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EX-32.2 - EX-32.2 - Everi Holdings Inc.evri-ex322_6.htm
EX-32.1 - EX-32.1 - Everi Holdings Inc.evri-ex321_7.htm
EX-31.2 - EX-31.2 - Everi Holdings Inc.evri-ex312_8.htm
EX-31.1 - EX-31.1 - Everi Holdings Inc.evri-ex311_9.htm
EX-10.1 - EX-10.1 - Everi Holdings Inc.evri-ex101_358.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,  2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM             TO             

Commission File Number: 001 — 32622

 

EVERI HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

20-0723270

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

7250 S. TENAYA WAY, SUITE 100

 

 

LAS VEGAS, NEVADA

 

89113

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(800) 833-7110

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

As of November 1, 2017, there were 67,366,979 shares of the registrant’s $0.001 par value per share common stock outstanding.

 

 

 

 

 


 

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

PART I: FINANCIAL INFORMATION

 

3

 

 

 

 

 

Item 1:

 

Financial Statements

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Loss and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

 

4

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

 

5

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2:

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

34

 

 

 

 

 

Item 3:

 

Quantitative and Qualitative Disclosures about Market Risk

 

47

 

 

 

 

 

Item 4:

 

Controls and Procedures

 

48

 

 

 

 

 

PART II: OTHER INFORMATION

 

48

 

 

 

 

 

Item 1:

 

Legal Proceedings

 

48

 

 

 

 

 

Item 1A:

 

Risk Factors

 

48

 

 

 

 

 

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

 

 

Item 3:

 

Defaults Upon Senior Securities

 

49

 

 

 

 

 

Item 4:

 

Mine Safety Disclosures

 

49

 

 

 

 

 

Item 5:

 

Other Information

 

49

 

 

 

 

 

Item 6:

 

Exhibits

 

50

 

 

 

 

 

Signatures

 

 

 

51

 

2


 

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements.

EVERI HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(In thousands, except loss per share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

55,452

 

 

$

56,218

 

 

$

165,832

 

 

$

158,660

 

Payments

 

 

191,870

 

 

 

165,959

 

 

 

561,257

 

 

 

483,286

 

Total revenues

 

 

247,322

 

 

 

222,177

 

 

 

727,089

 

 

 

641,946

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of

   depreciation and amortization)

 

 

13,820

 

 

 

15,467

 

 

 

39,503

 

 

 

36,871

 

Payments cost of revenue (exclusive of

   depreciation and amortization)

 

 

149,838

 

 

 

127,211

 

 

 

436,104

 

 

 

373,366

 

Operating expenses

 

 

29,463

 

 

 

26,996

 

 

 

87,235

 

 

 

87,735

 

Research and development

 

 

4,545

 

 

 

4,460

 

 

 

13,706

 

 

 

14,499

 

Depreciation

 

 

12,539

 

 

 

12,367

 

 

 

34,765

 

 

 

37,172

 

Amortization

 

 

17,322

 

 

 

24,104

 

 

 

52,086

 

 

 

70,887

 

Total costs and expenses

 

 

227,527

 

 

 

210,605

 

 

 

663,399

 

 

 

620,530

 

Operating income

 

 

19,795

 

 

 

11,572

 

 

 

63,690

 

 

 

21,416

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

23,368

 

 

 

24,815

 

 

 

72,306

 

 

 

74,548

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

14,615

 

 

 

 

Total other expenses

 

 

23,368

 

 

 

24,815

 

 

 

86,921

 

 

 

74,548

 

Loss before income tax

 

 

(3,573

)

 

 

(13,243

)

 

 

(23,231

)

 

 

(53,132

)

Income tax provision (benefit)

 

 

716

 

 

 

(4,989

)

 

 

3,623

 

 

 

(20,930

)

Net loss

 

 

(4,289

)

 

 

(8,254

)

 

 

(26,854

)

 

 

(32,202

)

Foreign currency translation

 

 

602

 

 

 

(394

)

 

 

1,710

 

 

 

(1,314

)

Comprehensive loss

 

$

(3,687

)

 

$

(8,648

)

 

$

(25,144

)

 

$

(33,516

)

Loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

 

$

(0.12

)

 

$

(0.40

)

 

$

(0.49

)

Diluted

 

$

(0.06

)

 

$

(0.12

)

 

$

(0.40

)

 

$

(0.49

)

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

66,897

 

 

 

66,049

 

 

 

66,449

 

 

 

66,041

 

Diluted

 

 

66,897

 

 

 

66,049

 

 

 

66,449

 

 

 

66,041

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


 

EVERI HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

108,471

 

 

$

119,051

 

Settlement receivables

 

 

127,443

 

 

 

128,821

 

Trade and other receivables, net of allowances for doubtful accounts of $5,427 and $4,701 at September 30, 2017 and December 31, 2016, respectively

 

 

44,971

 

 

 

56,651

 

Inventory

 

 

23,790

 

 

 

19,068

 

Prepaid expenses and other assets

 

 

22,538

 

 

 

18,048

 

Total current assets

 

 

327,213

 

 

 

341,639

 

Non-current assets

 

 

 

 

 

 

 

 

Property, equipment and leased assets, net

 

 

109,399

 

 

 

98,439

 

Goodwill

 

 

640,593

 

 

 

640,546

 

Other intangible assets, net

 

 

338,074

 

 

 

317,997

 

Other receivables

 

 

2,876

 

 

 

2,020

 

Other assets

 

 

7,450

 

 

 

7,522

 

Total non-current assets

 

 

1,098,392

 

 

 

1,066,524

 

Total assets

 

$

1,425,605

 

 

$

1,408,163

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Settlement liabilities

 

$

197,494

 

 

$

239,123

 

Accounts payable and accrued expenses

 

 

126,625

 

 

 

94,391

 

Current portion of long-term debt

 

 

8,200

 

 

 

10,000

 

Total current liabilities

 

 

332,319

 

 

 

343,514

 

Non-current liabilities

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

60,785

 

 

 

57,611

 

Long-term debt, less current portion

 

 

1,130,671

 

 

 

1,111,880

 

Other accrued expenses and liabilities

 

 

25,634

 

 

 

2,951

 

Total non-current liabilities

 

 

1,217,090

 

 

 

1,172,442

 

Total liabilities

 

 

1,549,409

 

 

 

1,515,956

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 500,000 shares authorized and 91,918 and 90,952 shares issued at September 30, 2017 and December 31, 2016, respectively

 

 

92

 

 

 

91

 

Convertible preferred stock, $0.001 par value, 50,000 shares authorized and 0 shares outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

273,906

 

 

 

264,755

 

Accumulated deficit

 

 

(221,152

)

 

 

(194,299

)

Accumulated other comprehensive loss

 

 

(399

)

 

 

(2,109

)

Treasury stock, at cost, 24,872 and 24,867 shares at September 30, 2017 and December 31, 2016, respectively

 

 

(176,251

)

 

 

(176,231

)

Total stockholders’ deficit

 

 

(123,804

)

 

 

(107,793

)

Total liabilities and stockholders’ deficit

 

$

1,425,605

 

 

$

1,408,163

 

 

See notes to unaudited condensed consolidated financial statements.

4


 

EVERI HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(26,854

)

 

$

(32,202

)

Adjustments to reconcile net loss to cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

86,851

 

 

 

108,059

 

Amortization of financing costs

 

 

4,567

 

 

 

5,023

 

Loss on sale or disposal of assets

 

 

1,580

 

 

 

2,554

 

Accretion of contract rights

 

 

5,845

 

 

 

6,521

 

Provision for bad debts

 

 

7,946

 

 

 

7,192

 

Deferred income taxes

 

 

3,174

 

 

 

(22,259

)

Write-down of assets

 

 

 

 

 

4,289

 

Reserve for obsolescence

 

 

46

 

 

 

942

 

Loss on extinguishment of debt

 

 

14,615

 

 

 

 

Stock-based compensation

 

 

5,125

 

 

 

4,146

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Settlement receivables

 

 

1,569

 

 

 

9,158

 

Trade and other receivables

 

 

2,767

 

 

 

(1,386

)

Inventory

 

 

(5,314

)

 

 

6,315

 

Prepaid and other assets

 

 

(3,337

)

 

 

2,912

 

Settlement liabilities

 

 

(41,799

)

 

 

(22,000

)

Accounts payable and accrued expenses

 

 

12,981

 

 

 

6,544

 

Net cash provided by operating activities

 

 

69,762

 

 

 

85,808

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(70,057

)

 

 

(67,025

)

Acquisitions, net of cash acquired

 

 

 

 

 

(694

)

Proceeds from sale of fixed assets

 

 

4

 

 

 

4,608

 

Placement fee agreements

 

 

(13,132

)

 

 

(11,187

)

Changes in restricted cash

 

 

(149

)

 

 

88

 

Net cash used in investing activities

 

 

(83,334

)

 

 

(74,210

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repayments of new credit facility

 

 

(2,050

)

 

 

 

Repayments of prior credit facility

 

 

(465,600

)

 

 

(21,900

)

Repayments of secured notes

 

 

(335,000

)

 

 

 

Proceeds from current credit facility

 

 

820,000

 

 

 

 

Debt issuance costs and discounts

 

 

(19,748

)

 

 

(480

)

Proceeds from exercise of stock options

 

 

4,046

 

 

 

 

Purchase of treasury stock

 

 

(21

)

 

 

(17

)

Net cash provided by (used in) financing activities

 

 

1,627

 

 

 

(22,397

)

Effect of exchange rates on cash

 

 

1,365

 

 

 

(743

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

Net decrease for the period

 

 

(10,580

)

 

 

(11,542

)

Balance, beginning of the period

 

 

119,051

 

 

 

102,030

 

Balance, end of the period

 

$

108,471

 

 

$

90,488

 

 

See notes to unaudited condensed consolidated financial statements.

5


 

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Supplemental cash disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

59,894

 

 

$

55,465

 

Cash paid for income tax

 

$

760

 

 

$

1,124

 

Cash refunded for income tax

 

$

200

 

 

$

92

 

Supplemental non-cash disclosures

 

 

 

 

 

 

 

 

Accrued and unpaid capital expenditures

 

$

4,736

 

 

$

1,427

 

Accrued and unpaid placement fees

 

$

39,074

 

 

$

 

Accrued and unpaid contingent liability for acquisitions

 

$

 

 

$

(3,169

)

Transfer of leased gaming equipment to inventory

 

$

6,093

 

 

$

6,222

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

6


 

EVERI HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In this filing, we refer to: (i) our unaudited condensed consolidated financial statements and notes thereto as our “Financial Statements,” (ii) our Unaudited Condensed Consolidated Statements of Loss and Comprehensive Loss as our “Statements of Loss,” (iii) our Unaudited Condensed Consolidated Balance Sheets as our “Balance Sheets,” and our Unaudited Condensed Consolidated Statements of Cash Flows as our “Cash Flows.”

1.

BUSINESS

Everi Holdings Inc. (formerly known as Global Cash Access Holdings, Inc.) (“Everi Holdings,” “Holdings” or “Everi”) is a holding company, the assets of which are the issued and outstanding shares of capital stock of each of Everi Games Holding Inc. (formerly known as Multimedia Games Holding Company, Inc.) (“Everi Games Holding”), which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (formerly known as Multimedia Games, Inc.) (“Everi Games” or “Games”) and Everi Payments Inc. (formerly known as Global Cash Access, Inc.) (“Everi Payments” or “Payments”). Unless otherwise indicated, the terms the “Company,” “we,” “us” and “our” refer to Holdings together with its consolidated subsidiaries.

Everi is dedicated to providing video and mechanical reel gaming content and technology solutions, integrated gaming payments solutions and compliance and efficiency software to casino operators. Everi Games provides: (a) comprehensive content, electronic gaming units and systems for Native American and commercial casinos, including both Wide-Area Progressive (“WAP”) systems and the TournEvent® slot tournament solution; and (b) the central determinant system for the video lottery terminals installed in the State of New York. Everi Payments provides: (a) access to cash at gaming facilities via Automated Teller Machine (“ATM”) cash withdrawals, credit card cash access transactions, point of sale (“POS”) debit card transactions, and check verification and warranty services; (b) fully integrated gaming industry kiosks that provide cash access and related services; (c) products and services that improve credit decision making, automate cashier operations and enhance patron marketing activities for gaming establishments; (d) compliance, audit and data solutions; and (e) online payment processing solutions for gaming operators in states that offer intrastate, Internet-based gaming and lottery activities.

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 and nine months ended September 30, 2017 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

There have been no changes to our basis of presentation and significant accounting policies since the most recent filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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, settlement receivables, trade receivables, other receivables, settlement liabilities, accounts payable and accrued expenses approximates fair value due to the short-term maturities of

7


 

these instruments. The fair value of our borrowings are 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).

 

 

 

Level of

Hierarchy

 

Fair Value

 

 

Outstanding

Balance

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

Term loan

 

2

 

$

826,130

 

 

$

817,950

 

Senior unsecured notes

 

1

 

$

378,875

 

 

$

350,000

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Term loan

 

1

 

$

451,632

 

 

$

465,600

 

Senior secured notes

 

3

 

$

324,950

 

 

$

335,000

 

Senior unsecured notes

 

1

 

$

350,000

 

 

$

350,000

 

 

The term loan facility was reported at fair value using a Level 2 input as there were quoted prices in markets that were not considered active as of September 30, 2017. The senior unsecured notes were reported at fair value using a Level 1 input as there were quoted prices in markets that were considered active as of September 30, 2017.

The term loan was reported at fair value using a Level 1 input as there were quoted prices in markets that were considered active as of December 31, 2016. The senior secured notes were reported at fair value using a Level 3 input as there was no market activity or observable inputs as of December 31, 2016. The senior unsecured notes were reported at fair value using a Level 1 input as there were quoted prices in markets that were considered active as of December 31, 2016.

Reclassification of Prior Year Balances

Reclassifications were made to the prior-period Financial Statements to conform to the current period presentation.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, which provides updated guidance on the goodwill impairment test and the method by which an entity recognizes an impairment charge. These amendments eliminate Step 2 from the current goodwill impairment process and require that an entity recognize an impairment charge equal to the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, a company should also take into consideration income tax effects from tax deductible goodwill on the carrying amount of a reporting unit when recording an impairment loss. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will be applied using a prospective approach. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this guidance in the current period. As no indicators of impairment were identified for our goodwill during the three and nine months ended September 30, 2017, this ASU did not impact our Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classification on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. We adopted this guidance in the current period on a prospective basis. As of September 30, 2017, the adoption of ASU No. 2016-09 has not materially impacted our Financial Statements. With respect to forfeitures, the Company will continue to estimate the number of awards expected to be forfeited in accordance with our existing accounting policy. In addition, our Cash Flows present excess tax benefits as operating activities in the current period, as the prior period was not adjusted.

In July 2015, the FASB issued ASU No. 2015-11, which provides guidance on the measurement of inventory value. The amendments require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable

8


 

value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments do not apply to inventory that is measured using LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. The pronouncement is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted. We adopted this guidance in the current period. This ASU did not have a material impact on our Financial Statements.

Recent Accounting Guidance Not Yet Adopted

In May 2017, the FASB issued ASU No. 2017-09 to clarify which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. An entity is required to account for the effects of a modification unless all of the following conditions are met: (i) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or value using an alternative measurement method) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in the first period of the year this guidance is adopted. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a prospective approach as of the beginning of the first period of adoption. Early adoption is permitted for acquisitions, or disposals that occur before the issuance date or effectiveness date of the amendments when the transaction has not been reported in financial statements that have been issued or made available for issuance. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In October 2016, the FASB issued ASU No. 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a retrospective approach to each period presented. Early adoption is permitted and adoption in an interim period should reflect adjustments as of the beginning of the fiscal year that includes that interim period. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In October 2016, the FASB issued ASU No. 2016-16, which provides updated guidance on the recognition of the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs, and this eliminates the exception for an intra-entity transfer of such assets. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a modified retrospective approach through a cumulative-effective adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted during the first interim period of the year this guidance is adopted. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15, which provides updated guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a

9


 

retrospective approach. If it is impracticable to apply the amendments retrospectively for some of the issues within this ASU, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted including adoption in an interim period. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, which provides updated guidance on credit losses for financial assets measured at amortized cost basis and available-for sale debt securities. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will be applied using a modified retrospective approach for the cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective and using a prospective approach for debt securities for which any other-than-temporary impairment had been recognized before the effective date. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, which provides guidance on the accounting treatment of leases. The ASU establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are currently assessing the impact of this ASU on our Financial Statements, we expect the primary impact to our consolidated financial position upon adoption will be the recognition, on a discounted basis, of our minimum commitments under noncancelable operating leases on our Balance Sheets, which will result in the recording of right of use assets and lease obligations and are currently discussed in “Note 12 — Commitments and Contingencies.”

In May 2014, the FASB issued ASU No. 2014-09, which creates FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” and supersedes ASC Topic 605, “Revenue Recognition”. The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. The guidance in ASU 2014-09 was further updated by ASU 2016-08 in March 2016, which provides clarification on the implementation of the principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, which provides clarification on the implementation of performance obligations and licensing in ASU 2014-09. In May 2016, the FASB issued ASU 2016-11, which amends guidance provided in two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting over various topics relating to ASU 606. In May 2016, the FASB issued ASU 2016-12, which clarified various topics in ASU 606. In December 2016, the FASB issued ASU 2016-20, which clarified additional topics in ASU 606. This guidance was originally effective for interim and annual reporting periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU No. 2015-14, which extended the effective date to interim and annual periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application.

