UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑K10-K
(Mark One)
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20182021
OR
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TOFor the transition period from to
Commission File Number:file number: 001-32622
EVERI HOLDINGS INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 20‑072327020-0723270 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
7250 S. Tenaya Way, Suite 100 Las Vegas, Nevada | | 89113 |
| Las Vegas | | |
| Nevada | | 89113 |
| (Address of principal executive offices) | | (Zip Code) |
(800) 833‑7110833-7110
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | EVRI | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well‑knownwell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨x No x¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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.
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| Large accelerated filer | | ¨x | | Accelerated filer | | x☐ |
| Non-accelerated filer | | ¨
☐ | | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ¨☐ No x
As of June 29, 2018,30, 2021, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $500.2 million2.2 billionbased on the closing sale price as reported on the New York Stock Exchange.
There were 70,320,02891,409,193 shares of the registrant’s common stock issued and outstanding as of the close of business on March 1, 2019.February 24, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Definitive Proxy Statement for its 20192022 Annual Meeting of Stockholders (which is expected to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s 20182021 fiscal year) are incorporated by reference into Part III of this Annual Report on Form 10-K. Except as expressly incorporated by reference, the registrant’s Proxy Statement shall not be deemed to be a part of this Annual Report on Form 10-K.
EVERI HOLDINGS INC.
ANNUAL REPORT ON FORM 10‑K10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 20182021
TABLE OF CONTENTS
In this filing, we refer to: (i) our audited consolidated financial statements and notes thereto as our “Financial Statements,” (ii) our audited Consolidated Statements of Income (Loss)Operations and Comprehensive Income (Loss) as our “Statements of Income (Loss),Operations,” (iii) our audited Consolidated Balance Sheets as our “Balance Sheets,” and (iv) Item 7. Management’ sManagement’s Discussion and Analysis of Financial Condition and Results of Operations as our “Results of Operations.”
CAUTIONARY INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS
Everi Holdings Inc. (“Everi Holdings,” “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 Payments Inc. (“Everi FinTech” or “FinTech”) and Everi Games Holding Inc. (“Everi Games Holding”), which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (“Everi Games” or “Games”), and Everi Payments Inc. (“Everi Payments”). Unless otherwise indicated, the terms the “Company,” “we,” “us,” and “our” refer to Everi Holdings together with its consolidated subsidiaries.
Our disclosure and analysis in thisThis Annual Report on Form 10-K contain(“Annual Report”) contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in1995, as do other materials or oral statements we release to the public, as well as oral forward-looking statements. We have tried, wherever possible, to identify such statements by using words such as “goal,” “target,” “future,” “estimate,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “project,” “may,” “should,” “will,” “likely,” “will likely result,” “will continue,” “forecast,” “observe,” “strategy,” and other words and terms of similar meaning. The forward-looking statements in this Annual Report on Form 10-K reflect the Company’s current views with respect to future events and financial performance.
Forward-looking statements include, but are not limited to, statements regarding the following matters: trends in gaming establishment and patron usage of our products; benefits realized by using our products and services; product development, including the release of new game features and additional game and system releases in the future; regulatory approvals; gaming regulatory, card association, and statutory compliance; the implementation of new or amended card association and payment network rules; consumer collection activities; future competition; future tax liabilities; future goodwill impairment charges; international expansion; resolution of litigation; dividend policy; new customer contracts and contract renewals; future results of operations (including revenue, expenses, margins, earnings, cash flow and capital expenditures); future interest rates and interest expense; future borrowings; and future equity incentive activity and compensation expense.
public. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, theyperformance, but instead are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-lookingconditions, as of the date on which this report is filed. Forward-looking statements relateoften, but do not always, contain words such as “expect,” “anticipate,” “aim to, the future, they” “designed to,” “intend,” “plan,” “believe,” “goal,” “target,” “future,” “assume,” “estimate,” “indication,” “seek,” “project,” “may,” “can,” “could,” “should,” “favorably positioned,” or “will” and other words and terms of similar meaning.
