s mission is to provide casino operators with games that facilitate memorable player experiences, offer secure financial transactions for casinos and their patrons, and deliver software applications and self-service tools to improve casino operations’ efficiencies and fulfill regulatory compliance requirements.
Everi Holdings reports its results of operations based on two operating segments: Games and FinTech.
Everi Games provides gaming operators with gaming technology products and services, including: (a) gaming machines, primarily comprising Class II and Class III slot machines placed under participation or fixed-fee lease arrangements or sold to casino customers; (b) providing and maintaining the central determinant systems for the video lottery terminals (“VLTs”) installed in the State of New York and similar technology in certain tribal jurisdictions; and (c) business-to-consumer (“B2C”) and business-to-business (“B2B”) interactive gaming activities.
Everi FinTech provides gaming operators with financial technology products and services, including: (a) services and equipment that facilitate casino patrons’ self-service access to cash at gaming facilities via Automated Teller Machine (“ATM”) cash withdrawals, credit card cash access transactions and point-of-sale (“POS”) debit card purchase and cash access transactions; (b) check warranty services; (c) self-service player loyalty enrollment and marketing equipment, including promotion management software and tools; (d) software and services that improve credit decision making, automate cashier operations, and enhance patron marketing activities for gaming establishments; (e) equipment that provides cash access and other cash handling efficiency-related services; and (f) compliance, audit, and data solutions.
Impact of COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility in the financial markets, increased unemployment levels, caused temporary, and in certain cases, closures of many businesses. The gaming industry was not immune to these factors as our casino customers closed their gaming establishments in March of this year, and as a result, our operations have experienced significant disruptions. In light of the COVID-19 pandemic, we have been affected by various measures, including, but not limited to: the institution of social distancing and sheltering-in-place requirements in many states and communities, which significantly impacted demand for our products and services, and which resulted in office closures, the furlough of approximately 80% of our employees, and the implementation of a work-from-home policy to protect our remaining employees and their families from potential virus transmission among co-workers.
The impact of the COVID-19 pandemic also exacerbates the risks disclosed in the Annual Report, including, but not limited to: our ability to comply with the terms of our indebtedness, our ability to generate revenues, earn profits and maintain adequate liquidity, our ability to service existing and attract new customers, maintain our overall competitiveness in the market, the potential for significant fluctuations in demand for our services, overall trends in the gaming industry impacting our business, as well as potential volatility in our stock price.
The impact of the COVID-19 pandemic on the Company’s operations, and significant and sustained decline in our stock price, qualified as a triggering event necessitating the evaluation of our long-lived assets and goodwill for indicators of impairment.
Liquidity
While our revenues from January 2020 through the middle of March 2020 were on pace to potentially exceed the results from the same period in the prior year, the closure of casino properties in light of COVID-19 resulted in reductions in revenue and had a significant impact on our results of operations and financial condition.
In March 2020, we completed the full draw down of our available capacity of $35.0 million under the Revolving Credit Facility in order to improve our liquidity and preserve financial flexibility in light of the uncertainty in our industry and the global economy as a result of COVID-19 (as discussed and defined in “Note 12 — Long-Term Debt”).
In April 2020, we entered into a fourth amendment (the “Fourth Amendment”) to our existing Credit Agreement (as defined in “Note 12 — Long-Term Debt”), which among other things, amended our debt covenants to provide relief with respect to our senior secured leverage ratio (as discussed in “Note 19 — Subsequent Events”).
In April 2020, we also entered into a new credit agreement, which provides for a $125.0 million senior secured term loan, which is secured on a pari passu basis with the loans under our existing Credit Agreement. The entire amount was borrowed on the Closing Date (as discussed and defined in “Note 19 — Subsequent Events”).
We have implemented a range of actions to maintain balance sheet flexibility and preserve liquidity as a result of the business disruption caused by the rapid nationwide spread of COVID-19, including, but not limited to:
•The executive officers elected to accept the following reductions to their compensation during the pendency of the COVID-19 pandemic in order to better position the Company to withstand the challenging conditions that have caused global and domestic disruption in the current economic environment, such that: (a) the Chief Executive Officer will forgo 100% of his base salary compensation; (b) the President and Chief Operating Officer’s annual base salary will be reduced to $95,000; and (c) all other executive officers’ annual base salaries will be reduced to $110,000;
•The independent members of the Board of Directors of the Company elected to forgo 100% of their quarterly cash compensation for Board and related committee services;
•We furloughed approximately 80% of our staff;
•We reduced the salaries of those remaining non-executive employees anywhere from 15% to 70%;
•We suspended certain employee benefits, such as providing a Company match on 401(k) contributions;
•We implemented a remote working environment, including establishing a work-from-home policy for our employees;
•We cancelled or delayed material capital expenditures; and
•We suspended all share repurchases under our previously authorized repurchase program.
Government Relief
In late March 2020, the U.S. government enacted the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) in response to the COVID-19 pandemic. We have taken advantage of the following components contained within the CARES Act:
•Employee Retention Payroll Tax Credit: We are applying a credit against payroll taxes for 50% of eligible employee wages paid or incurred from March 13, 2020 to December 31, 2020. This employee retention payroll tax credit would be provided for as much as $10,000 of qualifying wages for each eligible employee, including health benefits;
•Employer Social Security Tax Payment Deferral: We are deferring payment of the employer portion of the social security taxes due on remaining payments and from enactment of the CARES Act through December 31, 2020, with 50% due by December 31, 2021 and 50% due by December 31, 2022; and
•Alternative Minimum Tax (“AMT”) Credit Refund: We are applying for a refund of our AMT tax credits as the CARES Act affords us the ability to accelerate the recovery of such credits.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our unaudited condensed consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. The results for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for the full fiscal year. The Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report.
We evaluate the composition of our revenues to maintain compliance with SEC Regulation S-X Section 210.5-3, which requires us to separately present certain categories of revenues that exceed the quantitative threshold on our Statements of Operations.
Revenue Recognition
Overview
We evaluate the recognition of revenue based on the criteria set forth in Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers and ASC 842 — Leases, as appropriate. We recognize revenue upon transferring control of goods or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We enter into contracts with customers that include various performance obligations consisting of goods, services, or combinations of goods and services. Timing of the transfer of control varies based on the nature of the contract. We recognize revenue net of any sales and other taxes collected from customers, which are subsequently remitted to governmental authorities and are not included in revenues or operating expenses. We measure revenue based on the consideration specified in a contract with a customer and adjust it, as necessary.
Disaggregation of Revenues
Contract Balances
Since our contracts may include multiple performance obligations, there is often a timing difference between cash collections and the satisfaction of such performance obligations and revenue recognition. Such arrangements are evaluated to determine whether contract assets and liabilities exist. We generally record contract assets when the timing of cash collections differs from when revenue is recognized due to contracts containing specific performance obligations that are required to be met prior to a customer being invoiced. We generally record contract liabilities when cash is collected in advance of us satisfying performance obligations, including those that are satisfied over a period of time. Balances of our contract assets and contract liabilities may fluctuate due to timing of cash collections.
The following table summarizes our contract assets and contract liabilities arising from contracts with customers:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
Contract assets(1)
|
|
|
|
|
|
Balance at January 1 — current
|
|
$
|
8,634
|
|
|
$
|
5,199
|
|
|
Balance at January 1 — non-current
|
|
6,774
|
|
|
6,111
|
|
|
Total
|
|
15,408
|
|
|
11,310
|
|
|
Balance at March 31 — current
|
|
8,559
|
|
|
7,058
|
|
|
Balance at March 31 — non-current
|
|
6,902
|
|
|
7,040
|
|
|
Total
|
|
15,461
|
|
|
14,098
|
|
|
Increase
|
|
$
|
53
|
|
|
$
|
2,788
|
|
|
Contract liabilities(2)
|
|
|
|
|
|
Balance at January 1 — current
|
|
$
|
29,150
|
|
|
$
|
14,661
|
|
|
Balance at January 1 — non-current
|
|
354
|
|
|
809
|
|
|
Total
|
|
29,504
|
|
|
15,470
|
|
|
Balance at March 31 — current
|
|
31,226
|
|
|
23,892
|
|
|
Balance at March 31 — non-current
|
|
185
|
|
|
458
|
|
|
Total
|
|
31,411
|
|
|
24,350
|
|
|
Increase
|
|
$
|
1,907
|
|
|
$
|
8,880
|
|
(1) The current portion of contract assets is included within trade and other receivables, net, and the non-current portion is included within other receivables, net in our Balance Sheets.