10


 

We have performed a review of the requirements of the standard and identified our major revenue streams and the anticipated impact to each of them:

 

Major Revenue Stream

 

Preliminary Expected Impact Upon Adoption

 

 

 

Games Segment:

 

 

 

 

 

Game Sales

 

We expect revenue recognition to be consistent with our current practices, however, there may be some differences as we continue to evaluate the implications.

 

 

 

Game Operations

 

We expect revenue recognition to be consistent with our current practices, however, with respect to our WAP offering(s), for which we initiated this year, we will be required to net the direct costs with Games revenues as opposed to our existing practice of recording those amounts to Games cost of revenues. WAP jackpot expense was approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2017, respectively.

 

 

 

Payments Segment:

 

 

 

 

 

Cash Advance, ATM and Check Services

 

We generally expect revenue recognition to be consistent with our current practices, however, there may potentially be significant differences as we continue to evaluate the implications specifically related to our reporting these revenues on a gross versus net basis. As such, there will be no effect on operating income, net loss, cash flows or the timing of revenues recognized and costs incurred. In addition, there may be changes to the Kiosk Sales and Services and Compliance Sales and Services offerings that impact cash advance, ATM and check services revenue streams as we continue to evaluate the revenue recognition standard.

 

 

 

Central Credit

 

We expect revenue recognition to be consistent with our current practices, however, there may be differences as we continue to evaluate the implications.

 

 

 

Kiosk Sales and Services

 

We expect to encounter some level of change to our revenue recognition practices for these revenue streams under the new guidance, however, the amounts are not anticipated to be material as we continue to evaluate the implications.

 

 

 

Compliance Sales and Services

 

We expect to encounter some level of change to our revenue recognition practices for these revenue streams under the new guidance, however, the amounts are not anticipated to be material as we continue to evaluate the implications.

 

11


 

Currently, we do not expect our Games or certain of our Payments revenues to be materially impacted by the implementation of this guidance; however, we continue to evaluate certain of our other Payments-related revenue streams as there may be a potentially significant impact, depending on our final interpretation of the accounting guidance. More specifically, based on the transition guidance related to the new revenue recognition standard, we are in the process of determining if our cash advance, ATM and check services revenue streams will be required to be reported “net of transaction price” rather than our current gross revenue presentation basis. Under the existing Topic 605, certain factors that supported our gross reporting position have been eliminated in the new Topic 606. In addition, our understanding of the new transition guidance, as it specifically pertains to payments from customers, may further require us to report certain of these Payments-related revenue streams on a net presentation basis. If our conclusions, in accordance with GAAP, support a net reporting of these specific revenue streams, this will have a significant impact on our revenues, cost of revenues and margins for the affected revenue streams, however, there will be no effect on operating income, net loss, cash flows or the timing of revenues recognized and costs incurred.

As we continue to take the necessary measures of preparedness in connection with the adoption of the new revenue recognition standard, we continue to do the following:

 

Evaluate our revenue streams to determine the extent, if any, of the changes to the timing and amount of revenue recorded in each reporting period.

 

Review our existing accounting policies, procedures and internal controls to further determine the impact of the new standard on our Financial Statements.

 

Prepare the enhanced disclosures and updates to our revenue recognition policies to identify performance obligations to customers and that will require significant judgment in both measurement and recognition.

 

Review in detail our sales contract terms and conditions to determine the necessary adjustments, if any.

 

Monitor the activity of the FASB and the transition resource group as it relates to specific interpretive guidance that may impact us.

We may identify other impacts from the implementation of this guidance as we continue our assessment. We expect to adopt this guidance using the modified retrospective method beginning in the first quarter of 2018.

3.

BUSINESS COMBINATIONS

We account for business combinations in accordance with ASC 805, which requires that the identifiable assets acquired and liabilities assumed be recorded at their estimated fair values on the acquisition date separately from goodwill, which is the excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities. We include the results of operations of an acquired business as of the acquisition date. We had no material acquisitions for the three and nine months ended September 30, 2017 and 2016.

4.

FUNDING AGREEMENTS

Contract Cash Solutions Agreement

Our Contract Cash Solutions Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) allows us to use funds owned by Wells Fargo to provide the currency needed for normal operating requirements for our ATMs. For the use of these funds, we pay Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Statements of Loss, were $1.2 million and $3.5 million for the three and nine months ended September 30, 2017, respectively, and $0.7 million and $2.3 million for the three and nine months ended September 30, 2016, respectively. We are exposed to interest rate risk to the extent that the applicable London Interbank Offered Rate (“LIBOR”) increases.

Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable which is recorded on a net basis. As these funds are not our assets, supplied cash is not reflected on the Balance Sheets. The outstanding balances of ATM cash utilized by us from Wells Fargo were $226.6 million and $285.4 million as of September 30, 2017 and December 31, 2016, respectively.

12


 

The Contract Cash Solutions Agreement, as amended, provides us with cash in the maximum amount of $425.0 million during the term of the agreement, which expires on June 30, 2019.

We are responsible for any losses of cash in the ATMs under this agreement, and we self‑insure for this risk. We incurred no material losses related to this self‑insurance for the three and nine months ended September 30, 2017 and 2016.

Site-Funded ATMs

We operate ATMs at certain customer gaming establishments where the gaming establishment provides the cash required for the ATM operational needs. We are required to reimburse the customer for the amount of cash dispensed from these site-funded ATMs. The site-funded ATM liability included within settlement liabilities in the accompanying Balance Sheets was $134.1 million and $151.0 million as of September 30, 2017 and December 31, 2016, respectively.

Prefunded Cash Access Agreements

Due to certain regulatory requirements, some international gaming establishments require prefunding of cash to cover all outstanding settlement amounts in order for us to provide cash access services to their properties. We enter into agreements with these operators for which we supply our cash access services for their properties. Under these agreements, we maintain sole discretion to either continue or cease operations as well as discretion over the amounts prefunded to the properties and may request amounts to be refunded to us, with appropriate notice to the operator, at any time. The initial prefunded amounts and subsequent amounts from the settlement of transactions are deposited into a bank account that is to be used exclusively for cash access services, and we maintain the right to monitor all transaction activity in that account. The total amount of prefunded cash outstanding was approximately $9.3 million and $8.5 million at September 30, 2017 and December 31, 2016, respectively, and is included in prepaid expenses and other assets on our Balance Sheets.

5.

TRADE AND OTHER RECEIVABLES

Trade and loans receivables represent short-term credit granted to customers as well as long-term loans receivable on our games, fully integrated kiosks and compliance products. Trade and loans receivables generally do not require collateral. The balance of trade and loans receivables consists of outstanding balances owed to us by gaming establishments and casino patrons. Other receivables include income taxes receivables and other miscellaneous receivables. The balance of trade and other receivables consisted of the following (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Trade and other receivables, net

 

 

 

 

 

 

 

 

Games trade and loans receivables

 

$

36,837

 

 

$

44,410

 

Payments trade and loans receivables

 

 

10,214

 

 

 

12,337

 

Other receivables

 

 

796

 

 

 

1,924

 

Total trade and other receivables, net

 

$

47,847

 

 

$

58,671

 

Less: non-current portion of receivables

 

 

2,876

 

 

 

2,020

 

Total trade and other receivables,

   current portion

 

$

44,971

 

 

$

56,651

 

 

At least quarterly, we evaluate the collectability of the outstanding balances and establish a reserve for the face amount of the expected losses on our receivables. The allowance for doubtful accounts for trade receivables was $5.4 million and $4.7 million as of September 30, 2017 and December 31, 2016, respectively, and includes reserves for both Games and Payments receivables. The provision for doubtful accounts is generally included within operating expenses in the Statements of Loss. We also have a provision for doubtful accounts specifically associated with our outstanding check warranty receivables, which is included within Payments cost of revenues (exclusive of depreciation and amortization) in the Statements of Loss. The outstanding balances of the check warranty and general reserves were $3.0 million and $2.4 million, respectively, as of September 30, 2017 and $2.7 million and $2.0 million, respectively, as of December 31, 2016.

13


 

6.

PREPAID AND OTHER ASSETS

Prepaid and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our Revolving Credit Facility (defined herein), restricted cash and other assets. The current portion of these assets is included in prepaid and other 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 and other assets consisted of the following (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Prepaid expenses and other assets

 

 

 

 

 

 

 

 

Deposits

 

$

9,971

 

 

$

8,622

 

Prepaid expenses

 

 

7,870

 

 

 

5,937

 

Other

 

 

4,697

 

 

 

3,489

 

Total prepaid expenses and other assets

 

$

22,538

 

 

$

18,048

 

 

The balance of the non-current portion of other assets consisted of the following (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Other assets

 

 

 

 

 

 

 

 

Prepaid expenses and deposits

 

$

3,464

 

 

$

3,399

 

Debt issuance costs of revolving credit facility

 

 

898

 

 

 

689

 

Other

 

 

3,088

 

 

 

3,434

 

Total other assets

 

$

7,450

 

 

$

7,522

 

 

 

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. The inventory is stated at the lower of cost or net realizable value and accounted for using the FIFO method.

Inventory consisted of the following (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Inventory

 

 

 

 

 

 

 

 

Raw materials and component parts, net of reserves of $1,523 and $2,155 at

   September 30, 2017 and December 31, 2016, respectively

 

$

15,974

 

 

$

12,570

 

Work-in-progress

 

 

3,516

 

 

 

1,502

 

Finished goods

 

 

4,300

 

 

 

4,996

 

Total inventory

 

$

23,790

 

 

$

19,068

 

 

14


 

8.

PROPERTY, EQUIPMENT AND LEASED ASSETS

Property, equipment and leased assets consist of the following (in thousands):

 

 

 

 

 

At September 30, 2017

 

 

At December 31, 2016

 

 

 

Useful Life

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

(Years)

 

Cost

 

 

Depreciation

 

 

Value

 

 

Cost

 

 

Depreciation

 

 

Value

 

Property, equipment and leased

   assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental pool - deployed

 

2-4

 

$

149,895

 

 

$

73,623

 

 

$

76,272

 

 

$

123,812

 

 

$

59,188

 

 

$

64,624

 

Rental pool - undeployed

 

2-4

 

 

19,829

 

 

 

10,874

 

 

 

8,955

 

 

 

13,456

 

 

 

5,721

 

 

 

7,735

 

ATM equipment

 

5

 

 

17,154

 

 

 

11,992

 

 

 

5,162

 

 

 

16,537

 

 

 

11,189

 

 

 

5,348

 

Leasehold and building

   improvements

 

Lease

Term

 

 

10,723

 

 

 

4,820

 

 

 

5,903

 

 

 

10,023

 

 

 

3,698

 

 

 

6,325

 

Cash advance equipment

 

3

 

 

8,492

 

 

 

5,544

 

 

 

2,948

 

 

 

8,590

 

 

 

4,499

 

 

 

4,091

 

Machinery, office and other

   equipment

 

2-5

 

 

33,217

 

 

 

23,058

 

 

 

10,159

 

 

 

30,424

 

 

 

20,108

 

 

 

10,316

 

Total

 

 

 

$

239,310

 

 

$

129,911

 

 

$

109,399

 

 

$

202,842

 

 

$

104,403

 

 

$

98,439

 

 

Depreciation expense related to property, equipment and leased assets totaled approximately $12.5 million and $34.8 million for the three and nine months ended September 30, 2017, respectively, and $12.4 million and $37.2 million for the three and nine months ended September 30, 2016, respectively. There was no material impairment of our property, equipment and leased assets for the three and nine months ended September 30, 2017 and 2016.

9.

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 $640.6 million and $640.5 million at September 30, 2017 and December 31, 2016, respectively.

In accordance with ASC 350, we test goodwill at the reporting unit level, which are identified as operating segments or one level below, for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

We test for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter, or more often under certain circumstances. The annual impairment test is completed using either: a qualitative Step 0 assessment based on reviewing relevant events and circumstances; or a quantitative Step 1 assessment, which determines the fair value of the reporting unit, using an income approach that discounts future cash flows based on the estimated future results of our reporting units and a market approach that compares market multiples of comparable companies to determine whether or not any impairment exists. If the fair value of a reporting unit is less than its carrying amount, we will use the Step 1 assessment to determine the impairment in accordance with the adoption of ASU No 2017-04.

No impairment was identified for our goodwill for the three and nine months ended September 30, 2017 and 2016.

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Other Intangible Assets

Other intangible assets consist of the following (in thousands):

 

 

 

 

At September 30, 2017

 

 

At December 31, 2016

 

 

 

Useful Life

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

(years)

 

Cost

 

 

Amortization

 

 

Value

 

 

Cost

 

 

Amortization

 

 

Value

 

Other intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract rights under placement

   fee agreements

 

1-7

 

$

59,605

 

 

$

1,782

 

 

$

57,823

 

 

$

17,742

 

 

$

6,281

 

 

$

11,461

 

Customer contracts

 

7-14

 

 

50,975

 

 

 

42,768

 

 

 

8,207

 

 

 

50,975

 

 

 

40,419

 

 

 

10,556

 

Customer relationships

 

8-12

 

 

231,100

 

 

 

58,412

 

 

 

172,688

 

 

 

231,100

 

 

 

42,688

 

 

 

188,412

 

Developed technology and

   software

 

1-6

 

 

244,151

 

 

 

152,706

 

 

 

91,445

 

 

 

224,265

 

 

 

126,721

 

 

 

97,544

 

Patents, trademarks and other

 

1-17

 

 

28,834

 

 

 

20,923

 

 

 

7,911

 

 

 

27,771

 

 

 

17,747

 

 

 

10,024

 

Total

 

 

 

$

614,665

 

 

$

276,591

 

 

$

338,074

 

 

$

551,853

 

 

$

233,856

 

 

$

317,997

 

 

Amortization expense related to other intangible assets was approximately $17.3 million and $52.1 million for the three and nine months ended September 30, 2017, respectively, and $24.1 million and $70.9 million for the three and nine months ended September 30, 2016, respectively.

We evaluate our other intangible assets for potential impairment in connection with our quarterly review process. There was no material impairment identified for any of our other intangible assets for the three and nine months ended September 30, 2017 and 2016.

We enter into placement fee agreements to provide financing for new gaming facilities or for the expansion or improvement of existing facilities. The funding under placement fee agreements is not reimbursed. In return for the fees under these agreements, each facility dedicates a percentage of its floor space, or an agreed upon unit count, for the placement of our electronic gaming machines (“EGMs”) over the term of the agreement, generally 12 to 83 months, and we receive a fixed percentage or flat fee of those machines’ hold per day. Certain of the agreements contain EGM performance standards that could allow the respective facility to reduce a portion of our guaranteed floor space.

Placement fees and amounts advanced in excess of those to be reimbursed by the customer for real property and land improvements are allocated to intangible assets and are generally amortized over the term of the contract, which is recorded as a reduction of revenue generated from the facility. In the past we have, and in the future, we may, by mutual agreement, amend these agreements to reduce our floor space at the facilities. Any proceeds received for the reduction of floor space are first applied against the intangible asset for that particular placement fee agreement, if any, and the remaining net book value of the intangible asset is prospectively amortized on a straight-line method over the remaining estimated useful life. In July 2017, we entered into a placement fee agreement with a customer for certain of its locations for approximately $49.1 million, net of $10.1 million of unamortized fees related to superseded contracts. During the three and nine months ended September 30, 2017, we paid approximately $10.1 million and $13.1 million, respectively, in placement fees primarily related to this agreement. For the nine months ended September 30, 2016, $11.2 million was paid to extend the term of placement fee agreements with the same customer for certain of its locations. We did not enter into any placement fee agreements or incur related fees during the three months ended September 30, 2016.

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10.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The following table presents our accounts payable and accrued expenses (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Accounts payable and accrued expenses

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

62,422

 

 

$

55,352

 

Placement fees(1)

 

 

16,746

 

 

 

 

Accrued interest

 

 

7,650

 

 

 

82

 

Payroll and related expenses

 

 

10,207

 

 

 

12,305

 

Deferred and unearned revenues

 

 

9,981

 

 

 

9,222

 

Cash access processing and related expenses

 

 

7,682

 

 

 

7,001

 

Accrued taxes

 

 

2,734

 

 

 

2,587

 

Other

 

 

9,203

 

 

 

7,842

 

Total accounts payable and accrued expenses

 

$

126,625

 

 

$

94,391

 

 

 

(1)

The total outstanding balance of the placement fees was $39.1 million. The remaining $22.3 million of non-current placement fees was included in other accrued expenses and liabilities in our Balance Sheets as of September 30, 2017.

11.