Forward-looking statements are subject to inherent risks, uncertainties, and changes in circumstances that are often difficult to predict and many of which are beyond our control. control, including, but not limited to, statements regarding: trends, developments, and uncertainties impacting our business, including our ability to withstand: global supply chain disruption; changes in global market, business and regulatory conditions arising as a result of the COVID-19 global pandemic, including any related public health confidence and availability of discretionary spending income of casino patrons as well as expectations for the re-opening of casinos; product innovations that address customer needs in a new and evolving operating environment; to regain or maintain revenue, earnings, and cash flow momentum, and to enhance shareholder value in the long-term; trends in gaming establishment and patron usage of our products; benefits realized by using our products and services; benefits and/or costs associated with mergers, acquisitions, and/or strategic alliances; product development, including the release of new game features, additional games, and system releases in the future; regulatory approvals; gaming and financial regulatory and legal, card association, and statutory compliance and changes; the implementation of new or amended card association and payment network rules or interpretations; consumer collection activities; competition (including consolidations); tax liabilities; goodwill impairment charges; international expansion; resolution of litigation or government investigations; our dividend policy; new customer contracts and contract renewals; financial performance and results of operations (including revenue, expenses, margins, earnings, cash flow, and capital expenditures); interest rates and interest expense; borrowings and debt repayments; and equity incentive activity and compensation expense.
Our actual results and financial condition may differ materially from those indicated in forward-looking statements. Importantstatements, and important factors that could cause them to do so include, but are not limited to, the following:
•our actual resultsability to generate profits in the future and to create incremental value for shareholders;
•our ability to execute on mergers, acquisitions, and/or strategic alliances, including our ability to integrate and operate such acquisitions or alliances consistent with our forecasts in order to achieve future growth;
•our ability to execute on key initiatives and deliver ongoing improvements;
•expectations regarding growth for the Company’s installed base and daily win per unit;
•expectations regarding placement fee arrangements;
•inaccuracies in underlying operating assumptions;
•the impact of the ongoing Coronavirus Disease 2019 (“COVID-19”) global pandemic on our business, operations and financial condition, including (i) actions taken by international, federal, state, tribal and municipal governmental and
regulatory agencies to differ materially from those indicatedcontain the COVID-19 public health emergency or mitigate its impact, (ii) the direct and indirect economic effects of COVID-19 and measures to contain it, including directives, orders or similar actions by international, federal, state, tribal and municipal governmental and regulatory agencies to regulate freedom of movement and business operations such as travel restrictions, border closures, business closures, limitations on public gatherings, quarantines and shelter-in-place orders as well as re-opening safety protocols;
•changes in global market, business, and regulatory conditions arising as a result of the forward-looking statements include, without limitation:COVID-19 global pandemic;
•our history of net losses and our ability to generate profits in the future;
•our substantial leverage restrictions underand the related covenants that restrict our indebtedness, and operations;
•our ability to raise additionalgenerate sufficient cash to fund operations, working capital, and capital expenditures, and to service all of our indebtedness;indebtedness, fund working capital, and capital expenditures;
•our ability to compete in the gaming industry, manage competitive pressures, navigate gaming market contractions, and continue operating in Native American gaming markets;withstand unanticipated impacts of a pandemic outbreak of uncertain duration;
•our ability to protectwithstand the loss of revenue during the closure of our intellectual property rights;customers’ facilities;
the impact of changes in U.S. federal corporate tax laws;
•our ability to maintain our current customers, replace revenue associated with terminated contracts, and address margin degradation from contract renewals;customers;
our ability to prevent, mitigate, or timely recover from cybersecurity breaches, attacks, and compromises;
our ability to execute on mergers, acquisitions, 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, our product portfolio, and development and placement fee arrangements;
•expectations regarding customers’, gaming establishments’, and patrons’ preferences and demands for future gamingproduct and service offerings;
national and international economic conditions, including •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 (“EMV”);technology;
technological obsolescence, expenditures, and product development, and •our ability to successfully introduce new products and services, including third-party licensed content;
•gaming establishment and patron preferences; failure to control product development costs and create successful new products;
•anticipated sales performance;
employee turnover;•our ability to prevent, mitigate, or timely recover from cybersecurity breaches, attacks, and compromises;
•national and international economic and industry conditions;
•changes in gaming regulatory, card association, and statutory requirements, as well as requirements;
•regulatory and licensing difficulties;difficulties, competitive pressures and changes in the competitive environment;
•operational limitations;
•gaming market contraction;
•changes to tax laws;
•uncertainty of litigation outcomes;
•interest rate fluctuations;
•business prospects;
•unanticipated expenses or capital needs, interest rate fluctuations, or inaccuracies in underlying operating assumptions;needs; technological obsolescence and our ability to adapt to evolving technologies;
•our ability to comply with our debt covenants and service outstanding debt;
•employee turnover;
•our ability to comply with regulatory requirements under the Payment Card Industry (“PCI”) Data Security Standards and maintain our certified status; and
In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Annual Report on Form 10-K will in fact transpire or prove to be accurate. Readers are cautioned to consider the specific risk factors described herein and in “Item 1A. Risk Factors” of this Annual Report on Form 10-K and not to place undue reliance on the forward-looking statements contained herein, which are based only on information currently available to us and speak only as of the date hereof.