(2) The current portion of contract liabilities is included within accounts payable and accrued expenses, and the non-current portion is included within other accrued expenses and liabilities in our Balance Sheets.
We recognized approximately $11.0 million and $6.1 million in revenue that was included in the beginning contract liability balance during the three months ended March 31, 2020 and 2019, respectively.
Games Revenues
Our products and services include electronic gaming devices, such as Native American Class II offerings and other electronic bingo products, Class III slot machine offerings, VLTs, B2C and B2B interactive gaming activities, accounting and central determinant systems, and other back office systems. We conduct our Games segment business based on results generated from the following major revenue streams: (a) Gaming Operations; (b) Gaming Equipment and Systems; and (c) Gaming Other.
We recognize our Gaming Operations revenue based on criteria set forth in ASC 842 or ASC 606, as applicable. The amount of lease revenue included in our Gaming Operations revenues and recognized under ASC 842 was approximately $34.0 million and $33.8 million for the three months ended March 31, 2020 and 2019, respectively.
FinTech Revenues
Our FinTech products and services include solutions that we offer to gaming establishments to provide their patrons with cash access-related services, self-service player loyalty and marketing tools, and other information-related products and services. These solutions include: access to cash at gaming facilities via ATM cash withdrawals, credit card cash access transactions, and POS debit card purchase and cash access transactions; check warranty services; self-service ATMs and fully integrated kiosks and maintenance services; self-service player loyalty enrollment and marketing equipment, including promotion management software and tools; compliance, audit, and data software; casino credit data and reporting services; marketing and promotional offering subscription-based services; and other ancillary offerings. We conduct our FinTech segment business based on results generated from the following major revenue streams: (a) Cash Access Services; (b) Equipment; and (c) Information Services and Other.
Equipment revenues are derived from the sale of our cash access and loyalty kiosks and related equipment and are accounted for under ASC 606, unless such transactions meet the definition of a sales type or direct financing lease, which are accounted for under ASC 842. We did not have any new cash access kiosk and related equipment sales contracts accounted for under ASC 842 during the three months ended March 31, 2020 and 2019.
Restricted Cash
Our restricted cash primarily consists of: (a) funds held in connection with certain customer agreements; (b) deposits held in connection with a sponsorship agreement; (c) wide area progressive (“WAP”)-related restricted funds; and (d) Internet-related cash access activities. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Balance Sheets that sum to the total of the same such amounts shown in the statement of cash flows for the three months ended March 31, 2020.
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|
|
|
|
|
|
|
|
|
|
Classification on our Balance Sheets
|
|
At March 31, 2020
|
|
At December 31, 2019
|
|
Cash and cash equivalents
|
Cash and cash equivalents
|
|
$
|
49,941
|
|
|
$
|
289,870
|
|
|
Restricted cash - current
|
Prepaid expenses and other current assets
|
|
7,068
|
|
|
6,639
|
|
|
Restricted cash - non-current
|
Other assets
|
|
101
|
|
|
101
|
|
|
Total
|
|
|
$
|
57,110
|
|
|
$
|
296,610
|
|
Fair Values of Financial Instruments
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant market information about the financial instrument.
The carrying amount of cash and cash equivalents, restricted cash, settlement receivables, short-term trade and other receivables, settlement liabilities, accounts payable, and accrued expenses approximate fair value due to the short-term maturities of these instruments. The fair value of the long-term trade and loans receivable is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. The fair value of the long-term accounts payable is estimated by discounting the total obligation using the appropriate interest rate. As of March 31, 2020 and December 31, 2019, the fair value of trade and loans receivable approximated the carrying value due to contractual terms generally being slightly over 12 months. The fair value of our borrowings is estimated based on various inputs to determine a market price, such as: market demand and supply, size of tranche, maturity, and similar instruments trading in more active markets. The estimated fair value and outstanding balances of our borrowings are as follows (in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
Level of Hierarchy
|
|
Fair Value
|
|
Outstanding Balance
|
|
March 31, 2020
|
|
|
|
|
|
|
Term loan
|
2
|
|
$
|
589,614
|
|
|
$
|
735,500
|
|
|
Senior unsecured notes
|
2
|
|
$
|
216,890
|
|
|
$
|
285,381
|
|
|
Revolving credit facility
|
2
|
|
$
|
28,058
|
|
|
$
|
35,000
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Term loan
|
2
|
|
$
|
753,494
|
|
|
$
|
749,000
|
|
|
Senior unsecured notes
|
2
|
|
$
|
401,738
|
|
|
$
|
375,000
|
|
The term loan, senior unsecured notes, and revolving credit facility were reported at fair value using Level 2 inputs based on quoted market prices for these securities.
Reclassification of Prior Year Balances
Reclassifications were made to the prior-period Financial Statements to conform to the current period presentation where applicable.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
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|
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|
|
Standard
|
Description
|
Date of Adoption
|
Effect on Financial Statements
|
|
ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments
|
This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
|
January 1, 2020
|
This guidance primarily impacts our trade and other receivables, including those related to revenues from contracts with customers that may contain contract assets with respect to performance obligations that are satisfied for which the customers have not yet been invoiced. We adopted this guidance using the modified retrospective method. The adoption of ASC 326 did not have a material effect on our Financial Statements and did not result in a cumulative-effect adjustment. Refer to “Note 6 — Trade and Other Receivables” for further discussion.
|
|
ASU No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
|
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).
|
January 1, 2020
|
The adoption of this ASU did not have a material effect on our Financial Statements or on our disclosures.
|
Recent Accounting Guidance Not Yet Adopted
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|
|
|
|
|
|
|
|
|
Standard
|
Description
|
Date of Planned Adoption
|
Effect on Financial Statements
|
|
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
|
This ASU simplifies the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations, and interim calculations, and adds guidance to reduce the complexity of applying Topic 740.
|
January 1, 2021
|
We are currently evaluating the impact of adopting this ASU on our Financial Statements and our disclosures; however, we do not expect the impact to be material.
|
We do not anticipate recently issued accounting guidance to have a significant impact on our Financial Statements as of March 31, 2020.
3. LEASES
We determine if a contract is, or contains, a lease at the inception, or modification, of a contract based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an asset is predicated upon the notion that a lessee has both the right to (a) obtain substantially all of the economic benefit from the use of the asset; and (b) direct the use of the asset.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized based on the present value of minimum lease payments over the expected lease term at commencement date. Lease expense is recognized on a straight-line basis over the expected lease term. Our lease arrangements have both lease and non-lease components, and we have elected the practical expedient to account for the lease and non-lease elements as a single lease.
Certain of our lease arrangements contain options to renew with terms that generally have the ability to extend the lease term to a range of approximately 1 to 10 years. The exercise of lease renewal options is generally at our sole discretion. The expected lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such option. The depreciable life of leased assets and leasehold improvements are limited by the expected term of such assets, unless there is a transfer of title or purchase option reasonably certain to be exercised.
Lessee
We enter into operating lease agreements for real estate purposes that generally consist of buildings for office space and warehouses for manufacturing purposes. Certain of our lease agreements consist of rental payments that are periodically adjusted for inflation. Our lease agreements do not contain material residual value guarantees or material restrictive covenants. Our lease agreements do not generally provide explicit rates of interest; therefore, we use our incremental collateralized borrowing rate, which is based on a fully collateralized and fully amortizing loan with a maturity date the same as the length of the lease that is based on the information available at the commencement date to determine the present value of lease payments. Leases with an expected term of 12 months or less (short-term) are not accounted for on our Balance Sheets.