LONG-TERM DEBT

The following table summarizes our outstanding indebtedness (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Long-term debt

 

 

 

 

 

 

 

 

Senior secured term loan

 

$

817,950

 

 

$

465,600

 

Senior secured notes

 

 

 

 

 

335,000

 

Senior unsecured notes

 

 

350,000

 

 

 

350,000

 

Total debt

 

 

1,167,950

 

 

 

1,150,600

 

Less: debt issuance costs and discount

 

 

(29,079

)

 

 

(28,720

)

Total debt after debt issuance costs and

   discount

 

 

1,138,871

 

 

 

1,121,880

 

Less: current portion of long-term debt

 

 

(8,200

)

 

 

(10,000

)

Long-term debt, less current portion

 

$

1,130,671

 

 

$

1,111,880

 

 

Refinancing

On May 9, 2017 (the “Closing Date”), Everi Payments, as borrower, and Holdings entered into a credit agreement 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 “New Credit Agreement”). The New Credit Agreement provides for: (i) a $35.0 million, five-year senior secured revolving credit facility (the “New Revolving Credit Facility”); and (ii) an $820.0 million, seven-year senior secured term loan facility (the “New Term Loan Facility,” and together with the New Revolving Credit Facility, the “New Credit Facilities”). The fees associated with the New Credit Facilities included discounts of approximately $4.1 million and debt issuance costs of approximately $15.5 million. All borrowings under the New Credit Facilities are subject to the satisfaction of customary conditions, including the absence of defaults and the accuracy of representations and warranties.

The proceeds from the New Term Loan Facility incurred on the Closing Date were used to: (i) refinance: (a) the Everi Payments existing credit facility with an outstanding balance of approximately $462.3 million with Bank of America, N.A., as administrative agent, collateral agent, swing line lender and letter of credit issuer, Deutsche Bank Securities Inc., as syndication agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc., as joint lead arrangers and joint book managers (the “Prior Credit Facility”); and (b) the Everi Payments 7.25% Senior

17


 

Secured Notes due 2021 in the aggregate original principal amount of $335.0 million (the “Refinanced Secured Notes”); and (ii) pay related transaction fees and expenses.

In connection with the refinancing, we recorded a non-cash charge of approximately $14.6 million during the second quarter of 2017 related to the unamortized deferred financing fees and discounts related to the extinguished term loan under the Prior Credit Facility and the redeemed Refinanced Secured Notes. No prepayment penalties were incurred.

New Credit Facilities

The New Term Loan Facility matures seven years after the Closing Date (the “Stated Term Maturity Date”); provided that, if on the date that is 91 days prior to the maturity date (the “Unsecured Notes Maturity Date”) for the Everi Payments 10.00% Senior Unsecured Notes due 2022 in the aggregate original principal amount of $350.0 million (the “Unsecured Notes”), any Unsecured Notes remain outstanding and the Unsecured Notes Maturity Date has not been extended to a date that is at least six months after the Stated Term Maturity Date, then the New Term Loan Facility shall mature on the date that is 91 days before the Unsecured Notes Maturity Date. The New Revolving Credit Facility matures five years after the Closing Date; provided, that, if on the date that is 121 days prior to the Unsecured Notes Maturity Date, any Unsecured Notes remain outstanding and the Unsecured Notes Maturity Date has not been extended to a date that is at least six months after the Stated Term Maturity Date, then the New Revolving Credit Facility shall mature on the date that is 121 days before the Unsecured Notes Maturity Date. The New Revolving Credit Facility is available for general corporate purposes, including permitted acquisitions, working capital and the issuance of letters of credit.

The interest rate per annum applicable to loans under the New Revolving Credit Facility will be, at Everi Payments’ option, the base rate or the Eurodollar Rate (defined to be the London Interbank Offered Rate or a comparable or successor rate) (the “Eurodollar Rate”) plus, in each case, an applicable margin. The interest rate per annum applicable to the New Term Loan Facility will also be, at Everi Payments’ option, the base rate or the Eurodollar Rate plus, in each case, an applicable margin. The Eurodollar Rate will be reset at the beginning of each selected interest period based on the Eurodollar Rate then in effect; provided that, if the Eurodollar Rate is below 1.0%, then such rate will be equal to 1.0% plus the applicable margin. The base rate is a fluctuating interest rate equal to the highest of: (i) the prime lending rate announced by the administrative agent; (ii) the federal funds effective rate from time to time plus 0.50%; and (iii) the Eurodollar Rate (after taking account of any applicable floor) applicable for an interest period of one month plus 1.00%. The applicable margins for both the New Revolving Credit Facility and the New Term Loan Facility are: (i) 4.50% in respect of Eurodollar Rate loans and (ii) 3.50% in respect of base rate loans.

Voluntary prepayments of the term loan and the revolving loans and voluntary reductions in the unused commitments are permitted in whole or in part, in minimum amounts as set forth in the New Credit Agreement governing the New Credit Facilities, with prior notice but without premium or penalty, except that certain refinancings of the term loans within six months after the Closing Date will be subject to a prepayment premium of 1.00% of the principal amount repaid.

Subject to certain exceptions, the obligations under the New Credit Facilities are secured by substantially all of the present and subsequently acquired assets of each of Everi Payments, Holdings and the subsidiary guarantors party thereto including: (i) a perfected first priority pledge of all the capital stock of Everi Payments and each domestic direct, wholly owned material restricted subsidiary held by Holdings, Everi Payments or any such subsidiary guarantor; and (ii) a perfected first priority security interest in substantially all other tangible and intangible assets of Holdings, Everi Payments, and such subsidiary guarantors (including, but not limited to, accounts receivable, inventory, equipment, general intangibles, investment property, real property, intellectual property and the proceeds of the foregoing). Subject to certain exceptions, the New Credit Facilities are unconditionally guaranteed by Holdings and such subsidiary guarantors.

The New Credit Agreement governing the New Credit Facilities contains certain covenants that, among other things, limit Holdings’ ability, and the ability of certain of its 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 its affiliates. The New Credit Agreement governing the New Credit Facilities also requires Holdings, together with its subsidiaries, to comply with a consolidated secured leverage ratio. At

18


 

September 30, 2017, our consolidated secured leverage ratio was 3.63 to 1.00, with a maximum allowable ratio of 5.00 to 1.00. Our maximum consolidated secured leverage ratio will be 5.00 to 1.00, 4.75 to 1.00, and 4.50 to 1.00 as of December 31, 2017, 2018, and 2019 and thereafter, respectively.

We were in compliance with the terms of the New Credit Facilities as of September 30, 2017.

Events of default under the New Credit Agreement governing the New Credit Facilities include customary events such as a cross-default provision with respect to other material debt. In addition, an event of default will occur if Holdings undergoes a change of control. This is defined to include the case where Holdings ceases to own 100% of the equity interests of Everi Payments, or where any person or group acquires a percentage of the economic or voting interests of Holdings’ capital stock of 35% or more (determined on a fully diluted basis).

We are required to repay the New Term Loan Facility in an amount equal to 0.25% per quarter of the initial aggregate principal, with the final principal repayment installment on the maturity date. Interest is due in arrears on each interest payment date applicable thereto and at such other times as may be specified in the New Credit Agreement. As to any loan other than a base rate loan, the interest payment dates shall be the last day of each interest period applicable to such loan and the maturity date (provided, however, that if any interest period for a Eurodollar Rate loan exceeds three months, the respective dates that fall every three months after the beginning of such interest period shall also be interest payment dates). As to any base rate loan, the interest payment dates shall be last business day of each March, June, September and December and the maturity date.  

For the quarter ended September 30, 2017, the New Term Loan Facility had an applicable weighted average interest rate of 5.74%. For the nine months ended September 30, 2017, the Prior Credit Facility had an applicable weighted average interest rate of 6.29%; the New Term Loan Facility had an applicable weighted average interest rate of 5.71%; and a blended weighted average interest rate of 5.87% for the period ended September 30, 2017.

At September 30, 2017, we had $818.0 million of borrowings outstanding under the New Term Loan Facility and no borrowings outstanding under the New Revolving Credit Facility. We had $35.0 million of additional borrowing availability under the New Revolving Credit Facility as of September 30, 2017.

Refinanced Senior Secured Notes

In connection with entering into the New Credit Agreement, on May 9, 2017, Everi Payments redeemed in full $335.0 million face value (plus accrued interest) of the Refinanced Secured Notes. As a result of the redemption, the Company recorded $1.7 million, which consisted of unamortized deferred financing fees of $0.2 million and discounts of $1.5 million. These fees are included in the total $14.6 million non-cash charge.

Senior Unsecured Notes

In December 2014, we issued $350.0 million in aggregate principal amount of 10.00% Unsecured Notes due 2022 (the “Unsecured Notes”). The fees associated with the Unsecured Notes included original issue discounts of approximately $3.8 million and debt issuance costs of approximately $14.0 million.

Interest is due semi-annually in arrears each January and July.

The Unsecured Notes were acquired by the initial purchasers pursuant to the terms of a purchase agreement. Under the terms of the purchase agreement, during a one-year period following the closing and upon prior notice from the initial purchasers, the Company was required to use commercially reasonable efforts to aid the purchasers in the resale of the Unsecured Notes, including by preparing an updated offering memorandum and participating in reasonable marketing efforts including road shows, to the extent required therein. The Unsecured Notes were resold by the initial purchasers to third parties in the second quarter of 2015.

In December 2015, we completed an exchange offer in which all of the unregistered Unsecured Notes were exchanged for a like amount of Unsecured Notes that had been registered under the Securities Act.

We were in compliance with the terms of the Unsecured Notes as of September 30, 2017 and December 31, 2016.

19


 

12.

COMMITMENTS AND CONTINGENCIES

The following transactions have resulted in a change in our commitments under contractual obligations as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016:

In May 2017, we entered into the New Credit Agreement, which provides for the $35.0 million New Revolving Credit Facility and the $820.0 million New Term Loan Facility. Under the New Credit Agreement, we are required to make principal payments of 1% annually of $2.0 million in 2017, $8.2 million in years 2018 through 2021 and $783.1 million thereafter. We also have required interest payments, computed using a weighted average interest rate at September 30, 2017 of 5.74%, of $12.0 million, $46.6 million, $46.1 million, $45.7 million, $45.3 million and $104.5 million from 2017 through 2021 and thereafter, respectively.

In July 2017, we extended the term of our placement fee agreements to 6 years and 11 months with our largest customer in Oklahoma. Under the terms of the agreement, we made a $10.0 million cash payment in August 2017 and will pay approximately $5.6 million per quarter in placement fees, beginning in January 2018 and ending in July 2019.

We are involved in various investigations, claims and lawsuits in the ordinary course of our business. In addition, various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based upon current information, we do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our financial position, liquidity or results of operations.

13.

SHAREHOLDERS’ EQUITY

Preferred Stock. Our amended and restated certificate of incorporation, as amended, allows our Board of Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional, or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. As of September 30, 2017 and December 31, 2016, we had no shares of preferred stock outstanding.

Common Stock. Subject to the preferences that may apply to shares of preferred stock that may be outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of Everi, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to the common stock. Each outstanding share of common stock is fully paid and non-assessable. As of September 30, 2017 and December 31, 2016, we had 91,918,086 and 90,952,185 shares of common stock issued, respectively.

Treasury Stock. Employees may direct us to withhold vested shares of restricted stock to satisfy the minimum statutory withholding requirements applicable to their restricted stock vesting. We withheld from restricted stock awards 1,365 and 4,394 shares of common stock for the three and nine months ended September 30, 2017, respectively, at an aggregate purchase price of $10,115 and $20,706, respectively, and 2,223 and 7,135 shares of common stock for the three and nine months ended September 30, 2016, respectively, at an aggregate purchase price of $3,879 and $16,894, respectively, to satisfy the minimum applicable tax withholding obligations related to the vesting of such restricted stock awards.  

20


 

14.

WEIGHTED AVERAGE COMMON SHARES

The weighted average number of shares of common stock outstanding used in the computation of basic and diluted loss per share is as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Weighted average shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

   outstanding - basic

 

 

66,897

 

 

 

66,049

 

 

 

66,449

 

 

 

66,041

 

Potential dilution from equity awards(1)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common

   shares outstanding - diluted

 

 

66,897

 

 

 

66,049

 

 

 

66,449

 

 

 

66,041

 

 

(1)

The Company was in a net loss position for the three and nine months ended September 30, 2017 and 2016; therefore, potentially dilutive common shares were excluded as their effects would be antidilutive under the application of the treasury method. Equity awards to purchase approximately 8.0 million and 12.0 million shares of common stock for the three and nine months ended September 30, 2017, respectively, and 18.5 million and 15.9 million shares of common stock for the three and nine months ended September 30, 2016, respectively, were excluded from the diluted net loss per share results.  

15.

SHARE-BASED COMPENSATION

Equity Incentive Awards

Our 2014 Equity Incentive Plan (as amended and restated effective May 23, 2017, the “Amended and Restated 2014 Plan”) and our 2012 Equity Incentive Plan (as amended, the “2012 Plan”) are used to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and to promote the success of our business. The Amended and Restated 2014 Plan superseded the then current 2005 Stock Incentive Plan (the “2005 Plan”). The 2012 Plan was assumed in connection with our acquisition of Everi Games Holding and conformed to include similar provisions to those as set forth in the Amended and Restated 2014 Plan. Our equity incentive plans are administered by the Compensation Committee of our Board of Directors, which has the authority to select individuals who are to receive equity incentive awards and to specify the terms and conditions of grants of such awards, including, but not limited to, the vesting provisions and exercise prices.

Generally, we grant the following award types: (a) time-based options, (b) market-based options and (c) restricted stock. These awards have varying vesting provisions and expiration periods. For the three and nine months ended September 30, 2017, we granted time- and market-based 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. These options expire after a ten-year period. We estimate forfeiture amounts based on historical patterns.

Our market-based options granted in 2017 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 the Company’s 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 the vested tranche 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.

Our market-based options granted in 2016 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 the Company’s shares on the New York Stock Exchange is at least a specified price hurdle, defined as a 50% 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 the vested tranche 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.

21


 

A summary of award activity is as follows (in thousands):

 

 

 

Stock Options

 

 

Restricted Stock

 

 

 

Granted

 

 

Granted

 

Outstanding, December 31, 2016

 

 

18,233

 

 

 

80

 

Granted

 

 

4,107

 

 

 

40

 

Exercised options or vested shares

 

 

(950

)

 

 

(16

)

Cancelled or forfeited

 

 

(358

)

 

 

 

Outstanding, September 30, 2017

 

 

21,032

 

 

 

104

 

 

The maximum number of shares available for future equity awards, both under the Amended and Restated 2014 Plan and the 2012 Plan, is approximately 4.6 million shares of our common stock. There are no shares available for future equity awards under the 2005 Plan.

Stock Options

The fair values of our standard time-based options were determined as of the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

 

 

Nine months ended

 

 

 

 

September 30,

 

 

 

 

2017

 

 

 

2016

 

 

Risk-free interest rate

 

 

2

 

%

 

 

1

 

%

Expected life of options (in years)

 

 

6

 

 

 

 

5

 

 

Expected volatility

 

 

54

 

%

 

 

51

 

%

Expected dividend yield

 

 

 

%

 

 

 

%

 

For the nine months ended September 30, 2016, certain executive and director grants were valued under the Black-Scholes option pricing model that utilized different assumptions from those used for our standard time-based options. For the time-based options granted on February 25, 2016, the assumptions were: (a) risk-free interest rate of 1%; (b) expected term of five years; (c) expected volatility of 49%; and (d) no expected dividend yield. For the time-based options granted on February 13, 2016, the assumptions were: (a) risk-free interest rate of 1%; (b) expected term of six years; (c) expected volatility of 49%; and (d) no expected dividend yield.

The fair values of our market-based options were determined as of the date of grant using a lattice-based option valuation model with the following assumptions:

 

 

 

Nine months ended

 

 

 

 

September 30,

 

 

 

 

2017

 

 

 

2016

 

 

Risk-free interest rate

 

 

3

 

%

 

 

2

 

%

Measurement period (in years)

 

 

10

 

 

 

 

10

 

 

Expected volatility

 

 

70

 

%

 

 

68

 

%

Expected dividend yield

 

 

 

%

 

 

 

%

 

For the market-based options granted during the third quarter of 2016, the assumptions were: (a) risk-free interest rate of 2%; (b) expected term of ten years; (c) expected volatility of 69% and (d) no expected dividend yield.

 

22


 

The following tables present the options activity:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Number of

 

 

Weighted Average

 

 

Average Life

 

 

Aggregate

 

 

 

Common Shares

 

 

Exercise Price

 

 

Remaining

 

 

Intrinsic Value

 

 

 

(in thousands)

 

 

(per share)

 

 

(years)

 

 

(in thousands)

 

Outstanding, December 31, 2016

 

 

18,233

 

 

$

6.02

 

 

 

6.4

 

 

$

2,387

 

Granted

 

 

4,107

 

 

 

3.38

 

 

 

 

 

 

 

 

 

Exercised

 

 

(950

)

 

 

4.29

 

 

 

 

 

 

 

 

 

Canceled or forfeited

 

 

(358

)

 

 

5.99

 

 

 

 

 

 

 

 

 

Outstanding, September 30, 2017

 

 

21,032

 

 

$

5.58

 

 

 

6.5

 

 

$

48,106

 

Vested and expected to vest, September 30, 2017

 

 

18,401

 

 

$

5.71

 

 

 

6.3

 

 

$

40,291

 

Exercisable, September 30, 2017

 

 

10,539

 

 

$

6.85

 

 

 

4.8

 

 

$

13,298

 

 

There were 45,750 and 4.1 million options granted for the three and nine months ended September 30, 2017, respectively, and 0.2 million and 4.2 million options granted for the three and nine months ended September 30, 2016, respectively. The weighted average grant date fair value per share of options granted was $3.85 and $1.86 for the three and nine months ended September 30, 2017, respectively, and $0.89 and $0.81 for the three and nine months ended September 30, 2016, respectively. The total intrinsic value of options exercised was $0.8 million and $2.8 million for the three and nine months ended September 30, 2017, respectively. No options were exercised during the three and nine months ended September 30, 2016.