Supplemental balance sheet information related to our operating leases is as follows (in thousands):
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Classification on our Balance Sheets
|
|
At March 31, 2020
|
|
At December 31, 2019
|
|
Assets
|
|
|
|
|
|
|
|
Operating lease ROU assets
|
|
Other assets, non-current
|
|
$
|
11,779
|
|
|
$
|
12,257
|
|
|
Liabilities(1)
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
Accounts payable and accrued expenses
|
|
$
|
6,033
|
|
|
$
|
5,824
|
|
|
Non-current operating lease liabilities
|
|
Other accrued expenses and liabilities
|
|
$
|
8,720
|
|
|
$
|
9,628
|
|
(1) The amount of operating lease liabilities recorded on our Balance Sheets upon the adoption of ASC 842 on January 1, 2019 was approximately $18.0 million.
Supplemental cash flow information related to leases is as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Cash paid for long- and short-term leases
|
|
|
$
|
1,788
|
|
|
$
|
1,704
|
|
|
|
Operating lease ROU assets obtained in exchange for lease obligations(1)
|
|
$
|
704
|
|
|
$
|
15,132
|
|
(2)
|
(1) The amounts exclude amortization for the period.
(2) The amount includes approximately $14.1 million of operating lease ROU assets obtained in exchange for existing lease obligations due to the adoption of ASC 842.
Other information related to lease terms and discount rates is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2020
|
|
At December 31, 2019
|
|
Weighted average remaining lease term (in years)
|
|
3.15
|
|
2.96
|
|
Weighted average discount rate
|
|
5.25
|
%
|
|
5.25
|
%
|
Components of lease expense, which are included in operating expenses, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
Lease Cost:
|
|
|
|
|
|
Operating lease cost
|
|
$
|
1,372
|
|
|
$
|
944
|
|
|
Variable lease cost
|
|
$
|
445
|
|
|
$
|
439
|
|
Maturities of lease liabilities are summarized as follows as of March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
2020 (excluding the three months ended March 31, 2020)
|
|
$
|
4,978
|
|
|
2021
|
|
5,416
|
|
|
2022
|
|
3,122
|
|
|
2023
|
|
1,529
|
|
|
2024
|
|
564
|
|
|
Thereafter
|
|
328
|
|
|
Total future minimum lease payments
|
|
$
|
15,937
|
|
|
Amount representing interest
|
|
1,184
|
|
|
Present value of future minimum lease payments
|
|
$
|
14,753
|
|
|
Current operating lease obligations
|
|
6,033
|
|
|
Long-term lease obligations
|
|
$
|
8,720
|
|
Lessor
We generate lease revenues primarily from our gaming operations activities, and the majority of our leases are month-to-month leases. Under these arrangements, we retain ownership of the electronic gaming machines (“EGMs”) installed at customer facilities. We receive recurring revenues based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee. Such revenues are generated daily and are limited to the lesser of the net win per day generated by the leased gaming equipment or the fixed daily fee and the lease payments that have been collected from the lessee. Certain of our leases have terms and conditions with options for a lessee to purchase the underlying assets. The cost of property and equipment the Company is leasing to third-parties as of March 31, 2020 is approximately $212.9 million, which includes accumulated depreciation of approximately $118.7 million.
We did not have any new sales transactions that qualified for sales-type lease accounting treatment during the three months ended March 31, 2020 and 2019. Our interest income recognized in connection with sales-type leases executed in the prior periods is immaterial.
Supplemental balance sheet information related to our sales-type leases is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on our Balance Sheets
|
|
At March 31, 2020
|
|
At December 31, 2019
|
|
Assets
|
|
|
|
|
|
|
|
Net investment in sales-type leases — current
|
|
Trade and other receivables, net
|
|
$
|
873
|
|
|
$
|
874
|
|
|
Net investment in sales-type leases — non-current
|
|
Other receivables
|
|
$
|
1,070
|
|
|
$
|
1,288
|
|
4. BUSINESS COMBINATIONS
We had no material acquisitions for the three months ended March 31, 2020.
Atrient, Inc.
On March 8, 2019, we acquired certain assets of Atrient, Inc. (“Atrient” or the “Seller”), a privately held company that develops and distributes hardware and software applications to gaming operators to enhance gaming patron loyalty, pursuant to an asset purchase agreement. Under the terms of the asset purchase agreement, we paid the Seller $20.0 million at the closing of the transaction and an additional $10.0 million during the three months ended March 31, 2020 with another $10.0 million being due two years following the date of closing. The related liabilities were recorded at fair value on the acquisition date as part of the consideration transferred and were included in accounts payable and accrued expenses as of March 31, 2020 and accounts payable and accrued expenses and other accrued expenses and liabilities as of December 31, 2019.
In addition to the cash payments, we have recorded approximately $9.0 million in contingent consideration liabilities based upon the achievement of certain revenue targets with a maximum payout of up to $10.0 million. The related liabilities were recorded at fair value on the acquisition date as part of the consideration transferred and are remeasured each reporting period. The inputs used to measure the fair value of our liabilities are categorized as Level 3 in the fair value hierarchy. Contingent consideration liabilities as of March 31, 2020 and December 31, 2019 were approximately $9.5 million and $9.4 million, respectively, and were included in accounts payable and accrued expenses and other accrued expenses and liabilities of our Balance Sheets as of March 31, 2020 and December 31, 2019, respectively.
Micro Gaming Technologies, Inc.
On December 24, 2019, we acquired certain assets of Micro Gaming Technologies, Inc. (“MGT”), a privately held company that develops and distributes kiosks and software applications to gaming patrons to enhance patron loyalty, in an asset purchase agreement. The acquired assets consist of existing contracts with gaming operators, technology, and intellectual property intended to allow us to provide gaming operators with self-service patron loyalty functionality delivered through stand-alone kiosk equipment and a marketing platform that manages and delivers gaming operators marketing programs through these patron interfaces. This acquisition further expands our financial technology player loyalty offerings within our FinTech segment. Under the terms of the asset purchase agreement, we paid MGT $15.0 million at the closing of the transaction and per the original agreement, additional $5.0 million was due by April 1, 2020 with a final payment of $5.0 million due two years following the date of closing. In light of the COVID-19 pandemic, we entered into an amendment to the asset purchase agreement allowing us to remit the additional $5.0 million by July 1, 2020 with a final payment of $5.0 million due by July 1, 2021. The related liabilities were recorded at fair value on the acquisition date as part of the consideration transferred and were included in accounts payable and accrued expenses and other accrued expenses and liabilities as of March 31, 2020 and December 31, 2019 for current and non-current portions, respectively. The total consideration for this acquisition will be approximately $25.0 million. The acquisition did not have a significant impact on our results of operations or financial condition.
The estimates and assumptions incorporated in accounting for the transaction included the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as the Company finalizes its purchase price accounting. The significant items for which a final fair value has not been determined include, but are not limited to: the valuation and estimated useful lives of intangible assets, contract liabilities, including deferred and unearned revenues, and deferred income taxes. We do not expect our fair value determinations to materially change; however, there may be differences between the amounts recorded at the closing date of the transaction and the final fair value analysis, which we expect to complete no later than the fourth quarter of 2020.
The financial results included in our Statements of Operations for the three months ended March 31, 2020 reflected revenues of approximately $2.6 million attributed to the MGT business. Due to the integration of the acquired business into our existing player loyalty operations during the current period, presentation of net income contributed by MGT is impracticable. Acquisition-related costs incurred during the three months ended March 31, 2020 were not material.
The unaudited pro forma financial data with respect to the revenue and earnings as if the MGT acquisition occurred on January 1, 2019 would reflect revenues of approximately $127.3 million and net income of approximately $5.7 million for the three months ended March 31, 2019.
5. FUNDING AGREEMENTS
We have commercial arrangements with third-party vendors to provide cash for certain of our ATMs. For the use of these funds, we pay a cash usage fee on either the average daily balance of funds utilized multiplied by a contractually defined cash usage rate or the amounts supplied multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Statements of Operations, were approximately $1.5 million and $1.7 million for the three months ended March 31, 2020 and 2019, respectively. We are exposed to interest rate risk to the extent that the applicable rates increase.
Under these agreements, the currency supplied by third-party vendors remains their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected in our Balance Sheets. The outstanding balances of ATM cash utilized by us from these third-parties were approximately $141.6 million and $292.6 million as of March 31, 2020 and December 31, 2019, respectively.
Our primary commercial arrangement, the Contract Cash Solutions Agreement, as amended, is with Wells Fargo, N.A. (“Wells Fargo”). Wells Fargo provides us with cash in the maximum amount of $300 million with the ability to increase the amount by $75 million over a 5-day period for holidays, such as the period around New Year’s Day. The term of the agreement expires on June 30, 2022 and will automatically renew for additional one-year periods unless either party provides a 90-day written notice of its intent not to renew.
We are responsible for any losses of cash in the ATMs under this agreement, and we self-insure for this type of risk. There were no losses for the three months ended March 31, 2020 and 2019.
6. TRADE AND OTHER RECEIVABLES
Trade and other receivables represent short-term credit granted to customers and long-term loans receivable in connection with our Games and FinTech equipment and compliance products. Trade and loans receivable generally do not require collateral. The balance of trade and loans receivable consists of outstanding balances owed to us by gaming establishments. Other receivables include income tax receivables and other miscellaneous receivables.
The balance of trade and other receivables consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At December 31,
|
|
|
2020
|
|
2019
|
|
Trade and other receivables, net
|
|
|
|
|
Games trade and loans receivable
|
$
|
32,905
|
|
|
$
|
51,651
|
|
|
FinTech trade and loans receivable
|
23,376
|
|
|
23,723
|
|
|
Contract assets
|
15,461
|
|
|
|
15,408
|
|
|
Insurance settlement receivable(1)
|
7,650
|
|
|
7,650
|
|
|
Other receivables
|
3,110
|
|
|
3,977
|
|
|
Net investment in sales-type leases
|
1,943
|
|
|
2,162
|
|
|
Total trade and other receivables, net
|
84,445
|
|
|
104,571
|
|
|
Non-current portion of receivables
|
|
|
|
|
Games trade and loans receivable
|
(544)
|
|
|
(1,018)
|
|
|
FinTech trade and loans receivable
|
(6,983)
|
|
|
(7,581)
|
|
|
Contract assets
|
(6,902)
|
|
|
|
(6,774)
|
|
|
Net investment in sales-type leases
|
(1,070)
|
|
|
(1,288)
|
|
|
Total non-current portion of receivables
|
(15,499)
|
|
|
(16,661)
|
|
|
Total trade and other receivables, current portion
|
$
|
68,946
|
|
|
$
|
87,910
|
|
Allowance for Credit Losses
material impact on our Financial Statements and did not result in a cumulative-effect adjustment as of the adoption date. Our operations were not significantly impacted, both for short- and long-term accounts receivable, due to the following:
•Our FinTech business acts as a merchant of record for settlement transactions for our cash access related customers wherein cash is held by the Company; therefore, we generally have the ability to withhold the necessary funds from customers to satisfy the outstanding receivables associated with equipment, information and other products and services.
•Our Games business sells EGMs to gaming establishments on a relatively short-term basis and collections are reasonably certain based on historical experience, financial stability of our customers, and lack of concentration of our receivables. The material portion of long-term loans receivable balance is fully collateralized, and therefore, does not represent a risk of credit loss. The risk of credit loss is further reduced by the fact that both segments generally share the same top customers such that sales made by the Games business to the existing FinTech customers are secured by our ability to withhold the necessary funds through the FinTech revenue arrangements.
We continually evaluate the collectability of outstanding balances and maintain an allowance for credit losses related to our trade and other receivables and notes receivable that have been determined to have a high risk of uncollectability, which represents our best estimates of the current expected credit losses to be incurred in the future. To derive our estimates, we analyze historical collection trends and changes in our customer payment patterns, current and expected conditions and market trends along with our operating forecasts, concentration, and creditworthiness when evaluating the adequacy of our allowance for credit losses. In addition, with respect to our check warranty receivables, we are exposed to risk for the losses associated with warranted items that cannot be collected from patrons issuing these items. We evaluate the collectability of the outstanding balances and establish a reserve for the face amount of the current expected credit losses related to these receivables. The provision for doubtful accounts receivable is included within operating expenses and the check warranty loss reserves are included within cash access services cost of revenues in the Statements of Operations.
The activity in our allowance for credit losses for the three months ended March 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
2019
|
|
Beginning allowance for credit losses
|
$
|
(5,786)
|
|
|
|
$
|
(6,425)
|
|
|
Provision
|
(3,750)
|
|
|
|
(2,865)
|
|
|
Charge-offs and recoveries
|
3,943
|
|
|
|
3,009
|
|
|
Ending allowance for credit losses
|
$
|
(5,593)
|
|
|
|
$
|
(6,281)
|
|
7. INVENTORY
Our inventory primarily consists of component parts as well as work-in-progress and finished goods. The cost of inventory includes cost of materials, labor, overhead, and freight, and is accounted for using the first in, first out method. The inventory is stated at the lower of cost or net realizable value.
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At December 31,
|
|
|
2020
|
|
2019
|
|
Inventory
|
|
|
|
|
Component parts, net of reserves of $2,224 and $2,007 at March 31, 2020 and December 31, 2019, respectively
|
$
|
27,306
|
|
|
$
|
24,864
|
|
|
Work-in-progress
|
925
|
|
|
94
|
|
|
Finished goods
|
11,116
|
|
|
1,616
|
|
|
Total inventory
|
$
|
39,347
|
|
|
$
|
26,574
|
|
8. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our Revolving Credit Facility (defined herein), restricted cash, operating lease ROU assets, and other assets. The current portion of these assets is included in prepaid expenses and other current assets and the non-current portion is included in other assets, both of which are contained within the Balance Sheets.
The balance of the current portion of prepaid expenses and other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At December 31,
|
|
|
2020
|
|
2019
|
|
Prepaid expenses and other current assets
|
|
|
|
|
Prepaid expenses
|
$
|
15,256
|
|
|
$
|
11,272
|
|
|
Restricted cash(1)
|
7,068
|
|
|
6,639
|
|
|
Deposits
|
3,286
|
|
|
8,501
|
|
|
Other
|
1,381
|
|
|
1,484
|
|
|
Total prepaid expenses and other current assets
|
$
|
26,991
|
|
|
$
|
27,896
|
|
The balance of the non-current portion of other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At December 31,
|
|
|
2020
|
|
2019
|
|
Other assets
|
|
|
|
|
Operating lease ROU assets
|
$
|
11,779
|
|
|
$
|
12,257
|
|
|
Prepaid expenses and deposits
|
6,943
|
|
|
7,378
|
|
|
Debt issuance costs of revolving credit facility
|
411
|
|
|
460
|
|
|
Other
|
210
|
|
|
244
|
|
|
Total other assets
|
$
|
19,343
|
|
|
$
|
20,339
|
|
9. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2020
|
|
|
|
|
|
At December 31, 2019
|
|
|
|
|
|
|
Useful Life
(Years)
|
|
Cost
|
|
Accumulated
Depreciation
|
|
Net Book
Value
|
|
Cost
|
|
Accumulated
Depreciation
|
|
Net Book
Value
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental pool - deployed
|
2-4
|
|
$
|
212,924
|
|
|
$
|
118,687
|
|
|
$
|
94,237
|
|
|
$
|
196,571
|
|
|
$
|
106,888
|
|
|
$
|
89,683
|
|
|
Rental pool - undeployed
|
2-4
|
|
29,966
|
|
|
22,745
|
|
|
7,221
|
|
|
31,901
|
|
|
22,970
|
|
|
8,931
|
|
|
FinTech equipment
|
3-5
|
|
29,364
|
|
|
21,974
|
|
|
7,390
|
|
|
29,947
|
|
|
22,114
|
|
|
7,833
|
|
|
Leasehold and building improvements
|
Lease Term
|
|
12,198
|
|
|
8,589
|
|
|
3,609
|
|
|
11,815
|
|
|
8,150
|
|
|
3,665
|
|
|
Machinery, office, and other equipment
|
2-5
|
|
46,179
|
|
|
31,594
|
|
|
14,585
|
|
|
48,860
|
|
|
30,103
|
|
|
18,757
|
|
|
Total
|
|
|
$
|
330,631
|
|
|
$
|
203,589
|
|
|
$
|
127,042
|
|
|
$
|
319,094
|
|
|
$
|
190,225
|
|
|
$
|
128,869
|
|
Depreciation expense related to property and equipment totaled approximately $16.2 million and $14.8 million for the three months ended March 31, 2020 and 2019, respectively.