There was $11.7 million in unrecognized compensation expense related to options expected to vest as of September 30, 2017. This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.3 years. We recorded $4.8 million in non-cash compensation expense related to options granted that were expected to vest as of September 30, 2017. We received $2.2 million and $4.0 million in cash from the exercise of options for the three and nine months ended September 30, 2017, respectively.

There was $13.5 million in unrecognized compensation expense related to options expected to vest as of September 30, 2016. This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.3 years. We recorded $3.8 million in non-cash compensation expense related to options granted that were expected to vest as of September 30, 2016. There were no proceeds received from the exercise of options as no exercises occurred for the three and nine months ended September 30, 2016.

Restricted Stock

The following is a summary of non-vested share awards for our time-based restricted stock:

 

 

 

 

 

 

 

Weighted

 

 

 

Shares

 

 

Average Grant

 

 

 

Outstanding

 

 

Date Fair Value

 

 

 

(in thousands)

 

 

(per share)

 

Outstanding, December 31, 2016

 

 

80

 

 

$

7.12

 

Granted

 

 

40

 

 

 

6.66

 

Vested

 

 

(16

)

 

 

6.91

 

Forfeited

 

 

 

 

 

 

Outstanding, September 30, 2017

 

 

104

 

 

$

6.97

 

 

There were no shares and 40,000 shares of restricted stock granted for the three and nine months ended September 30, 2017, respectively, and there were no shares of restricted stock granted for the three and nine months ended September 30, 2016. The total fair value of restricted stock vested was $37,958 and $121,979 for the three and nine months ended September 30, 2017, respectively, and $23,393 and $74,100 for the three and nine months ended September 30, 2016, respectively.

23


 

There was $0.7 million in unrecognized compensation expense related to shares of time based restricted stock expected to vest as of September 30, 2017. This cost is expected to be recognized on a straight-line basis over a weighted average period of 1.2 years. There were 16,071 shares of restricted stock that vested and we recorded $0.3 million in non-cash compensation expense related to the restricted stock granted that was expected to vest during the nine months ended September 30, 2017.

There was $1.3 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest as of September 30, 2016. This cost was expected to be recognized on a straight-line basis over a weighted average period of 1.9 years. There were 30,000 shares of time-based restricted shares vested and we recorded $0.3 million in non-cash compensation expense related to the restricted stock granted that was expected to vest during the nine months ended September 30, 2016.

16.

INCOME TAXES

The income tax provision reflected an effective income tax rate of negative 20.0% and negative 15.6% for the three and nine months ended September, 30, 2017, respectively, which was less than the statutory federal rate of 35.0%, primarily due to an increase in our valuation allowance for deferred tax assets, partially offset by state taxes, and the benefit from a research credit. The income tax benefit reflected an effective income tax rate of 37.7% and 39.4% for the three and nine months ended September 30, 2016, respectively, which was higher than the statutory federal rate of 35.0%, primarily due to state taxes, the lower foreign tax rate applicable to our foreign source income, and the benefit from a research credit, partially offset by non-statutory stock options that expired in the year.

During the third quarter of 2017, we increased our valuation allowance by approximately $2.4 million for our deferred tax assets.

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 September 30, 2017, the Company recorded $0.8 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. The Company has not accrued any penalties and interest for its unrecognized tax benefits. Other than the unrecognized tax benefit recorded, we believe that our income tax filing positions and deductions will be sustained upon audit, and we do not anticipate any other adjustments that will result in a material change to our financial position. 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 Loss.

17.

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 in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group consists of the Chief Executive Officer and the Chief Financial Officer. This group manages the business, allocates resources and measures profitability based on our operating segments. Our operating segments are managed and reviewed separately, as each represents products that can be sold separately to our customers.

Our chief operating decision-making group has determined the following to be the operating segments for which we conduct business: (a) Games and (b) Payments. We have reported our financial performance based on our segments in both the current and prior periods. Each of these segments is monitored by our management for performance against its internal forecast and is consistent with our internal management reporting.

 

The Games segment provides solutions directly to gaming establishments to offer their patrons gaming entertainment-related experiences including: leased gaming equipment; sales and maintenance related services of gaming equipment; gaming systems; and ancillary products and services.

24


 

 

The Payments 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-related services; fully integrated kiosks and 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 accounting policies of the operating segments are generally the same as those described in the summary of significant accounting policies.

The following tables present segment information (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

55,452

 

 

$

56,218

 

 

$

165,832

 

 

$

158,660

 

Payments

 

 

191,870

 

 

 

165,959

 

 

 

561,257

 

 

 

483,286

 

Total revenues

 

$

247,322

 

 

$

222,177

 

 

$

727,089

 

 

$

641,946

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

1,787

 

 

$

(4,183

)

 

$

9,301

 

 

$

(14,638

)

Payments

 

 

18,008

 

 

 

15,755

 

 

 

54,389

 

 

 

36,054

 

Total operating income

 

$

19,795

 

 

$

11,572

 

 

$

63,690

 

 

$

21,416

 

 

 

 

At September 30, 2017

 

 

At December 31, 2016

 

Total assets

 

 

 

 

 

 

 

 

Games

 

$

927,888

 

 

$

894,213

 

Payments

 

 

497,717

 

 

 

513,950

 

Total assets

 

$

1,425,605

 

 

$

1,408,163

 

 

Major Customers. For the three and nine months ended September 30, 2017 and 2016, no single customer accounted for more than 10% of our revenues. Our five largest customers accounted for approximately 25% and 26% for the three and nine months ended September 30, 2017, respectively, and 30% and 31% for the three and nine months ended September 30, 2016, respectively.

18.

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

We conduct substantially all of our business through our U.S. and foreign subsidiaries. Everi Payments’ (“Subsidiary Issuer”) obligations under the Unsecured Notes are fully and unconditionally guaranteed, subject to certain customary release provisions, on a joint and several basis by Holdings (“Parent”) and substantially all of our 100%-owned U.S. subsidiaries other than Subsidiary Issuer (the “Guarantor Subsidiaries” and, together with Parent, the “Guarantors” and each a “Guarantor”). The guarantees of our Unsecured Notes will be released under the following customary circumstances: (i) the sale or disposition of all or substantially all of the assets of the Guarantor (by way of merger, consolidation, or otherwise) to a person that is not (either before or after giving effect to such transaction) Parent, Subsidiary Issuer or a restricted subsidiary; (ii) the sale or disposition of sufficient capital stock of the Guarantor to a person that is not (either before or after giving effect to such transaction) Parent, Subsidiary Issuer or a restricted subsidiary and the Guarantor ceases to be a restricted subsidiary of Subsidiary Issuer as a result of the sale or other disposition; (iii) the designation of the Guarantor as an unrestricted subsidiary in accordance with the indenture

25


 

governing the Unsecured Notes; or (iv) the legal or covenant defeasance of the Unsecured Notes or the satisfaction and discharge of the indenture governing the Unsecured Notes.

Presented below is condensed consolidating financial information for (a) Parent, (b) Subsidiary Issuer, (c) the Guarantor Subsidiaries and (d) our U.S. subsidiaries that are not Guarantor Subsidiaries and our foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016. The condensed consolidating financial information has been presented to show the nature of assets held and the results of operations and cash flows of Parent, Subsidiary Issuer, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming that the guarantee structure of the Unsecured Notes had been in effect at the beginning of the periods presented.

 

 

 

Three Months Ended September 30, 2017

 

 

 

Parent

 

 

Subsidiary

Issuer

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

 

 

$

 

 

$

55,331

 

 

$

1,739

 

 

$

(1,618

)

 

$

55,452

 

Payments

 

 

 

 

 

175,793

 

 

 

7,841

 

 

 

9,040

 

 

 

(804

)

 

 

191,870

 

Total revenues

 

 

 

 

 

175,793

 

 

 

63,172

 

 

 

10,779

 

 

 

(2,422

)

 

 

247,322

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 

 

 

 

 

 

 

13,857

 

 

 

1,106

 

 

 

(1,143

)

 

 

13,820

 

Payments cost of revenue (exclusive of depreciation and amortization)

 

 

 

 

 

140,299

 

 

 

2,478

 

 

 

7,061

 

 

 

 

 

 

149,838

 

Operating expenses

 

 

 

 

 

18,519

 

 

 

10,365

 

 

 

1,858

 

 

 

(1,279

)

 

 

29,463

 

Research and development

 

 

 

 

 

 

 

 

4,542

 

 

 

3

 

 

 

 

 

 

4,545

 

Depreciation

 

 

 

 

 

1,615

 

 

 

10,740

 

 

 

184

 

 

 

 

 

 

12,539

 

Amortization

 

 

 

 

 

2,260

 

 

 

14,579

 

 

 

483

 

 

 

 

 

 

17,322

 

Total costs and expenses

 

 

 

 

 

162,693

 

 

 

56,561

 

 

 

10,695

 

 

 

(2,422

)

 

 

227,527

 

Operating income

 

 

 

 

 

13,100

 

 

 

6,611

 

 

 

84

 

 

 

 

 

 

19,795

 

Other expenses (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (income) expense, net

 

 

 

 

 

(292

)

 

 

23,406

 

 

 

254

 

 

 

 

 

 

23,368

 

Income (loss) from subsidiaries

 

 

4,289

 

 

 

(2,898

)

 

 

(39

)

 

 

 

 

 

(1,352

)

 

 

 

Total other expenses (income)

 

 

4,289

 

 

 

(3,190

)

 

 

23,367

 

 

 

254

 

 

 

(1,352

)

 

 

23,368

 

(Loss) income before income tax

 

 

(4,289

)

 

 

16,290

 

 

 

(16,756

)

 

 

(170

)

 

 

1,352

 

 

 

(3,573

)

Income tax (benefit) provision

 

 

 

 

 

(1,055

)

 

 

1,708

 

 

 

63

 

 

 

 

 

 

716

 

Net (loss) income

 

 

(4,289

)

 

 

17,345

 

 

 

(18,464

)

 

 

(233

)

 

 

1,352

 

 

 

(4,289

)

Foreign currency translation

 

 

602

 

 

 

 

 

 

 

 

 

602

 

 

 

(602

)

 

 

602

 

Comprehensive (loss) income

 

$

(3,687

)

 

$

17,345

 

 

$

(18,464

)

 

$

369

 

 

$

750

 

 

$

(3,687

)

26


 

 

 

 

Three Months Ended September 30, 2016

 

 

 

Parent

 

 

Subsidiary

Issuer

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

 

 

$

 

 

$

56,218

 

 

$

 

 

$

 

 

$

56,218

 

Payments

 

 

 

 

 

153,145

 

 

 

7,519

 

 

 

5,417

 

 

 

(122

)

 

 

165,959

 

Total revenues

 

 

 

 

 

153,145

 

 

 

63,737

 

 

 

5,417

 

 

 

(122

)

 

 

222,177

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 

 

 

 

 

 

 

15,467

 

 

 

 

 

 

 

 

 

15,467

 

Payments cost of revenue (exclusive of depreciation and amortization)

 

 

 

 

 

122,316

 

 

 

2,206

 

 

 

2,689

 

 

 

 

 

 

127,211

 

Operating expenses

 

 

 

 

 

16,491

 

 

 

10,148

 

 

 

479

 

 

 

(122

)

 

 

26,996

 

Research and development

 

 

 

 

 

 

 

 

4,460

 

 

 

 

 

 

 

 

 

4,460

 

Depreciation

 

 

 

 

 

1,892

 

 

 

10,447

 

 

 

28

 

 

 

 

 

 

12,367

 

Amortization

 

 

 

 

 

3,128

 

 

 

20,439

 

 

 

537

 

 

 

 

 

 

24,104

 

Total costs and expenses

 

 

 

 

 

143,827

 

 

 

63,167

 

 

 

3,733

 

 

 

(122

)

 

 

210,605

 

Operating income

 

 

 

 

 

9,318

 

 

 

570

 

 

 

1,684

 

 

 

 

 

 

11,572

 

Other expenses (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

 

 

 

1,371

 

 

 

23,399

 

 

 

45

 

 

 

 

 

 

24,815

 

Loss (income) from subsidiaries

 

 

8,254

 

 

 

(4,306

)

 

 

 

 

 

 

 

 

(3,948

)

 

 

 

Total other expenses (income)

 

 

8,254

 

 

 

(2,935

)

 

 

23,399

 

 

 

45

 

 

 

(3,948

)

 

 

24,815

 

(Loss) income before income tax

 

 

(8,254

)

 

 

12,253

 

 

 

(22,829

)

 

 

1,639

 

 

 

3,948

 

 

 

(13,243

)

Income tax provision (benefit)

 

 

 

 

 

3,849

 

 

 

(9,261

)

 

 

423

 

 

 

 

 

 

(4,989

)

Net (loss) income

 

 

(8,254

)

 

 

8,404

 

 

 

(13,568

)

 

 

1,216

 

 

 

3,948

 

 

 

(8,254

)

Foreign currency translation

 

 

(394

)

 

 

 

 

 

 

 

 

(394

)

 

 

394

 

 

 

(394

)

Comprehensive (loss) income

 

$

(8,648

)

 

$

8,404

 

 

$

(13,568

)

 

$

822

 

 

$

4,342

 

 

$

(8,648

)

27


 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Subsidiary

 

 

Guarantor

 

 

Guarantor

 

 

 

 

 

 

 

 

 

Parent

 

 

Issuer

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

 

 

$

 

 

$

165,551

 

 

$

5,445

 

 

$

(5,164

)

 

$

165,832

 

Payments

 

 

 

 

 

515,853

 

 

 

23,323

 

 

 

25,409

 

 

 

(3,328

)

 

 

561,257

 

Total revenues

 

 

 

 

 

515,853

 

 

 

188,874

 

 

 

30,854

 

 

 

(8,492

)

 

 

727,089

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 

 

 

 

 

 

 

39,659

 

 

 

2,945

 

 

 

(3,101

)

 

 

39,503

 

Payments cost of revenue (exclusive of depreciation and amortization)

 

 

 

 

 

410,038

 

 

 

7,167

 

 

 

18,899

 

 

 

 

 

 

436,104

 

Operating expenses

 

 

 

 

 

53,413

 

 

 

32,463

 

 

 

6,750

 

 

 

(5,391

)

 

 

87,235

 

Research and development

 

 

 

 

 

 

 

 

13,676

 

 

 

30

 

 

 

 

 

 

13,706

 

Depreciation

 

 

 

 

 

5,057

 

 

 

29,292

 

 

 

416

 

 

 

 

 

 

34,765

 

Amortization

 

 

 

 

 

7,756

 

 

 

42,885

 

 

 

1,445

 

 

 

 

 

 

52,086

 

Total costs and expenses

 

 

 

 

 

476,264

 

 

 

165,142

 

 

 

30,485

 

 

 

(8,492

)

 

 

663,399

 

Operating income

 

 

 

 

 

39,589

 

 

 

23,732

 

 

 

369

 

 

 

 

 

 

63,690

 

Other expenses (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

 

 

 

2,216

 

 

 

69,455

 

 

 

635

 

 

 

 

 

 

72,306

 

Loss (income) from subsidiaries

 

 

26,854

 

 

 

(8,884

)

 

 

(121

)

 

 

 

 

 

(17,849

)

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

14,615

 

 

 

 

 

 

 

 

 

 

 

 

14,615

 

Total other expenses (income)

 

 

26,854

 

 

 

7,947

 

 

 

69,334

 

 

 

635

 

 

 

(17,849

)

 

 

86,921

 

(Loss) income before income tax

 

 

(26,854

)

 

 

31,642

 

 

 

(45,602

)

 

 

(266

)

 

 

17,849

 

 

 

(23,231

)

Income tax (benefit) provision

 

 

 

 

 

(1,701

)

 

 

5,108

 

 

 

216

 

 

 

 

 

 

3,623

 

Net (loss) income

 

 

(26,854

)

 

 

33,343

 

 

 

(50,710

)

 

 

(482

)

 

 

17,849

 

 

 

(26,854

)

Foreign currency translation

 

 

1,710

 

 

 

 

 

 

 

 

 

1,710

 

 

 

(1,710

)

 

 

1,710

 

Comprehensive (loss) income

 

$

(25,144

)

 

$

33,343

 

 

$

(50,710

)

 

$

1,228

 

 

$

16,139

 

 

$

(25,144

)

28


 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Subsidiary

 

 

Guarantor

 

 

Guarantor

 

 

 

 

 

 

 

 

 

Parent

 

 

Issuer

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

 

 

$

 

 

$

158,660

 

 

$

 

 

$

 

 

 

158,660

 

Payments

 

 

 

 

 

447,762

 

 

 

22,622

 

 

 

13,769

 

 

 

(867

)

 

 

483,286

 

Total revenues

 

 

 

 

 

447,762

 

 

 

181,282

 

 

 

13,769

 

 

 

(867

)

 

 

641,946

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 

 

 

 

 

 

 

36,871

 

 

 

 

 

 

 

 

 

36,871

 

Payments cost of revenue (exclusive of depreciation and amortization)

 

 

 

 

 

359,265

 

 

 

6,754

 

 

 

7,347

 

 

 

 

 

 

373,366

 

Operating expenses

 

 

 

 

 

53,912

 

 

 

33,230

 

 

 

1,460

 

 

 

(867

)

 

 

87,735

 

Research and development

 

 

 

 

 

 

 

 

14,499

 

 

 

 

 

 

 

 

 

14,499

 

Depreciation

 

 

 

 

 

6,376

 

 

 

30,707

 

 

 

89

 

 

 

 

 

 

37,172

 

Amortization

 

 

 

 

 

9,370

 

 

 

59,830

 

 

 

1,687

 

 

 

 

 

 

70,887

 

Total costs and expenses

 

 

 

 

 

428,923

 

 

 

181,891

 

 

 

10,583

 

 

 

(867

)

 

 

620,530

 

Operating income (loss)

 

 

 

 

 

18,839

 

 

 

(609

)

 

 

3,186

 

 

 

 

 

 

21,416

 

Other expenses (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

 

 

 

4,880

 

 

 

69,500

 

 

 

168

 

 

 

 

 

 

74,548

 

Loss (income) from subsidiaries

 

 

32,202

 

 

 

(11,120

)

 

 

 

 

 

 

 

 

(21,082

)

 

 

 

Total other expenses (income)

 

 

32,202

 

 

 

(6,240

)

 

 

69,500

 

 

 

168

 

 

 

(21,082

)

 

 

74,548

 

(Loss) income before income tax

 

 

(32,202

)

 

 

25,079

 

 

 

(70,109

)

 

 

3,018

 

 

 

21,082

 

 

 

(53,132

)

Income tax provision (benefit)

 

 

 

 

 

5,785

 

 

 

(27,642

)

 

 

927

 

 

 

 

 

 

(20,930

)

Net (loss) income

 

 

(32,202

)

 

 

19,294

 

 

 

(42,467

)

 

 

2,091

 

 

 

21,082

 

 

 

(32,202

)

Foreign currency translation

 

 

(1,314

)

 

 

 

 

 

 

 

 

(1,314

)

 

 

1,314

 

 

 

(1,314

)

Comprehensive (loss) income

 

$

(33,516

)

 

$

19,294

 

 

$

(42,467

)

 

$

777

 

 

$

22,396

 

 

$

(33,516

)

29


 

 

 

 

At September 30, 2017

 

 

 

Parent

 

 

Subsidiary

Issuer

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

85,633

 

 

$

6,587

 

 

$

16,251

 

 

$

 

 

$

108,471

 

Settlement receivables

 

 

 

 

 

112,879

 

 

 

 

 

 

14,564

 

 

 

 

 

 

127,443

 

Trade and other receivables, net

 

 

 

 

 

6,370

 

 

 

35,415

 

 

 

3,186

 

 

 

 

 

 

44,971

 

Inventory

 

 

 

 

 

5,550

 

 

 

18,240

 

 

 

 

 

 

 

 

 

23,790

 

Prepaid expenses and other assets

 

 

 

 

 

6,078

 

 

 

6,691

 

 

 

9,769

 

 

 

 

 

 

22,538

 

Intercompany balances

 

 

 

 

 

167,488

 

 

 

207,021

 

 

 

1,531

 

 

 

(376,040

)

 

 

 

Total current assets

 

 

 

 

 

383,998

 

 

 

273,954

 

 

 

45,301

 

 

 

(376,040

)

 

 

327,213

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, equipment and leased assets, net

 

 

 

 

 

13,987

 

 

 

93,258

 

 

 

2,154

 

 

 

 

 

 

109,399

 

Goodwill

 

 

 

 

 

151,417

 

 

 

488,511

 

 

 

665

 

 

 

 

 

 

640,593

 

Other intangible assets, net

 

 

 

 

 

20,330

 

 

 

314,348

 

 

 

3,396

 

 

 

 

 

 

338,074

 

Other receivables

 

 

 

 

 

1,220

 

 

 

1,656

 

 

 

 

 

 

 

 

 

2,876

 

Investment in subsidiaries

 

 

(123,760

)

 

 

182,365

 

 

 

1,007

 

 

 

79

 

 

 

(59,691

)

 

 

 

Deferred tax asset

 

 

 

 

 

34,386

 

 

 

 

 

 

 

 

 

(34,386

)

 

 

 

Other assets

 

 

 

 

 

4,632

 

 

 

2,635

 

 

 

183

 

 

 

 

 

 

7,450

 

Intercompany balances

 

 

 

 

 

1,148,223

 

 

 

 

 

 

 

 

 

(1,148,223

)

 

 

 

Total non-current assets

 

 

(123,760

)

 

 

1,556,560

 

 

 

901,415

 

 

 

6,477

 

 

 

(1,242,300

)

 

 

1,098,392

 

Total assets

 

$

(123,760

)

 

$

1,940,558

 

 

$

1,175,369

 

 

$

51,778

 

 

$

(1,618,340

)

 

$

1,425,605

 

LIABILITIES AND STOCKHOLDERS’

(DEFICIT) EARNINGS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlement liabilities

 

$

 

 

$

189,738

 

 

$

202

 

 

$

7,554

 

 

$

 

 

$

197,494

 

Accounts payable and accrued expenses

 

 

 

 

 

77,194

 

 

 

46,314

 

 

 

3,117

 

 

 

 

 

 

126,625

 

Current portion of long-term debt

 

 

 

 

 

8,200

 

 

 

 

 

 

 

 

 

 

 

 

8,200

 

Intercompany balances

 

 

 

 

 

204,387

 

 

 

154,489

 

 

 

17,164

 

 

 

(376,040

)

 

 

 

Total current liabilities

 

 

 

 

 

479,519

 

 

 

201,005

 

 

 

27,835

 

 

 

(376,040

)

 

 

332,319

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

 

 

 

 

 

 

95,171

 

 

 

 

 

 

(34,386

)

 

 

60,785

 

Long-term debt, less current portion

 

 

 

 

 

1,130,671

 

 

 

 

 

 

 

 

 

 

 

 

1,130,671

 

Other accrued expenses and liabilities

 

 

 

 

 

2,973

 

 

 

22,661

 

 

 

 

 

 

 

 

 

25,634

 

Intercompany balances

 

 

 

 

 

 

 

 

1,148,223

 

 

 

 

 

 

(1,148,223

)

 

 

 

Total non-current liabilities

 

 

 

 

 

1,133,644

 

 

 

1,266,055

 

 

 

 

 

 

(1,182,609

)

 

 

1,217,090

 

Total liabilities

 

 

 

 

 

1,613,163

 

 

 

1,467,060

 

 

 

27,835

 

 

 

(1,558,649

)

 

 

1,549,409

 

Stockholders’ (deficit) equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

92

 

Additional paid-in capital

 

 

273,906

 

 

 

93,091

 

 

 

6,841

 

 

 

21,109

 

 

 

(121,041

)

 

 

273,906

 

(Accumulated deficit) retained earnings

 

 

(221,152

)

 

 

234,659

 

 

 

(297,969

)

 

 

4,279

 

 

 

59,031

 

 

 

(221,152

)

Accumulated other comprehensive loss

 

 

(355

)

 

 

(355

)

 

 

(563

)

 

 

(1,445

)

 

 

2,319

 

 

 

(399

)

Treasury stock, at cost

 

 

(176,251

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(176,251

)

Total stockholders’ (deficit) equity

 

 

(123,760

)

 

 

327,395

 

 

 

(291,691

)

 

 

23,943

 

 

 

(59,691

)

 

 

(123,804

)

Total liabilities and stockholders’ (deficit) equity

 

$

(123,760

)

 

$

1,940,558

 

 

$

1,175,369

 

 

$

51,778

 

 

$

(1,618,340

)

 

$

1,425,605

 

30


 

 

 

 

At December 31, 2016

 

 

 

Parent

 

 

Subsidiary

Issuer

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

88,648

 

 

$

9,103

 

 

$

21,300

 

 

$

 

 

$

119,051

 

Settlement receivables

 

 

 

 

 

122,222

 

 

 

 

 

 

6,599

 

 

 

 

 

 

128,821

 

Trade and other receivables, net

 

 

 

 

 

9,001

 

 

 

41,743

 

 

 

5,907

 

 

 

 

 

 

56,651

 

Inventory

 

 

 

 

 

6,009

 

 

 

13,059

 

 

 

 

 

 

 

 

 

19,068

 

Prepaid expenses and other assets

 

 

 

 

 

5,359

 

 

 

3,807

 

 

 

8,882

 

 

 

 

 

 

18,048

 

Intercompany balances

 

 

 

 

 

106,729

 

 

 

188,028

 

 

 

1,461

 

 

 

(296,218

)

 

 

 

Total current assets

 

 

 

 

 

337,968

 

 

 

255,740

 

 

 

44,149

 

 

 

(296,218

)

 

 

341,639

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, equipment and leased assets, net

 

 

 

 

 

15,144

 

 

 

81,993

 

 

 

1,302

 

 

 

 

 

 

98,439

 

Goodwill

 

 

 

 

 

151,417

 

 

 

488,512

 

 

 

617

 

 

 

 

 

 

640,546

 

Other intangible assets, net

 

 

 

 

 

23,901

 

 

 

289,338

 

 

 

4,758

 

 

 

 

 

 

317,997

 

Other receivables

 

 

 

 

 

2,019

 

 

 

 

 

 

1

 

 

 

 

 

 

2,020

 

Investment in subsidiaries

 

 

(107,751

)

 

 

171,979

 

 

 

1,293

 

 

 

86

 

 

 

(65,607

)

 

 

 

Deferred tax asset

 

 

 

 

 

37,578

 

 

 

 

 

 

 

 

 

(37,578

)

 

 

 

Other assets

 

 

 

 

 

4,940

 

 

 

2,286

 

 

 

296

 

 

 

 

 

 

7,522

 

Intercompany balances

 

 

 

 

 

1,143,115

 

 

 

7,851

 

 

 

 

 

 

(1,150,966

)

 

 

 

Total non-current assets

 

 

(107,751

)

 

 

1,550,093

 

 

 

871,273

 

 

 

7,060

 

 

 

(1,254,151

)

 

 

1,066,524

 

Total assets

 

$

(107,751

)

 

$

1,888,061

 

 

$

1,127,013

 

 

$

51,209

 

 

$

(1,550,369

)

 

$

1,408,163

 

LIABILITIES AND STOCKHOLDERS’

(DEFICIT) EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlement liabilities

 

$

 

 

$

225,170

 

 

$

268

 

 

$

13,685

 

 

$

 

 

$

239,123

 

Accounts payable and accrued expenses

 

 

 

 

 

64,192

 

 

 

28,970

 

 

 

1,229

 

 

 

 

 

 

94,391

 

Current portion of long-term debt

 

 

 

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

Intercompany balances

 

 

 

 

 

189,488

 

 

 

101,387

 

 

 

5,343

 

 

 

(296,218

)

 

 

 

Total current liabilities

 

 

 

 

 

488,850

 

 

 

130,625

 

 

 

20,257

 

 

 

(296,218

)

 

 

343,514

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

 

 

 

 

 

 

95,189

 

 

 

 

 

 

(37,578

)

 

 

57,611

 

Long-term debt, less current portion

 

 

 

 

 

1,111,880

 

 

 

 

 

 

 

 

 

 

 

 

1,111,880

 

Other accrued expenses and liabilities

 

 

 

 

 

2,583

 

 

 

368

 

 

 

 

 

 

 

 

 

2,951

 

Intercompany balances

 

 

 

 

 

 

 

 

1,143,116

 

 

 

7,850

 

 

 

(1,150,966

)

 

 

 

Total non-current liabilities

 

 

 

 

 

1,114,463

 

 

 

1,238,673

 

 

 

7,850

 

 

 

(1,188,544

)

 

 

1,172,442

 

Total liabilities

 

 

 

 

 

1,603,313

 

 

 

1,369,298

 

 

 

28,107

 

 

 

(1,484,762

)

 

 

1,515,956

 

Stockholders’ (deficit) equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

91

 

Additional paid-in capital

 

 

264,755

 

 

 

85,499

 

 

 

5,314

 

 

 

21,093

 

 

 

(111,906

)

 

 

264,755

 

(Accumulated deficit) retained earnings

 

 

(194,299

)

 

 

201,316

 

 

 

(247,273

)

 

 

5,168

 

 

 

40,789

 

 

 

(194,299

)

Accumulated other comprehensive loss

 

 

(2,067

)

 

 

(2,067

)

 

 

(326

)

 

 

(3,159

)

 

 

5,510

 

 

 

(2,109

)

Treasury stock, at cost

 

 

(176,231

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(176,231

)

Total stockholders’ (deficit) equity

 

 

(107,751

)

 

 

284,748

 

 

 

(242,285

)

 

 

23,102

 

 

 

(65,607

)

 

 

(107,793

)

Total liabilities and stockholders’ (deficit) equity

 

$

(107,751

)

 

$

1,888,061

 

 

$

1,127,013

 

 

$

51,209

 

 

$

(1,550,369

)

 

$

1,408,163

 

31


 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

Parent

 

 

Subsidiary

Issuer

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Total

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(26,854

)

 

$

33,343

 

 

$

(50,710

)

 

$

(482

)

 

$

17,849

 

 

$

(26,854

)

Adjustments to reconcile net (loss) income

   to cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

12,813

 

 

 

72,177

 

 

 

1,861

 

 

 

 

 

 

86,851

 

Amortization of financing costs

 

 

 

 

 

4,567

 

 

 

 

 

 

 

 

 

 

 

 

4,567

 

Loss on sale or disposal of assets

 

 

 

 

 

347

 

 

 

1,233

 

 

 

 

 

 

 

 

 

1,580

 

Accretion of contract rights

 

 

 

 

 

 

 

 

5,845

 

 

 

 

 

 

 

 

 

5,845

 

Provision for bad debts

 

 

 

 

 

(136

)

 

 

8,082

 

 

 

 

 

 

 

 

 

7,946

 

Deferred income taxes

 

 

 

 

 

3,193

 

 

 

(19

)

 

 

 

 

 

 

 

 

3,174

 

Reserve for obsolescence

 

 

 

 

 

265

 

 

 

(219

)

 

 

 

 

 

 

 

 

46

 

Loss on extinguishment of debt

 

 

 

 

 

14,615

 

 

 

 

 

 

 

 

 

 

 

 

14,615

 

Equity in loss (income) of subsidiaries

 

 

26,854

 

 

 

(8,884

)

 

 

(121

)

 

 

 

 

 

(17,849

)

 

 

 

Stock-based compensation

 

 

 

 

 

3,684

 

 

 

1,441

 

 

 

 

 

 

 

 

 

5,125

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net settlement receivables and liabilities

 

 

 

 

 

(26,089

)

 

 

(66

)

 

 

(14,075

)

 

 

 

 

 

(40,230

)

Other changes in operating assets and liabilities

 

 

 

 

 

(35,336

)

 

 

34,422

 

 

 

8,011

 

 

 

 

 

 

7,097

 

Net cash provided by (used in) operating activities

 

 

 

 

 

2,382

 

 

 

72,065

 

 

 

(4,685

)

 

 

 

 

 

69,762

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

(7,191

)

 

 

(61,474

)

 

 

(1,392

)

 

 

 

 

 

(70,057

)

Proceeds from sale of fixed assets

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

4

 

Placement fee agreements

 

 

 

 

 

 

 

 

(13,132

)

 

 

 

 

 

 

 

 

(13,132

)

Changes in restricted cash

 

 

 

 

 

96

 

 

 

(245

)

 

 

 

 

 

 

 

 

(149

)

Intercompany investing activities

 

 

(4,025

)

 

 

3,996

 

 

 

270

 

 

 

(76

)

 

 

(165

)

 

 

 

Net cash used in investing activities

 

 

(4,025

)

 

 

(3,095

)

 

 

(74,581

)

 

 

(1,468

)

 

 

(165

)

 

 

(83,334

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of new credit facility

 

 

 

 

 

(2,050

)

 

 

 

 

 

 

 

 

 

 

 

(2,050

)

Repayments of prior credit facility

 

 

 

 

 

(465,600

)

 

 

 

 

 

 

 

 

 

 

 

(465,600

)

Repayments of secured notes

 

 

 

 

 

(335,000

)

 

 

 

 

 

 

 

 

 

 

 

(335,000

)

Proceeds from current credit facility

 

 

 

 

 

820,000

 

 

 

 

 

 

 

 

 

 

 

 

820,000

 

Debt issuance costs and discounts

 

 

 

 

 

(19,748

)

 

 

 

 

 

 

 

 

 

 

 

(19,748

)

Proceeds from exercise of stock options

 

 

4,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,046

 

Purchase of treasury stock

 

 

(21

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21

)

Intercompany financing activities

 

 

 

 

 

96

 

 

 

 

 

 

(261

)

 

 

165

 

 

 

 

Net cash provided by (used in) financing activities

 

 

4,025

 

 

 

(2,302

)

 

 

 

 

 

(261

)

 

 

165

 

 

 

1,627

 

Effect of exchange rates on cash

 

 

 

 

 