We review our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
Interim Assessment for Impairment of Property and Equipment
We identified a potential indicator of impairment for our property and equipment as a result of the COVID-19 pandemic. As our operations have experienced significant disruptions and revenue reductions and we have been impacted by various measures discussed in “Note 1 — Business,” we revised our cash flow projections to reflect the current economic environment, including the uncertainty surrounding the nature, timing, and extent of reopening of our casino customers. The results of our interim assessment indicated no impairment of our property and equipment as of March 31, 2020.
To the extent new facts and circumstances arise in light of COVID-19, we expect to revise our cash flow projections accordingly as our estimates of future cash flows are highly dependent upon certain assumptions, including, but not limited to, the amount and timing of the economic recovery globally, nationally, and specifically within the gaming industry. More specifically, given the significant degree of uncertainty with respect to the timing of the reopening of casino properties throughout North America and the resulting demand from patrons that visit these gaming establishments, we may need to further adjust our assumptions and determine the impacts to our property and equipment, accordingly.
Furthermore, the evaluation of impairment of property and equipment requires the use of estimates about future operating results. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations. The estimates of expected future cash flows require significant judgment and are based on assumptions we determined to be reasonable; however, they are unpredictable and inherently uncertain, including, estimates of future growth rates, operating margins, and assumptions about the overall economic climate as well as the competitive environment within which we operate. There can be no assurance that our estimates and assumptions made for purposes of our impairment assessments as of the time of evaluation will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, we may be required to record impairment charges in future periods, whether in connection with our normal review procedures periodically, or earlier, if an indicator of an impairment is present prior to such evaluation.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. The balance of goodwill was approximately $681.5 million and $681.6 million at March 31, 2020 and December 31, 2019, respectively.
We test our goodwill for impairment on October 1 each year by conducting the “Step 1” analysis, which requires a comparison of the carrying amount of each reporting unit to its estimated fair value, or more frequently if the events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.
Other Intangible Assets
Other intangible assets consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2020
|
|
|
|
|
|
At December 31, 2019
|
|
|
|
|
|
|
Useful Life
(Years)
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract rights under placement fee agreements
|
3-7
|
|
$
|
58,516
|
|
|
$
|
23,058
|
|
|
$
|
35,458
|
|
|
$
|
58,516
|
|
|
$
|
20,888
|
|
|
$
|
37,628
|
|
|
Customer contracts
|
3-14
|
|
71,975
|
|
|
50,716
|
|
|
21,259
|
|
|
71,975
|
|
|
49,477
|
|
|
22,498
|
|
|
Customer relationships
|
3-7
|
|
231,100
|
|
|
110,825
|
|
|
120,275
|
|
|
231,100
|
|
|
105,584
|
|
|
125,516
|
|
|
Developed technology and software
|
1-6
|
|
314,265
|
|
|
228,627
|
|
|
85,638
|
|
|
314,343
|
|
|
224,274
|
|
|
90,069
|
|
|
Patents, trademarks, and other
|
2-18
|
|
19,682
|
|
|
16,622
|
|
|
3,060
|
|
|
19,682
|
|
|
16,206
|
|
|
3,476
|
|
|
Total
|
|
|
$
|
695,538
|
|
|
$
|
429,848
|
|
|
$
|
265,690
|
|
|
$
|
695,616
|
|
|
$
|
416,429
|
|
|
$
|
279,187
|
|
Amortization expense related to other intangible assets was approximately $19.3 million and $16.3 million for the three months ended March 31, 2020 and 2019, respectively.
We paid approximately $0.6 million and $5.6 million in placement fees for the three months ended March 31, 2020 and 2019, respectively. The payment for the three months ended March 31, 2019 included approximately $0.3 million of imputed interest.
We evaluate our other intangible assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
Interim Assessment for Impairment of Goodwill and Other Intangible Assets
The impact of the COVID-19 pandemic on the Company’s operations, and significant and sustained decline in our stock price, qualified as a triggering event during the three months ended March 31, 2020 and accordingly, management performed a review of potential indicators of impairment for the carrying amount of goodwill at each of our reporting units and other intangible assets. Our operations have experienced significant disruptions and revenue reductions and we have been impacted by various measures discussed in “Note 1 — Business.” We conducted a qualitative interim impairment assessment as of March 31, 2020, which included an evaluation of our revised cash flow projections to reflect the current economic environment, including the uncertainty surrounding the nature, timing, and extent of reopening of our casino customers, and assessed the amount of cushion for each of the reporting units in the 2019 impairment test. We determined that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying amount as of March 31, 2020. Therefore, an interim quantitative impairment test of our goodwill at the reporting unit level was not required to be performed. In addition, the results of our interim assessment indicated no impairment of our other intangible assets as of March 31, 2020.
We continue to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and other intangible assets. To the extent new facts and circumstances arise in light of the impact of the COVID-19 pandemic on the Company’s operations, we expect to revise our cash flow projections accordingly as our estimates of future cash flows are highly dependent upon certain assumptions, including, but not limited to, the amount and timing of the economic recovery globally, nationally, and specifically within the gaming industry. More specifically, given the significant degree of uncertainty with respect to the timing of the reopening of casino properties throughout North America and the resulting demand from patrons that visit these gaming establishments, we may need to further adjust our assumptions and we may be required to perform a quantitative test for impairment for our goodwill and other intangible assets in future periods.
Furthermore, the evaluation of impairment of goodwill and other intangible assets requires the use of estimates about future operating results. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations. The estimates of expected future cash flows require significant judgment and are based on assumptions we determined to be reasonable; however, they are unpredictable and inherently uncertain, including, estimates of future growth rates, operating margins, and assumptions about the overall economic climate as well as the competitive environment within which we operate. There can be no assurance that our estimates and assumptions made for purposes of our impairment assessments as of the time of evaluation will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments, or anticipated growth rates are not correct, we may be required to record non-cash impairment charges in future periods, whether in connection with our normal review procedures periodically, or earlier, if an indicator of an impairment is present prior to such evaluation.
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table presents our accounts payable and accrued expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At December 31,
|
|
|
2020
|
|
2019
|
|
Accounts payable and accrued expenses
|
|
|
|
|
Trade accounts payable
|
$
|
63,752
|
|
|
$
|
78,627
|
|
|
Contract liabilities
|
31,226
|
|
|
29,150
|
|
|
Litigation accrual(1)
|
14,000
|
|
|
|
14,000
|
|
|
Contingent consideration and acquisition-related liabilities(2)
|
23,954
|
|
|
|
14,902
|
|
|
Accrued interest
|
6,450
|
|
|
1,347
|
|
|
Operating lease liabilities
|
6,033
|
|
|
5,824
|
|
|
Payroll and related expenses
|
5,122
|
|
|
18,058
|
|
|
Cash access processing and related expenses
|
3,923
|
|
|
5,511
|
|
|
Other
|
2,924
|
|
|
3,253
|
|
|
Accrued taxes
|
1,816
|
|
|
1,846
|
|
|
Placement fees
|
—
|
|
|
585
|
|
|
Total accounts payable and accrued expenses
|
$
|
159,200
|
|
|
$
|
173,103
|
|
12. LONG-TERM DEBT
The following table summarizes our outstanding indebtedness (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
Interest
|
|
At March 31,
|
|
At December 31,
|
|
|
|
Date
|
|
Rate
|
|
2020
|
|
2019
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$820 million Term Loan Facility
|
|
2024
|
|
LIBOR+2.75%
|
|
$
|
735,500
|
|
|
$
|
749,000
|
|
|
$35 million Revolving Credit Facility
|
|
2022
|
|
LIBOR+4.50%
|
|
35,000
|
|
|
|
—
|
|
|
Senior Secured Credit Facilities
|
|
|
|
|
|
770,500
|
|
|
749,000
|
|
|
$375 million 2017 Unsecured Notes
|
|
2025
|
|
7.50%
|
|
285,381
|
|
|
|
375,000
|
|
|
Total debt
|
|
|
|
|
|
1,055,881
|
|
|
1,124,000
|
|
|
Debt issuance costs and discount
|
|
|
|
|
|
(14,231)
|
|
|
(15,922)
|
|
|
Total long-term debt after debt issuance costs and discount
|
|
|
|
|
|
$
|
1,041,650
|
|
|
$
|
1,108,078
|
|
Senior Secured Credit Facilities
Our Senior Secured Credit Facilities consist of an $820.0 million, seven-year senior secured term loan facility (the “Term Loan Facility”), and a $35.0 million, five-year senior secured revolving credit facility (the “Revolving Credit Facility”) provided for under our credit agreement with Everi FinTech, as borrower, and Everi Holdings with the lenders party thereto and Jefferies Finance LLC, as administrative agent, collateral agent, swing line lender, letter of credit issuer, sole lead arranger and sole book manager (the “Credit Agreement”).