 

 

 

 

 

 

1,365

 

 

 

 

 

 

1,365

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net decrease for the period

 

 

 

 

 

(3,015

)

 

 

(2,516

)

 

 

(5,049

)

 

 

 

 

 

(10,580

)

Balance, beginning of the period

 

 

 

 

 

88,648

 

 

 

9,103

 

 

 

21,300

 

 

 

 

 

 

119,051

 

Balance, end of the period

 

$

 

 

$

85,633

 

 

$

6,587

 

 

$

16,251

 

 

$

 

 

$

108,471

 

32


 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

Parent

 

 

Subsidiary

Issuer

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Total

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(32,202

)

 

$

19,294

 

 

$

(42,467

)

 

$

2,091

 

 

$

21,082

 

 

$

(32,202

)

Adjustments to reconcile net (loss) income

   to cash provided by operating

   activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

15,746

 

 

 

90,537

 

 

 

1,776

 

 

 

 

 

 

108,059

 

Amortization of financing costs

 

 

 

 

 

5,023

 

 

 

 

 

 

 

 

 

 

 

 

5,023

 

Loss on sale or disposal of assets

 

 

 

 

 

1,349

 

 

 

1,205

 

 

 

 

 

 

 

 

 

2,554

 

Accretion of contract rights

 

 

 

 

 

 

 

 

6,521

 

 

 

 

 

 

 

 

 

6,521

 

Provision for bad debts

 

 

 

 

 

18

 

 

 

7,174

 

 

 

 

 

 

 

 

 

7,192

 

Deferred income taxes

 

 

 

 

 

10,546

 

 

 

(32,805

)

 

 

 

 

 

 

 

 

(22,259

)

Write-down of assets

 

 

 

 

 

 

 

 

4,289

 

 

 

 

 

 

 

 

 

4,289

 

Reserve for obsolescence

 

 

 

 

 

484

 

 

 

458

 

 

 

 

 

 

 

 

 

942

 

Equity in loss (income) of subsidiaries

 

 

32,202

 

 

 

(11,120

)

 

 

 

 

 

 

 

 

(21,082

)

 

 

 

Stock-based compensation

 

 

 

 

 

2,910

 

 

 

1,236

 

 

 

 

 

 

 

 

 

4,146

 

Other non-cash items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net settlement receivables and liabilities

 

 

 

 

 

(16,538

)

 

 

6

 

 

 

3,690

 

 

 

 

 

 

(12,842

)

Other changes in operating assets and liabilities

 

 

1

 

 

 

(27,155

)

 

 

41,544

 

 

 

(5

)

 

 

 

 

 

14,385

 

Net cash provided by operating activities

 

 

1

 

 

 

557

 

 

 

77,698

 

 

 

7,552

 

 

 

 

 

 

85,808

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

(7,330

)

 

 

(59,622

)

 

 

(73

)

 

 

 

 

 

(67,025

)

Acquisitions, net of cash acquired

 

 

 

 

 

(694

)

 

 

 

 

 

 

 

 

 

 

 

(694

)

Proceeds from sale of fixed assets

 

 

 

 

 

4,608

 

 

 

 

 

 

 

 

 

 

 

 

4,608

 

Placement fee agreements

 

 

 

 

 

 

 

 

(11,187

)

 

 

 

 

 

 

 

 

(11,187

)

Changes in restricted cash

 

 

 

 

 

88

 

 

 

 

 

 

 

 

 

 

 

 

88

 

Intercompany investing activities

 

 

10

 

 

 

499

 

 

 

175

 

 

 

(67

)

 

 

(617

)

 

 

 

Net cash provided by (used in) investing activities

 

 

10

 

 

 

(2,829

)

 

 

(70,634

)

 

 

(140

)

 

 

(617

)

 

 

(74,210

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of prior credit facility

 

 

 

 

 

(21,900

)

 

 

 

 

 

 

 

 

 

 

 

(21,900

)

Debt issuance costs and discounts

 

 

 

 

 

(480

)

 

 

 

 

 

 

 

 

 

 

 

(480

)

Purchase of treasury stock

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17

)

Intercompany financing activities

 

 

 

 

 

68

 

 

 

 

 

 

(685

)

 

 

617

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(17

)

 

 

(22,312

)

 

 

 

 

 

(685

)

 

 

617

 

 

 

(22,397

)

Effect of exchange rates on cash

 

 

 

 

 

 

 

 

 

 

 

(743

)

 

 

 

 

 

(743

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase for the period

 

 

(6

)

 

 

(24,584

)

 

 

7,064

 

 

 

5,984

 

 

 

 

 

 

(11,542

)

Balance, beginning of the period

 

 

6

 

 

 

87,078

 

 

 

3,900

 

 

 

11,046

 

 

 

 

 

 

102,030

 

Balance, end of the period

 

$

 

 

$

62,494

 

 

$

10,964

 

 

$

17,030

 

 

$

 

 

$

90,488

 

 

 

19.

SUBSEQUENT EVENTS

 

As of the filing date, we had not identified, and were not aware of, any subsequent event for the period.

33


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In this filing, we refer to: (i) our unaudited condensed consolidated financial statements and notes thereto as our “Financial Statements,” (ii) our Unaudited Condensed Consolidated Statements of Loss and Comprehensive Loss as our “Statements of Loss,” (iii) our Unaudited Condensed Consolidated Balance Sheets as our “Balance Sheets,” and (iv) our unaudited condensed consolidated results of operations as our “Results of Operations.”

Cautionary Information Regarding Forward-Looking Statements

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements” as defined in the U.S. Private Securities Litigation Reform Act of 1995. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “anticipate,” “believe,” “expect,” “intend,” “estimate,” “project,” “may,” “should,” “will,” “likely,” “will likely result,” “will continue,” “future,” “plan,” “target,” “forecast,” “goal,” “observe,” “seek,” “strategy” and other words and terms of similar meaning. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those projected or assumed, including, but not limited to, the following: our ability to generate profits in the future; our ability to execute on mergers, acquisitions and/or strategic alliances, including our ability to integrate and operate such acquisitions consistent with our forecasts; expectations regarding our existing and future installed base and win per day; expectations regarding placement fee arrangements; inaccuracies in underlying operating assumptions; expectations regarding customers’ preferences and demands for future gaming offerings; expectations regarding our product portfolio; the overall growth of the gaming industry, if any; our ability to replace revenue associated with terminated contracts; margin degradation from contract renewals; our ability to comply with the Europay, MasterCard and Visa global standard for cards equipped with security chip technology; our ability to introduce new products and services, including third-party licensed content; gaming establishment and patron preferences; expenditures and product development; anticipated sales performance; employee turnover; national and international economic conditions; changes in gaming regulatory, card association and statutory requirements; regulatory and licensing difficulties; competitive pressures; operational limitations; gaming market contraction; changes to tax laws; uncertainty of litigation outcomes; interest rate fluctuations; business prospects; unanticipated expenses or capital needs; technological obsolescence; our ability to comply with our debt covenants and service outstanding debt; employee turnover and other statements that are not historical facts. If any of these assumptions prove to be incorrect, the results contemplated by the forward-looking statements regarding our future results of operations are unlikely to be realized.

These cautionary statements qualify our forward-looking statements, and you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and the information included in our other press releases, reports and other filings with the Securities and Exchange Commission (the “SEC”). Understanding the information contained in these filings is important in order to fully understand our reported financial results and our business outlook for future periods.

Overview

Everi Holdings Inc. (formerly known as Global Cash Access Holdings, Inc.) (“Everi Holdings,” “Holdings” or “Everi”) is a holding company, the assets of which are the issued and outstanding shares of capital stock of each of Everi Games Holding Inc. (formerly known as Multimedia Games Holding Company, Inc.) (“Everi Games Holding”), which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (formerly known as Multimedia Games, Inc.) (“Everi Games” or “Games”) and Everi Payments Inc. (formerly known as Global Cash Access, Inc.) (“Everi Payments” or “Payments”). Unless otherwise indicated, the terms the “Company,” “we,” “us” and “our” refer to Holdings together with its consolidated subsidiaries.

Everi is dedicated to providing video and mechanical reel gaming content and technology solutions, integrated gaming payments solutions and compliance and efficiency software to casino operators. Everi Games provides: (a) comprehensive content, electronic gaming units and systems for Native American and commercial casinos, including both Wide-Area Progressive systems and the award winning TournEvent® slot tournament solution; and (b) the central determinant system for the video lottery terminals installed in the State of New York. Everi Payments provides:

34


 

(a) access to cash at gaming facilities via Automated Teller Machine (“ATM”) cash withdrawals, credit card cash access transactions, point of sale (“POS”) debit card transactions, and check verification and warranty services; (b) fully integrated gaming industry kiosks that provide cash access and related services; (c) products and services that improve credit decision making, automate cashier operations and enhance patron marketing activities for gaming establishments; (d) compliance, audit and data solutions; and (e) online payment processing solutions for gaming operators in states that offer intrastate, Internet-based gaming and lottery activities.

Trends and Developments Impacting our Business

Our strategic planning and forecasting processes include the consideration of economic and industry wide trends that may impact our Games and Payments businesses. We have identified the more material positive and negative trends affecting our business as the following:

 

Casino gaming is dependent upon discretionary consumer spending, which is typically the first type of spending that is restrained by consumers when they are uncertain about their jobs and income. Global economic uncertainty in the marketplace may have an impact on casino gaming and ultimately the demand for new gaming equipment.

 

The total North American installed slot base in the third quarter of 2017 remained relatively flat to the same period in 2016. We expect flat to moderate growth in the forward replacement cycle for electronic gaming machines (“EGMs”).  

 

The volume of new casino openings and new market expansions have slowed from previous years. The reduced demand as a result of fewer new market expansions could reduce the overall demand for slot machines.

 

We face continued competition from smaller competitors in the gaming cash access market and face additional competition from larger gaming equipment manufacturers and systems providers. This increased competition has resulted in pricing pressure for both our Games and Payments businesses.

 

Governmental oversight related to the cost of transaction processing and related fees to the consumer has increased in recent years. We expect the financial services and payments industry to respond to these legislative acts by changing other fees and costs, which may negatively impact our Payments business in the future.

 

Casino operators continue to try to broaden their appeal by focusing on investments in the addition of non-gaming amenities to their facilities, which could impact casino operator’s capital allocation for games.

Impact of ASC Topic 606 on the Comparability of Our Results of Operations in Future Periods

As discussed in detail in “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies – Recent Accounting Guidance – Recent Accounting Guidance Not Yet Adopted,” in Item 1: Financial Statements, we are, and have been, assessing the potential impact on our financial statements of ASC Topic 606, “Revenue from Contracts with Customers,” which will initially apply to us beginning with the fiscal year ending December 31, 2018. Based on the transition guidance related to ASC Topic 606, we are in the process of determining if our cash advance, ATM and check services revenue streams will be required to be reported “net of transaction price” rather than on a gross revenue presentation basis, as has been our practice to date. In this regard, ASC Topic 606 eliminates certain factors that appear in the existing governing standard, ASC Topic 605, and that supported our position of reporting these Payments-related revenue streams on a gross revenue basis. In addition, the new revenue recognition standard, as it specifically pertains to payments from customers, may also require us to report certain of these Payments-related revenue streams on a net presentation basis. If, upon the conclusion of our assessment and adoption of ASC Topic 606, we determine that we are required to report these Payments-related revenue streams on a “net of transaction price” basis rather than on a gross revenue presentation basis, this will have a significant impact on our Payments-related revenues, cost of revenues and margins. In particular, our “Payments revenue” would be reduced by the “Payments cost of revenue (exclusive of depreciation and amortization)” associated with the Payments-related revenue streams affected by the new standard, our “Payments cost of revenue (exclusive of depreciation and amortization)” would be reduced by a similar amount, and, correspondingly, our Payments operating margin will remain unchanged. The new revenue standard would not impact our operating income, net loss, cash flows or the timing of revenues recognized and costs incurred under generally accepted accounting principles in the United States (“GAAP”).

35


 

Operating Segments

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 in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group consists of the Chief Executive Officer and the Chief Financial Officer. This group manages the business, allocates resources and measures profitability based on our operating segments. The operating segments are managed and reviewed separately, as each represents products that can be sold separately to our customers.

Our chief operating decision-making group has determined the following to be the operating segments for which we conduct business: (a) Games and (b) Payments. We have reported our financial performance based on our segments in both the current and prior periods. Each of these segments is monitored by our management for performance against its internal forecast and is consistent with our internal management reporting.

 

The Games segment provides solutions directly to gaming establishments to offer their patrons gaming entertainment related experiences including: leased gaming equipment; sales and maintenance related services of gaming equipment; gaming systems; and ancillary products and services.

 

The Payments 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-related services; fully integrated kiosks and 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.

36


 

Results of Operations

Three months ended September 30, 2017 compared to three months ended September 30, 2016

The following table presents our Results of Operations (in thousands)*:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

September 30, 2016

 

 

 

2017 vs 2016

 

 

 

 

$

 

 

%

 

 

 

$

 

 

%

 

 

 

$ Variance

 

 

% Variance

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

55,452

 

 

 

22

 

%

 

$

56,218

 

 

 

25

 

%

 

$

(766

)

 

 

(1

)

%

Payments

 

 

191,870

 

 

 

78

 

%

 

 

165,959

 

 

 

75

 

%

 

 

25,911

 

 

 

16

 

%

Total revenues

 

 

247,322

 

 

 

100

 

%

 

 

222,177

 

 

 

100

 

%

 

 

25,145

 

 

 

11

 

%

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 

13,820

 

 

 

5

 

%

 

 

15,467

 

 

 

7

 

%

 

 

(1,647

)

 

 

(11

)

%

Payments cost of revenue (exclusive of depreciation and amortization)

 

 

149,838

 

 

 

61

 

%

 

 

127,211

 

 

 

57

 

%

 

 

22,627

 

 

 

18

 

%

Operating expenses

 

 

29,463

 

 

 

12

 

%

 

 

26,996

 

 

 

12

 

%

 

 

2,467

 

 

 

9

 

%

Research and development

 

 

4,545

 

 

 

2

 

%

 

 

4,460

 

 

 

2

 

%

 

 

85

 

 

 

2

 

%

Depreciation

 

 

12,539

 

 

 

5

 

%

 

 

12,367

 

 

 

6

 

%

 

 

172

 

 

 

1

 

%

Amortization

 

 

17,322

 

 

 

7

 

%

 

 

24,104

 

 

 

11

 

%

 

 

(6,782

)

 

 

(28

)

%

Total costs and expenses

 

 

227,527

 

 

 

92

 

%

 

 

210,605

 

 

 

95

 

%

 

 

16,922

 

 

 

8

 

%

Operating income

 

 

19,795

 

 

 

8

 

%

 

 

11,572

 

 

 

5

 

%

 

 

8,223

 

 

 

71

 

%

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

23,368

 

 

 

9

 

%

 

 

24,815

 

 

 

11

 

%

 

 

(1,447

)

 

 

(6

)

%

Total other expenses

 

 

23,368

 

 

 

9

 

%

 

 

24,815

 

 

 

11

 

%

 

 

(1,447

)

 

 

(6

)

%

Loss before income tax

 

 

(3,573

)

 

 

(1

)

%

 

 

(13,243

)

 

 

(6

)

%

 

 

9,670

 

 

 

(73

)

%

Income tax provision (benefit)

 

 

716

 

 

 

(1

)

%

 

 

(4,989

)

 

 

(2

)

%

 

 

5,705

 

 

 

(114

)

%

Net loss

 

$

(4,289

)

 

 

(2

)

%

 

$

(8,254

)

 

 

(4

)

%

 

$

3,965

 

 

 

(48

)

%

 

*

Rounding may cause variances.

Revenues

Total revenues increased by $25.1 million, or 11%, to $247.3 million for the three months ended September 30, 2017, as compared to the same period in the prior year. This was attributable to higher Payments revenues, slightly offset by lower Games revenues.

Games revenues decreased by $0.8 million, or 1%, to $55.4 million for the three months ended September 30, 2017, as compared to the same period in the prior year. This was primarily related to the timing of the TournEvent of Champions® slot tournament that occurred in the fourth quarter of 2017 as compared to the third quarter of 2016 and, to a lesser extent, the decrease in leased units and a lower daily win per unit on these games, partially offset by higher unit sales.

Payments revenues increased by $25.9 million, or 16%, to $191.9 million for the three months ended September 30, 2017, as compared to the same period in the prior year. This was primarily associated with higher dollar and transaction volumes and fees earned from our cash access services, expansion in Canada for our ATM operations as well as growth in the segment.

37


 

Costs and Expenses

Games cost of revenues (exclusive of depreciation and amortization) decreased by $1.6 million, or 11%, to $13.8 million for the three months ended September 30, 2017, as compared to the same period in the prior year. This was primarily due to a decline in cost of revenues as a result of the timing of the TournEvent of Champions® slot tournament that occurred in the fourth quarter of 2017 as compared to the third quarter of 2016.

Payments cost of revenues (exclusive of depreciation and amortization) increased by $22.6 million, or 18%, to $149.8 million for the three months ended September 30, 2017, as compared to the same period in the prior year. This was primarily related to the costs associated with the increase in cash access services volumes.