In March 2020, we completed the full draw down of our available capacity of $35.0 million under the Revolving Credit Facility in order to improve our liquidity and preserve financial flexibility in light of the uncertainty in our industry and the global economy as a result of COVID-19. In accordance with the terms of the Revolving Credit Facility, the proceeds from this borrowing are being used for working capital, general corporate purposes and other permitted uses.
The Term Loan Facility and the Revolving Credit Facility had an applicable weighted average interest rate of 4.43% and 5.73%, respectively, for the three months ended March 31, 2020.
Senior Unsecured Notes
In December 2017, we issued $375.0 million in aggregate principal amount of 7.50% Senior Unsecured Notes due 2025 (the “2017 Unsecured Notes”) under an indenture (the “2017 Notes Indenture”), dated December 5, 2017, among Everi FinTech (as issuer), Everi Holdings and certain of its direct and indirect domestic subsidiaries as guarantors, and Deutsche Bank Trust Company Americas, as trustee. Interest on the 2017 Unsecured Notes accrues at a rate of 7.50% per annum and is payable semi-annually in arrears on each June 15 and December 15 since June 15, 2018.
In January 2020, we completed a partial redemption payment of approximately $84.5 million of aggregate principal with respect to the 2017 Unsecured Notes. In March 2020, we completed an open market repurchase of approximately $5.1 million of aggregate principal with respect to the 2017 Unsecured Notes. The total outstanding balance of the 2017 Unsecured Notes following the redemption and repurchase transactions was approximately $285.4 million. We incurred a loss on extinguishment of debt of approximately $7.4 million, which consisted of a $6.3 million redemption premium related to the satisfaction and redemption of a portion of the 2017 Unsecured Notes, and non-cash charges for the accelerated amortization of the related debt issuance costs of approximately $1.1 million.
Compliance with Debt Covenants
We were in compliance with the covenants and terms of the Senior Secured Credit Facilities as of March 31, 2020. Refer to “Note 19 — Subsequent Events” for updates to our debt covenant requirements in connection with the execution of the Fourth Amendment to our Credit Agreement on April 21, 2020.
We were in compliance with the terms of the 2017 Unsecured Notes as of March 31, 2020.
13. COMMITMENTS AND CONTINGENCIES
We are involved in various legal proceedings in the ordinary course of our business. While we believe resolution of the claims brought against us, both individually and in the aggregate, will not have a material adverse impact on our financial condition or results of operations, though litigation of this nature is inherently unpredictable. Our views on these legal proceedings, including those described below, may change in the future. We intend to vigorously defend against these actions, and ultimately believe we should prevail.
Legal Contingencies
We evaluate matters and record an accrual for legal contingencies when it is both probable that a liability has been incurred and the amount or range of the loss may be reasonably estimated. We evaluate legal contingencies at least quarterly and, as appropriate, establish new accruals or adjust existing accruals to reflect: (a) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings, and other relevant events and developments; (b) the advice and analyses of counsel; and (c) the assumptions and judgment of management. Legal costs associated with such proceedings are expensed as incurred. Due to the inherent uncertainty of legal proceedings as a result of the procedural, factual, and legal issues involved, the outcomes of our legal contingencies could result in losses in excess of amounts we have accrued.
We have accrued approximately $14.0 million for the legal contingencies in connection with Fair and Accurate Credit Transactions Act (“FACTA”)-related matters based on ongoing settlement negotiations with various parties. We expect to recover within the next year approximately $7.7 million of the amount accrued from certain of our insurance providers, for which we recorded an insurance settlement receivable included within trade and other receivables, net on our Balance Sheets, as recovery is deemed to be probable. In addition, we are seeking relief from a certain other carrier, Peleus Insurance Company, pursuant to the provisions of our policy; however, we have not recorded any amounts with respect to this specific insurance carrier as there have been no commitments, settlements or determinations entered into as of the date of this periodic filing.
FACTA-related matters:
Geraldine Donahue, et. al. v. Everi FinTech, et. al. (“Donahue”), is a putative class action matter filed on December 12, 2018, in Circuit Court of Cook County, Illinois County Division, Chancery Division. The original defendant was dismissed and the Company was substituted as the defendant on April 22, 2019. Plaintiff, on behalf of himself and others similarly situated, alleges that Everi FinTech and the Company (a) have violated certain provisions of FACTA by their failure, as agent to the original defendant, to properly truncate patron credit card numbers when printing cash access receipts as required under FACTA, and (b) have been unjustly enriched through the charging of service fees for transactions conducted at the original defendant’s facilities. Plaintiff seeks an award of statutory damages, attorney’s fees, and costs. The parties have reached an agreement in principle for settlement of this matter, which will include the settlement and resolution of all the FACTA-related
matters pending against the Company and Everi FinTech. The settlement requires court approval, which the parties are in the process of working to obtain.
Oneeb Rehman, et. al. v. Everi FinTech and Everi Holdings, was a putative class action matter pending in the U.S. District Court for the Southern District of Florida, Ft. Lauderdale Division filed on October 16, 2018. The original defendant was dismissed and the Company was substituted as the defendant on April 22, 2019. Plaintiff, on behalf of himself and others similarly situated, alleged that Everi FinTech and the Company (a) had violated certain provisions of FACTA by their failure, as agent to the original defendant, to properly truncate patron credit card numbers when printing cash access receipts as required under FACTA, and (b) had been unjustly enriched through the charging of service fees for transactions conducted at the original defendant’s facilities. Plaintiff sought an award of statutory damages, attorney’s fees, and costs. This matter has been dismissed in anticipation of court approval of the settlement in Donahue.
Mat Jessop, et. al. v. Penn National Gaming, Inc., was a putative class action matter filed on October 15, 2018, pending in the U.S. District Court for the Middle District of Florida, Orlando Division. Everi FinTech was added as a defendant on December 21, 2018. Penn National Gaming, Inc. (“Penn National”) was dismissed by the Court with prejudice on October 28, 2019, leaving only claims against Everi FinTech. Plaintiff, on behalf of himself and others similarly situated, alleged that Everi FinTech had been unjustly enriched through the charging of service fees for transactions conducted at Penn National facilities. Plaintiff sought injunctive relief against both parties, and an award of statutory damages, attorney’s fees, and costs. This matter has been dismissed in anticipation of court approval of the settlement in Donahue.
Everi Payments Inc. and Everi Holdings Inc. v Peleus Insurance Company is a civil action filed by the Company on January 28, 2020, pending in the District Court, Clark County, Nevada alleging defendant breached its contractual obligations under an excess insurance policy when it denied the Company coverage of the FACTA-related matters described above. Everi FinTech and the Company are seeking actual and consequential damages for breach of contract, costs, attorney’s fees, and other fees and expenses incurred by Everi FinTech and the Company, up to and including amounts related to the settlement in Donahue.
NRT matter:
NRT Technology Corp., et. al. v. Everi Holdings Inc., et. al., is a civil action filed on April 30, 2019 against the Company and Everi FinTech in the United States District Court for the District of Delaware by NRT Technology Corp. and NRT Technology, Inc., alleging monopolization of the market for unmanned, integrated kiosks in violation of federal antitrust laws, fraudulent procurement of patents on functionality related to such unmanned, integrated kiosks and sham litigation related to prior litigation brought by Everi FinTech (operating as Global Cash Access Inc.) against the plaintiff entities. Plaintiffs seek compensatory damages, trebled damages, and injunctive and declaratory relief. We are currently unable to determine the probability of the outcome of this legal matter or estimate the range of reasonably possible loss, if any.
14. STOCKHOLDERS’ EQUITY
In February 2020, our Board of Directors authorized and approved a new share repurchase program granting us the authority to repurchase an amount not to exceed $10.0 million of outstanding Company common stock with no minimum number of shares that the Company is required to repurchase. This new repurchase program commenced in the first quarter of 2020 and authorizes us to buy our common stock from time to time in open market transactions, block trades or in private transactions in accordance with trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended, or by a combination of such methods, including compliance with the Company’s finance agreements. The share repurchase program is subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors, and may be suspended or discontinued at any time without prior notice. In light of COVID-19, we have suspended all share repurchases under the repurchase program and no repurchases occurred during the quarter.
15. WEIGHTED AVERAGE COMMON SHARES
The weighted average number of shares of common stock outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
2019
|
|
Weighted average shares
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
84,624
|
|
|
70,334
|
|
|
Potential dilution from equity awards(1)
|
—
|
|
|
4,922
|
|
|
Weighted average number of common shares outstanding - diluted(1)
|
84,624
|
|
|
75,256
|
|
(1) We were in a net loss position for the three months ended March 31, 2020, and therefore, no potential dilution from the application of the treasury stock method was applicable. The potential dilution excludes the weighted average effect of equity awards to purchase approximately 0.2 million and 6.7 million shares of common stock for the three months ended March 31, 2020 and 2019, respectively, as the application of the treasury stock method, as required, makes them anti-dilutive.
16. SHARE-BASED COMPENSATION
Equity Incentive Awards
Generally, we grant the following types of awards: (a) time-based options; (b) market-based options; (c) time-based restricted stock; and (d) restricted stock units (“RSUs”) with either time- or performance-based criteria. We estimate forfeiture amounts based on historical patterns.
A summary of award activity is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Granted
|
|
Restricted Stock Units Granted
|
|
Outstanding, December 31, 2019
|
11,969
|
|
|
3,451
|
|
|
Granted
|
—
|
|
|
275
|
|
|
Exercised options or vested shares
|
(298)
|
|
|
(15)
|
|
|
Canceled or forfeited
|
(12)
|
|
|
(13)
|
|
|
Outstanding, March 31, 2020
|
11,659
|
|
|
3,698
|
|
There are approximately 2.5 million awards of our common stock available for future equity grants under our existing equity incentive plans.
Stock Options
Our time-based stock options granted under our equity plans generally vest at a rate of 25% per year on each of the first four anniversaries of the option grant dates, and expire after a ten year period.
Our market-based options granted in 2017 under our 2014 Equity Incentive Plan (as amended and restated effective May 22, 2018, the “Amended and Restated 2014 Plan”) and our 2012 Equity Incentive Plan (as amended, the “2012 Plan”) vest at a rate of 25% per year on each of the first four anniversaries of the grant date, provided that as of the vesting date for each vesting tranche, the closing price of our shares on the New York Stock Exchange is at least a specified price hurdle, defined as a 25% premium to the closing stock price on the grant date. If the price hurdle is not met as of the vesting date for a vesting tranche, then it shall vest and become vested shares on the last day of a period of 30 consecutive trading days during which the closing price is at least the price hurdle. These options expire after a ten year period.
There were no market-based or time-based option awards granted during the three months ended March 31, 2020 and 2019.
The following table presents the options activity for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
(in thousands)
|
|
Weighted Average
Exercise Price
(per Share)
|
|
Weighted
Average Life
Remaining
(Years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding, December 31, 2019
|
11,969
|
|
|
$
|
5.06
|
|
|
5.5
|
|
$
|
100,143
|
|
|
Granted
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
(298)
|
|
|
$
|
5.50
|
|
|
|
|
|
|
Canceled or forfeited
|
(12)
|
|
|
$
|
4.56
|
|
|
|
|
|
|
Outstanding, March 31, 2020
|
11,659
|
|
|
$
|
5.05
|
|
|
5.3
|
|
$
|
4,359
|
|
|
Vested and expected to vest, March 31, 2020
|
11,548
|
|
|
$
|
5.07
|
|
|
5.3
|
|
$
|
4,336
|
|
|
Exercisable, March 31, 2020
|
9,933
|
|
|
$
|
5.43
|
|
|
5.1
|
|
$
|
3,038
|
|
As stated above, we had no options granted during the three months ended March 31, 2020 and 2019. The total intrinsic value of options exercised was approximately $1.3 million and $3.3 million for the three months ended March 31, 2020 and 2019, respectively.
There was approximately $1.1 million in unrecognized compensation expense related to options expected to vest as of March 31, 2020. This cost was expected to be recognized on a straight-line basis over a weighted average period of 0.7 years. We recorded approximately $0.7 million in non-cash compensation expense related to options granted that were expected to vest as of March 31, 2020. We received approximately $1.6 million in cash from the exercise of options for the three months ended March 31, 2020.
There was approximately $2.7 million in unrecognized compensation expense related to options expected to vest as of March 31, 2019. This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.3 years. We recorded approximately $1.0 million in non-cash compensation expense related to options granted that were expected to vest as of March 31, 2019. We received approximately $4.7 million in cash from the exercise of options for the three months ended March 31, 2019.
Restricted Stock Units
The fair value of each RSU grant is based on the market value of our common stock at the time of grant.
The time-based RSUs generally vest at a rate of 25% per year on each of the first four anniversaries of the grant dates.
The following table presents our RSU awards activity for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
(in thousands)
|
|
Weighted
Average Grant
Date Fair Value
(per share)
|
|
Weighted
Average Life
Remaining
(years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding, December 31, 2019
|
3,451
|
|
|
$
|
9.05
|
|
|
1.7
|
|
$
|
46,342
|
|
|
Granted
|
275
|
|
|
$
|
8.06
|
|
|
|
|
|
|
Vested
|
(15)
|
|
|
$
|
7.31
|
|
|
|
|
|
|
Forfeited
|
(13)
|
|
|
$
|
9.52
|
|
|
|
|
|
|
Outstanding, March 31, 2020
|
3,698
|
|
|
$
|
8.98
|
|
|
1.4
|
|
$
|
12,201
|
|
|
Vested and expected to vest, March 31, 2020
|
2,800
|
|
|
$
|
8.91
|
|
|
1.2
|
|
$
|
9,241
|
|
There were approximately 0.3 million and 0.1 million shares of RSU awards granted for the three months ended March 31, 2020 and 2019, respectively. There were approximately 14,624 and 2,084 RSU awards that vested during the three months ended March 31, 2020 and 2019, respectively.
There was approximately $12.7 million and $6.4 million in unrecognized compensation expense related to RSU awards expected to vest as of March 31, 2020 and 2019, respectively. This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.2 years and 2.8 years as of March 31, 2020 and 2019, respectively. We recorded approximately $1.8 million and $0.8 million in non-cash compensation expense related to the RSU awards during the three months ended March 31, 2020 and 2019, respectively.
17. INCOME TAXES
The income tax benefit reflected an effective income tax rate of 6.9% for the three months ended March 31, 2020, which was less than the statutory federal rate of 21.0%, primarily due to an increase in our valuation allowance due to book loss incurred during the period, partially offset by certain indefinite lived deferred tax assets that can be offset against our indefinite lived deferred tax liabilities. The income tax benefit reflected an effective income tax rate of negative 7.1% for the three months ended March 31, 2019, which was less than the statutory federal rate of 21.0%, primarily due to a decrease in our valuation allowance for deferred tax assets, the benefit from stock option exercises and the benefit from a research credit.