Operating expenses increased by $2.5 million, or 9%, to $29.5 million for the three months ended September 30, 2017, as compared to the same period in the prior year. This was primarily attributable to higher payroll and related expenses.

Research and development for the three months ended September 30, 2017 remained relatively consistent with the same period in the prior year.

Depreciation for the three months ended September 30, 2017 remained relatively consistent with the same period in the prior year.

Amortization decreased by $6.8 million, or 28%, to $17.3 million for the three months ended September 30, 2017, as compared to the same period in the prior year. This was primarily associated with certain intangible assets being fully amortized related to our acquisition of the Games business.

Primarily as a result of the factors described above, operating income increased by $8.2 million, or 71%, to $19.8 million for the three months ended September 30, 2017, as compared to the same period in the prior year. The operating margin increased from 5% for the three months ended September 30, 2016 to 8% for the three months ended September 30, 2017.

Interest expense, net of interest income decreased by $1.4 million, or 6%, to $23.4 million for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. This was primarily due to lower interest expense as a result of our debt refinancing in May 2017.

Income tax provision was $0.7 million for the three months ended September 30, 2017, as compared to an income tax benefit of $5.0 million for the same period in the prior year. This was primarily due to an increase in the valuation allowance for deferred tax assets. The income tax provision reflected an effective income tax rate of negative 20.0% for the three months ended September 30, 2017, which was less than the statutory federal rate of 35.0% primarily due to an increase in our valuation allowance for deferred tax assets, partially offset by state taxes and the benefit from a research credit. The income tax benefit reflected an effective income tax rate of 37.7% for the same period in the prior year, which was higher than the statutory federal rate of 35.0% primarily due to state taxes, the lower foreign tax rate applicable to our foreign source income and the benefit from a research credit, partially offset by non-statutory stock options that expired in the year.

38


 

Nine months ended September 30, 2017 compared to nine months ended September 30, 2016

The following table presents our Results of Operations (in thousands)*:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

September 30, 2016

 

 

 

2017 vs 2016

 

 

 

 

$

 

 

%

 

 

 

$

 

 

%

 

 

 

$ Variance

 

 

% Variance

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

165,832

 

 

 

23

 

%

 

$

158,660

 

 

 

25

 

%

 

$

7,172

 

 

 

5

 

%

Payments

 

 

561,257

 

 

 

77

 

%

 

 

483,286

 

 

 

75

 

%

 

 

77,971

 

 

 

16

 

%

Total revenues

 

 

727,089

 

 

 

100

 

%

 

 

641,946

 

 

 

100

 

%

 

 

85,143

 

 

 

13

 

%

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 

39,503

 

 

 

5

 

%

 

 

36,871

 

 

 

6

 

%

 

 

2,632

 

 

 

7

 

%

Payments cost of revenue (exclusive of depreciation and amortization)

 

 

436,104

 

 

 

60

 

%

 

 

373,366

 

 

 

58

 

%

 

 

62,738

 

 

 

17

 

%

Operating expenses

 

 

87,235

 

 

 

12

 

%

 

 

87,735

 

 

 

14

 

%

 

 

(500

)

 

 

(1

)

%

Research and development

 

 

13,706

 

 

 

2

 

%

 

 

14,499

 

 

 

2

 

%

 

 

(793

)

 

 

(5

)

%

Depreciation

 

 

34,765

 

 

 

5

 

%

 

 

37,172

 

 

 

6

 

%

 

 

(2,407

)

 

 

(6

)

%

Amortization

 

 

52,086

 

 

 

7

 

%

 

 

70,887

 

 

 

11

 

%

 

 

(18,801

)

 

 

(27

)

%

Total costs and expenses

 

 

663,399

 

 

 

91

 

%

 

 

620,530

 

 

 

97

 

%

 

 

42,869

 

 

 

7

 

%

Operating income

 

 

63,690

 

 

 

9

 

%

 

 

21,416

 

 

 

3

 

%

 

 

42,274

 

 

 

197

 

%

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

72,306

 

 

 

10

 

%

 

 

74,548

 

 

 

12

 

%

 

 

(2,242

)

 

 

(3

)

%

Loss on extinguishment of debt

 

 

14,615

 

 

 

2

 

%

 

 

 

 

 

 

%

 

 

14,615

 

 

 

 

%

Total other expenses

 

 

86,921

 

 

 

12

 

%

 

 

74,548

 

 

 

12

 

%

 

 

12,373

 

 

 

17

 

%

Loss before income tax

 

 

(23,231

)

 

 

(3

)

%

 

 

(53,132

)

 

 

(8

)

%

 

 

29,901

 

 

 

56

 

%

Income tax provision (benefit)

 

 

3,623

 

 

 

(1

)

%

 

 

(20,930

)

 

 

(3

)

%

 

 

24,553

 

 

 

117

 

%

Net loss

 

$

(26,854

)

 

 

(4

)

%

 

$

(32,202

)

 

 

(5

)

%

 

$

5,348

 

 

 

17

 

%

 

*

Rounding may cause variances.

Revenues

Total revenues increased by $85.1 million, or 13%, to $727.1 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily attributable to higher Games and Payments revenues.

Games revenues increased by $7.2 million, or 5%, to $165.8 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily related to an increase in unit sales, which were partially offset by a lower average outstanding number of leased units combined with lower daily win per unit on these games. In addition, revenues were also impacted as a result of the timing of the TournEvent of Champions® slot tournament that occurred in the fourth quarter of 2017 as compared to the third quarter of 2016.

Payments revenues increased by $78.0 million, or 16%, to $561.3 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily associated with higher dollar and transaction volumes and fees earned from our cash access services, expansion in Canada for our ATM operations as well as growth in the segment.

Costs and Expenses

Games cost of revenues (exclusive of depreciation and amortization) increased by $2.6 million, or 7%, to $39.5 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily due to higher variable costs associated with the increase in unit sales, partially offset by a decline in the cost of revenues as a result of the timing of the TournEvent of Champions® slot tournament that occurred in the fourth quarter of 2017 as compared to the third quarter of 2016.

39


 

Payments cost of revenues (exclusive of depreciation and amortization) increased by $62.7 million, or 17%, to $436.1 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily related to the costs associated with the increase in cash access services volumes.

Operating expenses decreased by $0.5 million, or 1%, to $87.2 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily attributable to higher costs in the prior-year period for the write down of an acquired note receivable and a warrant associated with Bee Cave Games, Inc. and severance costs related to a former executive, partially offset by higher payroll and related expenses and non-cash stock compensation costs.

Research and development decreased by $0.8 million, or 5%, to $13.7 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily due to a higher capitalization of certain development costs.

Depreciation decreased by $2.4 million, or 6%, to $34.8 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily associated with certain fixed assets being fully depreciated, partially offset by higher expense associated with new assets placed in service.

Amortization decreased by $18.8 million, or 27%, to $52.1 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily associated with certain intangible assets being fully amortized related to our acquisition of the Games business.

Primarily as a result of the factors described above, operating income increased by $42.3 million, or 197%, to $63.7 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. The operating margin increased from 3% for the nine months ended September 30, 2016 to 9% for the nine months ended September 30, 2017.

Interest expense, net of interest income decreased by $2.2 million, or 3%, to $72.3 million for the nine months ended September 30, 2017, as compared to $74.5 million for the nine months ended September 30, 2016. This was primarily due to lower interest expense as a result of our debt refinancing in May 2017.

Loss on extinguishment of debt was $14.6 million for the nine months ended September 30, 2017 as a result of our debt refinancing in May 2017.

Income tax provision was $3.6 million for the nine months ended September 30, 2017, as compared to an income tax benefit of $20.9 million for the same period in the prior year. This was primarily due to an increase in the valuation allowance for deferred tax assets. The income tax provision reflected an effective income tax rate of negative 15.6% for the nine months ended September 30, 2017, which was less than the statutory federal rate of 35.0% primarily due to an increase in our valuation allowance for deferred tax assets, partially offset by state taxes and the benefit from a research credit. The income tax benefit reflected an effective income tax rate of 39.4% for the same period in the prior year, which was higher than the statutory federal rate of 35.0% primarily due to state taxes, the lower foreign tax rate applicable to our foreign source income, and the benefit from a research credit, partially offset by non-statutory stock options that expired in the year.

40


 

Games Revenues and Leased Units

The following tables include the revenues from our Games segment and the related leased units (amounts in thousands, except for EGMs):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30, 2017

 

September 30, 2016

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

% of Games

 

Total

 

 

 

 

 

 

% of Games

 

2017 vs 2016

 

 

EGMs

 

 

Revenue

 

 

Revenue

 

EGMs

 

 

Revenue

 

 

Revenue

 

% Variance

Games revenues and leased

   units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual agreement(1)

 

 

4,994

 

 

$

7,130

 

 

 

13

 

%

 

 

5,249

 

 

$

8,649

 

 

 

15

 

%

 

 

(18

)

%

Participation revenue(2)

 

 

8,221

 

 

 

25,842

 

 

 

47

 

%

 

 

8,038

 

 

 

24,789

 

 

 

44

 

%

 

 

4

 

%

Sales

 

 

 

 

 

16,292

 

 

 

29

 

%

 

 

 

 

 

14,795

 

 

 

27

 

%

 

 

10

 

%

NY Lottery(3)

 

 

 

 

 

4,667

 

 

 

8

 

%

 

 

 

 

 

4,594

 

 

 

8

 

%

 

 

2

 

%

Other

 

 

 

 

 

1,521

 

 

 

3

 

%

 

 

 

 

 

3,391

 

 

 

6

 

%

 

 

(55

)

%

Total

 

 

13,215

 

 

$

55,452

 

 

 

100

 

%

 

 

13,287

 

 

$

56,218

 

 

 

100

 

%

 

 

(1

)

%

 

(1)

We enter into placement fee agreements for our EGMs to secure floor space for a contracted period of time.

(2)

In general, under participation arrangements, we secure floor space for our EGMs on a month-to-month basis.

(3)

We provide the New York State Gaming Commission with an accounting and central determinant system for the video lottery terminals in operation at licensed New York State facilities.

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30, 2017

 

September 30, 2016

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

% of Games

 

Total

 

 

 

 

 

 

% of Games

 

2017 vs 2016

 

 

EGMs

 

 

Revenue

 

 

Revenue

 

EGMs

 

 

Revenue

 

 

Revenue

 

% Variance

Games revenues and leased

   units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual agreement(1)

 

 

4,994

 

 

$

20,552

 

 

 

12

 

%

 

 

5,249

 

 

$

27,694

 

 

 

17

 

%

 

 

(26

)

%

Participation revenue(2)

 

 

8,221

 

 

 

76,452

 

 

 

46

 

%

 

 

8,038

 

 

 

74,135

 

 

 

47

 

%

 

 

3

 

%

Sales

 

 

 

 

 

52,574

 

 

 

32

 

%

 

 

 

 

 

38,718

 

 

 

24

 

%

 

 

36

 

%

NY Lottery(3)

 

 

 

 

 

13,715

 

 

 

8

 

%

 

 

 

 

 

13,788

 

 

 

9

 

%

 

 

(1

)

%

Other

 

 

 

 

 

2,539

 

 

 

2

 

%

 

 

 

 

 

4,325

 

 

 

3

 

%

 

 

(41

)

%

Total

 

 

13,215

 

 

$

165,832

 

 

 

100

 

%

 

 

13,287

 

 

$

158,660

 

 

 

100

 

%

 

 

5

 

%

 

(1)

We enter into placement fee agreements for our EGMs to secure floor space for a contracted period of time.

(2)

In general, under participation arrangements, we secure floor space for our EGMs on a month-to-month basis.

(3)

We provide the New York State Gaming Commission with an accounting and central determinant system for the video lottery terminals in operation at licensed New York State facilities.

Critical Accounting Policies  

The preparation of our Financial Statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in our Financial Statements. The SEC has defined critical accounting policies as the ones that are most important to the portrayal of the financial condition and results of operations, and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain.

For the three and nine months ended September 30, 2017, there were no material changes to the critical accounting policies and estimates discussed in our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

41


 

Recent Accounting Guidance

For a description of our recently adopted accounting guidance and recent accounting guidance not yet adopted, see “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies — Recent Accounting Guidance” of our Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a description of recent accounting guidance.

LIQUIDITY AND CAPITAL RESOURCES

Overview

The following table presents selected balance sheet information and an unaudited reconciliation of cash and cash equivalents per GAAP to net cash position and net cash available (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

 

2017

 

 

2016

 

 

Balance sheet data

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,425,605

 

 

$

1,408,163

 

 

Total long-term debt

 

$

1,138,871

 

 

$

1,121,880

 

 

Total stockholders’ deficit

 

$

(123,804

)

 

$

(107,793

)

 

Cash available

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

108,471

 

 

$

119,051

 

 

Settlement receivables

 

 

127,443

 

 

 

128,821

 

 

Settlement liabilities

 

 

(197,494

)

 

 

(239,123

)

 

Net cash position(1)

 

 

38,420

 

 

 

8,749

 

 

Undrawn revolving credit facility

 

 

35,000

 

 

 

50,000

 

 

Net cash available(1)

 

$

73,420

 

 

$

58,749

 

 

 

(1)

Non-GAAP measure. In order to enhance investor understanding of our cash balance, we are providing in this Quarterly Report on Form 10-Q net cash position and net cash available, which are not measures of our financial performance or position under GAAP. Accordingly, these measures should not be considered in isolation or as a substitute for, and should be read in conjunction with, our cash and cash equivalents prepared in accordance with GAAP. We define (i) net cash position as cash and cash equivalents plus settlement receivables less settlement liabilities and (ii) net cash available as net cash position plus undrawn amounts available under our Revolving Credit Facility (defined herein). We present net cash position because our cash position, as measured by cash and cash equivalents, depends upon changes in settlement receivables and the timing of payments related to settlement liabilities. As such, our cash and cash equivalents can change substantially based upon the timing of our receipt of payments for settlement receivables and payments we make to customers for our settlement liabilities. We present net cash available as management monitors this amount in connection with its forecasting of cash flows and future cash requirements.

Cash Resources

Our cash balance, cash flows and line of credit are expected to be sufficient to meet our recurring operating commitments and to fund our planned capital expenditures for the foreseeable future. Cash and cash equivalents at September 30, 2017 included cash in non-U.S. jurisdictions of approximately $16.3 million. Generally, these funds are available for operating and investment purposes within the jurisdiction in which they reside, but are subject to taxation in the U.S. upon repatriation.

We provide cash settlement services to our customers related to our cash access products. These services involve the movement of funds between the various parties associated with cash access transactions. These activities result in a balance due to us at the end of each business day for the face amount provided to patrons plus the service fee charged to those patrons that we recoup over the next few business days and classify as settlement receivables. These activities also result in a balance due to our customers at the end of each business day for the face amount provided to patrons that we remit over the next few business days and classify as settlement liabilities. As of September 30, 2017, we had $127.4 million in settlement receivables, for which we generally receive payment within one week. As of September 30, 2017, we had $197.5 million in settlement liabilities due to our customers for these settlement services that are generally

42


 

paid within the next few business days. As the timing of cash received from settlement receivables and payment of settlement liabilities may differ, the total amount of cash held by us will fluctuate throughout the year.

Our cash and cash equivalents were $108.5 million and $119.1 million as of September 30, 2017 and December 31, 2016, respectively. Our net cash position after considering the impact of settlement receivables and settlement liabilities was $38.4 million and $8.7 million as of September 30, 2017 and December 31, 2016, respectively. Our net cash available after considering the net cash position and undrawn amounts available under our Revolving Credit Facility was approximately $73.4 million and $58.7 million as of September 30, 2017 and December 31, 2016, respectively.

Sources and Uses of Cash

The following table presents a summary of our cash flow activity (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

2017 vs 2016

 

 

 

2017

 

 

2016

 

 

Change

 

Cash flow activities

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

69,762

 

 

$

85,808

 

 

$

(16,046

)

Investing activities

 

 

(83,334

)

 

 

(74,210

)

 

 

(9,124

)

Financing activities

 

 

1,627

 

 

 

(22,397

)

 

 

24,024

 

Effect of exchange rates on cash

 

 

1,365

 

 

 

(743

)

 

 

2,108

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

Net decrease for the period

 

 

(10,580

)

 

 

(11,542

)

 

 

962

 

Balance, beginning of the period

 

 

119,051

 

 

 

102,030

 

 

 

17,021

 

Balance, end of the period

 

$

108,471

 

 

$

90,488

 

 

$

17,983

 

 

Cash flows provided by operating activities decreased by $16.0 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily attributable to the impact of the change in settlement receivables and settlement liabilities for the period.   

Cash flows used in investing activities increased by $9.1 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily attributable to lower proceeds from the sale of fixed assets and higher placement fees and capital expenditures.

Cash flows provided by financing activities increased by $24.0 million for the nine months ended September 30, 2017, as compared to the same period in the prior year. This was primarily attributable to repayments of our Prior Credit Facility (defined below) that were not applicable in the current period and additional proceeds from exercise of stock options.

We expect that our cash provided by operating activities will be sufficient for our operating and debt servicing needs during the next 12 months. If not, we have sufficient borrowings available under the New Credit Facilities to meet additional funding requirements. On occasion, we monitor the financial strength of our lenders associated with certain of our debt instruments using publicly-available information. Therefore, we believe it is more likely than not that our lenders will be able to honor their commitments under the New Credit Agreement.

43


 

Long-Term Debt

The following table summarizes our outstanding indebtedness (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Long-term debt

 

 

 

 

 

 

 

 

Senior secured term loan

 

$

817,950

 

 

$

465,600

 

Senior secured notes

 

 

 

 

 

335,000

 

Senior unsecured notes

 

 

350,000

 

 

 

350,000

 

Total debt

 

 

1,167,950

 

 

 

1,150,600

 

Less: debt issuance costs and discount

 

 

(29,079

)

 

 

(28,720

)

Total debt after debt issuance costs and

   discount

 

 

1,138,871

 

 

 

1,121,880

 

Less: current portion of long-term debt

 

 

(8,200

)

 

 

(10,000

)

Long-term debt, less current portion

 

$

1,130,671

 

 

$

1,111,880

 

 

Refinancing

On May 9, 2017 (the “Closing Date”), Everi Payments, as borrower, and Holdings entered into a credit agreement 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 “New Credit Agreement”). The New Credit Agreement provides for: (i) a $35.0 million, five-year senior secured revolving credit facility (the “New Revolving Credit Facility”); and (ii) an $820.0 million, seven-year senior secured term loan facility (the “New Term Loan Facility,” and together with the New Revolving Credit Facility, the “New Credit Facilities”). The fees associated with the New Credit Facilities included discounts of approximately $4.1 million and debt issuance costs of approximately $15.5 million. All borrowings under the New Credit Facilities are subject to the satisfaction of customary conditions, including the absence of defaults and the accuracy of representations and warranties.

The proceeds from the New Term Loan Facility incurred on the Closing Date were used to: (i) refinance: (a) the Everi Payments existing credit facility with an outstanding balance of approximately $462.3 million with Bank of America, N.A., as administrative agent, collateral agent, swing line lender and letter of credit issuer, Deutsche Bank Securities Inc., as syndication agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc., as joint lead arrangers and joint book managers (the “Prior Credit Facility”); and (b) the Everi Payments 7.25% Senior Secured Notes due 2021 in the aggregate original principal amount of $335.0 million (the “Refinanced Secured Notes”); and (ii) pay related transaction fees and expenses.

In connection with the refinancing, we recorded a non-cash charge of approximately $14.6 million during the second quarter of 2017 related to the unamortized deferred financing fees and discounts related to the extinguished term loan under the Prior Credit Facility and the redeemed Refinanced Secured Notes. No prepayment penalties were incurred.

New Credit Facilities

The New Term Loan Facility matures seven years after the Closing Date (the “Stated Term Maturity Date”); provided that, if on the date that is 91 days prior to the maturity date (the “Unsecured Notes Maturity Date”) for the Everi Payments 10.00% Senior Unsecured Notes due 2022 in the aggregate original principal amount of $350.0 million (the “Unsecured Notes”), any Unsecured Notes remain outstanding and the Unsecured Notes Maturity Date has not been extended to a date that is at least six months after the Stated Term Maturity Date, then the New Term Loan Facility shall mature on the date that is 91 days before the Unsecured Notes Maturity Date. The New Revolving Credit Facility matures five years after the Closing Date; provided, that, if on the date that is 121 days prior to the Unsecured Notes Maturity Date, any Unsecured Notes remain outstanding and the Unsecured Notes Maturity Date has not been extended to a date that is at least six months after the Stated Term Maturity Date, then the New Revolving Credit Facility shall mature on the date that is 121 days before the Unsecured Notes Maturity Date. The New Revolving Credit Facility is available for general corporate purposes, including permitted acquisitions, working capital and the issuance of letters of credit.  

44


 

The interest rate per annum applicable to loans under the New Revolving Credit Facility will be, at Everi Payments’ option, the base rate or the Eurodollar Rate (defined to be the London Interbank Offered Rate or a comparable or successor rate) (the “Eurodollar Rate”) plus, in each case, an applicable margin. The interest rate per annum applicable to the New Term Loan Facility will also be, at Everi Payments’ option, the base rate or the Eurodollar Rate plus, in each case, an applicable margin. The Eurodollar Rate will be reset at the beginning of each selected interest period based on the Eurodollar Rate then in effect; provided that, if the Eurodollar Rate is below 1.0%, then such rate will be equal to 1.0% plus the applicable margin. The base rate is a fluctuating interest rate equal to the highest of: (i) the prime lending rate announced by the administrative agent; (ii) the federal funds effective rate from time to time plus 0.50%; and (iii) the Eurodollar Rate (after taking account of any applicable floor) applicable for an interest period of one month plus 1.00%. The applicable margins for both the New Revolving Credit Facility and the New Term Loan Facility are: (i) 4.50% in respect of Eurodollar Rate loans and (ii) 3.50% in respect of base rate loans.

Voluntary prepayments of the term loan and the revolving loans and voluntary reductions in the unused commitments are permitted in whole or in part, in minimum amounts as set forth in the New Credit Agreement governing the New Credit Facilities, with prior notice but without premium or penalty, except that certain refinancings of the term loans within six months after the Closing Date will be subject to a prepayment premium of 1.00% of the principal amount repaid.

Subject to certain exceptions, the obligations under the New Credit Facilities are secured by substantially all of the present and subsequently acquired assets of each of Everi Payments, Holdings and the subsidiary guarantors party thereto including: (i) a perfected first priority pledge of all the capital stock of Everi Payments and each domestic direct, wholly owned material restricted subsidiary held by Holdings, Everi Payments or any such subsidiary guarantor; and (ii) a perfected first priority security interest in substantially all other tangible and intangible assets of Holdings, Everi Payments, and such subsidiary guarantors (including, but not limited to, accounts receivable, inventory, equipment, general intangibles, investment property, real property, intellectual property and the proceeds of the foregoing). Subject to certain exceptions, the New Credit Facilities are unconditionally guaranteed by Holdings and such subsidiary guarantors.

The New Credit Agreement governing the New Credit Facilities contains certain covenants that, among other things, limit Holdings’ ability, and the ability of certain of its 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 its affiliates. The New Credit Agreement governing the New Credit Facilities also requires Holdings, together with its subsidiaries, to comply with a consolidated secured leverage ratio. At September 30, 2017, our consolidated secured leverage ratio was 3.63 to 1.00, with a maximum allowable ratio of 5.00 to 1.00. Our maximum consolidated secured leverage ratio will be 5.00 to 1.00, 4.75 to 1.00, and 4.50 to 1.00 as of December 31, 2017, 2018, and 2019 and thereafter, respectively.

We were in compliance with the terms of the New Credit Facilities as of September 30, 2017.

Events of default under the New Credit Agreement governing the New Credit Facilities include customary events such as a cross-default provision with respect to other material debt. In addition, an event of default will occur if Holdings undergoes a change of control. This is defined to include the case where Holdings ceases to own 100% of the equity interests of Everi Payments, or where any person or group acquires a percentage of the economic or voting interests of Holdings’ capital stock of 35% or more (determined on a fully diluted basis).

We are required to repay the New Term Loan Facility in an amount equal to 0.25% per quarter of the initial aggregate principal, with the final principal repayment installment on the maturity date. Interest is due in arrears on each interest payment date applicable thereto and at such other times as may be specified in the New Credit Agreement. As to any loan other than a base rate loan, the interest payment dates shall be the last day of each interest period applicable to such loan and the maturity date (provided, however, that if any interest period for a Eurodollar Rate loan exceeds three months, the respective dates that fall every three months after the beginning of such interest period shall also be interest payment dates). As to any base rate loan, the interest payment dates shall be last business day of each March, June, September and December and the maturity date.

45


 

For the quarter ended September 30, 2017,  the New Term Loan Facility had an applicable weighted average interest rate of 5.74%. For the nine months ended September 30, 2017, the Prior Credit Facility had an applicable weighted average interest rate of 6.29%; the New Term Loan Facility had an applicable weighted average interest rate of 5.71%; and a blended weighted average interest rate of 5.87% for the period ended September 30, 2017.

At September 30, 2017, we had $818.0 million of borrowings outstanding under the New Term Loan Facility and no borrowings outstanding under the New Revolving Credit Facility. We had $35.0 million of additional borrowing availability under the New Revolving Credit Facility as of September 30, 2017.

Refinanced Senior Secured Notes

In connection with entering into the New Credit Agreement, on May 9, 2017, Everi Payments redeemed in full $335.0 million face value (plus accrued interest) of the Refinanced Secured Notes. As a result of the redemption, the Company recorded $1.7 million, which consisted of unamortized deferred financing fees of $0.2 million and discounts of $1.5 million. These fees are included in the total $14.6 million non-cash charge.

Senior Unsecured Notes

In December 2014, we issued $350.0 million in aggregate principal amount of 10.00% Unsecured Notes due 2022 (the “Unsecured Notes”). The fees associated with the Unsecured Notes included original issue discounts of approximately $3.8 million and debt issuance costs of approximately $14.0 million.

Interest is due semi-annually in arrears each January and July.

The Unsecured Notes were acquired by the initial purchasers pursuant to the terms of a purchase agreement. Under the terms of the purchase agreement, during a one-year period following the closing and upon prior notice from the initial purchasers, the Company was required to use commercially reasonable efforts to aid the purchasers in the resale of the Unsecured Notes, including by preparing an updated offering memorandum and participating in reasonable marketing efforts including road shows, to the extent required therein. The Unsecured Notes were resold by the initial purchasers to third parties in the second quarter of 2015.

In December 2015, we completed an exchange offer in which all of the unregistered Unsecured Notes were exchanged for a like amount of Unsecured Notes that had been registered under the Securities Act.

We were in compliance with the terms of the Unsecured Notes as of September 30, 2017 and December 31, 2016.

Contractual Obligations

The following transactions have resulted in a change in our commitments under contractual obligations as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016:

In May 2017, we entered into the New Credit Agreement, which provides for the $35.0 million New Revolving Credit Facility and the $820.0 million New Term Loan Facility. Under the New Credit Agreement, we are required to make principal payments of 1% annually of $2.0 million in 2017, $8.2 million in years 2018 through 2021 and $783.1 million thereafter. We also have required interest payments, computed using a blended weighted average interest rate at September 30, 2017 of 5.74%, of $12.0 million, $46.6 million, $46.1 million, $45.7 million, $45.3 million and $104.5 million from 2017 through 2021 and thereafter, respectively.

In July 2017, we extended the term of our placement fee agreements to 6 years and 11 months with our largest customer in Oklahoma. Under the terms of the agreement, we made a $10.0 million cash payment in August 2017, and will pay approximately $5.6 million per quarter in placement fees, beginning in January 2018 and ending in July 2019.

Other Liquidity Needs and Resources

We need cash to support our foreign operations. For some foreign jurisdictions, such as the United Kingdom, applicable law and cross border treaties allow us to transfer funds between our domestic and foreign operations efficiently. For

46


 

other foreign jurisdictions, we must rely on the cash generated by our operations in those foreign jurisdictions, and the cost of repatriation is prohibitive. For example, Global Cash Access (Canada), Inc., the subsidiary through which we operate our Payments business in Canada, generates cash that is sufficient to support its operations. If we expand our Payments business into new foreign jurisdictions, we must rely on treaty favored cross border transfers of funds, the cash generated by our operations in those foreign jurisdictions or alternate sources of working capital.

Off-Balance Sheet Arrangements

Our Contract Cash Solutions Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) allows us to use funds owned by Wells Fargo to provide the currency needed for normal operating requirements for our ATMs. For the use of these funds, we pay Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Statements of Loss, were $1.2 million and $3.5 million for the three and nine months ended September 30, 2017, respectively, and $0.7 million and $2.3 million for the three and nine months ended September 30, 2016, respectively. We are exposed to interest rate risk to the extent that the applicable LIBOR increases.

Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable, which is recorded on a net basis. As these funds are not our assets, supplied cash is not reflected on the Balance Sheets. The outstanding balances of ATM cash utilized by us from Wells Fargo were $226.6 million and $285.4 million as of September 30, 2017 and December 31, 2016, respectively.

The Contract Cash Solutions Agreement, as amended, provides us with cash in the maximum amount of $425.0 million during the term of the agreement, which expires on June 30, 2019.

We are responsible for any losses of cash in the ATMs under this agreement and we self-insure for this risk. We incurred no material losses related to this self-insurance for the three and nine months ended September 30, 2017 and 2016.

Effects of Inflation

Our monetary assets, consisting primarily of cash, receivables, inventory and our non-monetary assets, consisting primarily of the deferred tax asset, goodwill and other intangible assets, are not significantly affected by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our operating expenses, such as those for salaries and benefits, armored carrier expenses, telecommunications expenses and equipment repair and maintenance services, which may not be readily recoverable in the financial terms under which we provide our Games and Payments products and services to gaming establishments and their patrons.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

In the normal course of business, we are exposed to foreign currency exchange risk. We operate and conduct business in foreign countries and, as a result, are exposed to movements in foreign currency exchange rates. Our exposure to foreign currency exchange risk related to our foreign operations is not material to our results of operations, cash flows or financial position. At present, we do not hedge this risk, but continue to evaluate such foreign currency translation risk exposure.

Wells Fargo supplies us with currency needed for normal operating requirements of our domestic ATMs pursuant to the Contract Cash Solutions Agreement. Under the terms of this agreement, we pay a monthly cash usage fee based upon the product of the average daily dollars outstanding in all such ATMs multiplied by a margin that is tied to LIBOR. We are, therefore, exposed to interest rate risk to the extent that the applicable LIBOR increases. The currency supplied by Wells Fargo was $226.6 million as of September 30, 2017. Based upon this outstanding amount of currency supplied by Wells Fargo, each 1% increase in the applicable LIBOR would have a $2.3 million impact on income before taxes over a 12-month period. Foreign gaming establishments or third-party vendors supply the currency needs for the ATMs located on their premises.

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The New Credit Facilities bear interest at rates that can vary over time. We have the option of having interest on the outstanding amounts under the New Credit Facilities paid based on a base rate or based on LIBOR. We have historically elected to pay interest based on LIBOR, and we expect to continue to pay interest based on LIBOR of various maturities.

The weighted average interest rate on the New Credit Facilities was approximately 5.71% for the nine months ended September 30, 2017. Based upon the outstanding balance on the New Credit Facilities of $818.0 million as of September 30, 2017, each 1% increase in the applicable LIBOR would have an $8.2 million impact on interest expense over a 12-month period. The interest rate on the Unsecured Notes is fixed, and therefore, an increase in LIBOR does not impact the interest expense associated with such notes.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2017. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017, the Company’s disclosure controls and procedures are effective such that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms and (ii) accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting during the Quarter Ended September 30, 2017

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the third quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are involved in various investigations, claims and lawsuits in the ordinary course of our business. In addition, various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based upon current information, we do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our financial position, liquidity or results of operations.

Item 1A. Risk Factors.

We refer you to documents filed by us with the SEC, specifically “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which identify important risk factors that could materially affect our business, financial condition and future results. We also refer you to the factors and cautionary language set forth in the section entitled “Cautionary Statements Regarding Forward-looking Statements” in “Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including the accompanying Financial Statements, should be read in conjunction with such risks and other factors for a full understanding of our operations and financial condition. The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and herein are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 have not materially changed.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases and Withholding of Equity Securities

 

 

 

Total Number of

Shares Purchased (1)

(in thousands)

 

 

Average Price per

Share (2)

 

Tax Withholdings

 

 

 

 

 

 

 

 

7/1/17 - 7/31/17

 

 

0.5

 

 

$

7.10

 

8/1/17 - 8/31/17

 

 

0.4

 

 

$

7.33

 

9/1/17 - 9/30/17

 

 

0.5

 

 

$

7.80

 

Total

 

 

1.4

 

 

$

7.41

 

 

 

(1)

Represents the shares of common stock that were withheld from restricted stock awards to satisfy the minimum applicable tax withholding obligations incident to the vesting of such restricted stock awards. There are no limitations on the number of shares of common stock that may be withheld from restricted stock awards to satisfy the minimum tax withholding obligations incident to the vesting of restricted stock awards.

 

(2)

Represents the average price per share of common stock withheld from restricted stock awards on the date of withholding.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits

 

Exhibit
Number

 

Description

 

 

 

  10.1*

 

Transition and Resignation Agreement and General Release of All Claims with Juliet A. Lim (dated October 25, 2017).

 

 

 

  31.1*

 

Certification of Michael D. Rumbolz, President and Chief Executive Officer of Everi Holdings Inc. in accordance with Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2*

 

Certification of Randy L. Taylor, Chief Financial Officer of Everi Holdings Inc. in accordance with Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1**

 

Certification of Michael D. Rumbolz, President and Chief Executive Officer of Everi Holdings Inc. in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.2**

 

Certification of Randy L. Taylor, Chief Financial Officer of Everi Holdings Inc. in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*

 

XBRL Instance Document.

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

*

Filed herewith.

**

Furnished herewith.

50


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

November 7, 2017

 

 

 

EVERI HOLDINGS INC.

(Date)

 

 

 

(Registrant)

 

 

 

 

 

 

 

By:

 

/s/ Todd A. Valli

 

 

 

 

Todd A. Valli

 

 

 

 

Senior Vice President, Corporate Finance and

   Chief Accounting Officer

 

 

 

 

(For the Registrant and as Principal

   Accounting Officer)

 

 

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