We have analyzed filing positions in all of the federal, state, and foreign jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As of March 31, 2020, we recorded approximately $1.4 million of unrecognized tax benefits, all of which would impact our effective tax rate, if recognized. We do not anticipate that our unrecognized tax benefits will materially change within the next 12 months. We have not accrued any penalties and interest for our unrecognized tax benefits. We may, from time to time, be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy for recording interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax in our Statements of Operations.
For interim income tax reporting, the Company estimates its annual effective tax rate and applies it to its year-to-date ordinary income. Our projection of certain indefinite lived deferred tax assets affecting the valuation allowance is particularly dependent upon current and anticipated future revenue and cash outflows. However, the operations of our main customers remain closed as a result of the COVID-19 pandemic and we could be impacted by unanticipated developments or by events beyond our control. Future changes to estimates used in this projection could result in material changes in the annual effective tax rate with a corresponding impact on the provision for income taxes.
As discussed in “Note 1 — Business,” in late March 2020, the CARES Act was enacted in light of the COVID-19 pandemic. We are taking advantage of the various income and payroll tax provisions in the CARES Act and are continuing to analyze its impact in our tax accounts.
18. SEGMENT INFORMATION
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-making group (the “CODM”). Our CODM consists of the Chief Executive Officer, the President and Chief Operating Officer, and the Chief Financial Officer. Our CODM allocates resources and measures profitability based on our operating segments, which are managed and reviewed separately, as each represents products and services that can be sold separately to our customers. Our segments are monitored by management for performance against our internal forecasts.
We have reported our financial performance based on our segments in both the current and prior periods. Our CODM determined that our operating segments for conducting business are: (a) Games and (b) FinTech:
•The Games segment provides solutions directly to gaming establishments to offer their patrons gaming entertainment- related experiences including: leased gaming equipment; sales of gaming equipment; gaming systems; interactive solutions; and ancillary products and services.
•The FinTech segment provides solutions directly to gaming establishments to offer their patrons cash access-related services and products, including: access to cash at gaming facilities via ATM cash withdrawals; credit card cash access transactions and POS debit card cash access transactions; check warranty services; kiosks for cash access and other services; self-service enrollment, player loyalty and marketing equipment; maintenance services; compliance, audit, and data software; casino credit data and reporting services; and other ancillary offerings.
Corporate overhead expenses have been allocated to the segments either through specific identification or based on a reasonable methodology. In addition, we record depreciation and amortization expenses to the business segments.
Our business is predominantly domestic with no specific regional concentrations and no significant assets in foreign locations.
The following tables present segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
2019
|
|
Games
|
|
|
|
|
Revenues
|
|
|
|
|
Gaming operations
|
$
|
45,686
|
|
|
$
|
44,286
|
|
|
Gaming equipment and systems
|
11,583
|
|
|
23,087
|
|
|
Gaming other
|
21
|
|
|
54
|
|
|
Total revenues
|
$
|
57,290
|
|
|
$
|
67,427
|
|
|
Costs and expenses
|
|
|
|
|
|
|
Cost of revenues(1)
|
|
|
|
|
|
|
Gaming operations
|
4,545
|
|
|
4,124
|
|
|
Gaming equipment and systems
|
6,824
|
|
|
12,529
|
|
|
Cost of revenues
|
11,369
|
|
|
16,653
|
|
|
Operating expenses
|
14,805
|
|
|
14,667
|
|
|
Research and development
|
6,195
|
|
|
5,847
|
|
|
Depreciation
|
14,728
|
|
|
13,374
|
|
|
Amortization
|
15,585
|
|
|
13,782
|
|
|
Total costs and expenses
|
62,682
|
|
|
64,323
|
|
|
Operating (loss) income
|
$
|
(5,392)
|
|
|
$
|
3,104
|
|
(1) Exclusive of depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
2019
|
|
FinTech
|
|
|
|
|
Revenues
|
|
|
|
|
Cash access services
|
$
|
36,973
|
|
|
$
|
40,832
|
|
|
Equipment
|
6,351
|
|
|
7,028
|
|
|
Information services and other
|
12,694
|
|
|
8,488
|
|
|
Total revenues
|
$
|
56,018
|
|
|
$
|
56,348
|
|
|
Costs and expenses
|
|
|
|
|
Cost of revenues(1)
|
|
|
|
|
Cash access services
|
3,555
|
|
|
2,697
|
|
|
Equipment
|
3,891
|
|
|
4,330
|
|
|
Information services and other
|
873
|
|
|
958
|
|
|
Cost of revenues
|
8,319
|
|
|
7,985
|
|
|
Operating expenses
|
24,467
|
|
|
19,981
|
|
|
Research and development
|
2,160
|
|
|
1,684
|
|
|
Depreciation
|
1,515
|
|
|
1,415
|
|
|
Amortization
|
3,739
|
|
|
2,515
|
|
|
Total costs and expenses
|
40,200
|
|
|
33,580
|
|
|
Operating income
|
$
|
15,818
|
|
|
$
|
22,768
|
|
(1) Exclusive of depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At December 31,
|
|
|
2020
|
|
2019
|
|
Total assets
|
|
|
|
|
Games
|
$
|
878,472
|
|
|
$
|
902,888
|
|
|
FinTech
|
417,732
|
|
|
726,335
|
|
|
Total assets
|
$
|
1,296,204
|
|
|
$
|
1,629,223
|
|
Major Customers. No single customer accounted for more than 10% of our revenues for the three months ended March 31, 2020 and 2019. Our five largest customers accounted for approximately 15% and 16% of our revenues for the three months ended March 31, 2020 and 2019, respectively.
19. SUBSEQUENT EVENTS
On April 21, 2020, we entered into the Fourth Amendment to our existing Credit Agreement, which among other things: (a) permits the incurrence of incremental equivalent debt subject to a 4.50:1.00 Consolidated Secured Leverage Ratio (as defined in the Credit Agreement) for calculation periods prior to December 31, 2021; and (b) amends the consolidated secured leverage ratio covenant, including to remove the maximum consolidated secured leverage ratio for the quarters ending June 30, 2020, September 30, 2020 and December 31, 2020 and to change the computation methodology of the consolidated leverage ratio for the quarters ending March 31, 2021, June 30, 2021, and September 30, 2021.
On April 21, 2020 (the “Closing Date”), we entered into a new credit agreement, dated as of April 21, 2020 (the “Incremental Term Loan Credit Agreement”), which provides for a $125.0 million senior secured term loan (the “Incremental Term Loan”), which is secured on a pari passu basis with the loans under our existing Credit Agreement. The entire amount of the Incremental Term Loan was borrowed on April 21, 2020.
The Incremental Term Loan matures May 9, 2024. The interest rate per annum applicable to the Incremental Term Loan will be, at Everi FinTech’s option, the Eurodollar rate plus 10.50% or the base rate plus 9.50%.
Voluntary prepayments of the Incremental Term Loan prior to the two-year anniversary of the Closing Date will be subject to a make-whole premium, and voluntary prepayments for the six-month period thereafter will be subject to a prepayment premium of 1.00% of the principal amount repaid.
The Incremental Term Loan Credit Agreement contains certain covenants that, among other things, limit our ability, and the ability of certain of our subsidiaries, to incur additional indebtedness, sell assets or consolidate or merge with or into other companies, pay dividends or repurchase or redeem capital stock, make certain investments, issue capital stock of subsidiaries, incur liens, prepay, redeem or repurchase subordinated debt, and enter into certain types of transactions with our affiliates. The Incremental Term Loan Credit Agreement also requires us, together with our subsidiaries, to comply with a maximum consolidated secured leverage ratio, except that no such requirement shall apply for the quarters ending June 30, 2020, September 30, 2020, and December 31, 2020.
Upon the issuance of the Incremental Term Loan on April 21, 2020, we also issued warrants to Sagard Credit Partners, LP and Sagard Credit Partners (Cayman), LP (collectively, “Sagard”) to acquire 184,670 and 40,330 shares of our common stock with an exercise price equal to $5.37 per share. The warrants expire on the fifth anniversary of the date of issuance. The number of shares issuable pursuant to the warrants and the warrant exercise price are subject to adjustment for stock splits, reverse stock splits, stock dividends, recapitalization, mergers and certain other events.