We undertake no obligation to update or publicly revise any forward-looking statement whether written or oral, that may be made from time to time, whethers as a result of new information, future developments or otherwise. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph.section. You are advised, however, to consult any further disclosures we make on related subjects in our reports and other filings with the Securities and Exchange Commission (the “SEC”).
PART I
Item 1. Business.
Overview
Everi is a leading supplier of imaginative entertainment and trusted technology solutions for the casino and digital gaming industry. We provideEveri’s mission is to lead the gaming industry through the power of people, imagination and technology. Focused on player engagement and assisting our casino operators withcustomers operate more efficiently, the Company develops entertaining game content and gaming machines, gaming systems and services for land-based and iGaming operators. The Company is also a diverse portfoliopreeminent and comprehensive provider of products including innovative gaming machinestrusted financial technology solutions that power the casino floor while improving operational efficiencies and casino operationalfulfilling regulatory compliance requirements, including products and management systemsservices that include comprehensive end-to-end payments solutions, criticalfacilitate convenient and secure cash and cashless financial transactions, self-service player loyalty tools and applications, and regulatory and intelligence offerings, and gaming operations efficiency technologies.software.
Everi Holdings reports its results offinancial performance, and organizes and manages its operations, based onacross the following two operatingbusiness segments: Games(i) Games; and FinTech. Effective April 1, 2018, we changed the name of the operating segment previously referred to as “Payments” to “Financial(ii) Financial Technology Solutions”Solutions (“Everi FinTech” or “FinTech”). We believe this reference more accurately reflects the focus of the business segment on delivering innovative and integrated solutions to enhance the efficiency of the casino operator, support the comprehensive regulatory and tax requirements of their gaming customers, and improve players’ gaming experience by providing easy access to their funds and payment of winnings.
Everi Games primarily provides gaming operators with gaming technology and entertainment products and services, including: (a)(i) gaming machines, primarily comprised ofcomprising Class II and Class III slot machines placed under participation or fixed feefixed-fee lease arrangements or sold to casino customers, including TournEvent® that allows operators to switch from in-revenue gaming to out-of-revenue tournaments; (b) system software, licenses, ancillary equipment,customers; (ii) providing and maintenance; and (c) business-to-consumer and business-to-business interactive activities. In addition, Everi Games develops and managesmaintaining the central determinant systemsystems for the video lottery terminals (“VLTs”) installed in the State of New York and it also provides similar technology in certain tribal jurisdictions.jurisdictions; and (iii) business-to-business (“B2B”) digital online gaming activities.
Everi FinTech provides gaming operators cash access and relatedwith financial technology products and services, including: (a)(i) financial access and related services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels; (ii) loyalty and marketing software and tools, regulatory and compliance (“RegTech”) software solutions, other information-related products and services, and hardware maintenance services; and (iii) associated casino patron self-service hardware that utilizes our financial access, software and other services. Our services operate as part of an end-to-end security suite to protect against cyber-related attacks and maintain the necessary secured environments to maintain compliance with applicable regulatory requirements. These solutions include: access to cash and cashless funding at gaming facilities via Automated Teller Machine (“ATM”) cashdebit withdrawals, credit card cashfinancial access transactions, and point of sale (“POS”) debit card cash access transactions,purchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check verificationwarranty services, self-service ATMs and warrantyfully integrated kiosk and maintenance services; (b) equipment that provides cash accessself-service loyalty tools and efficiency-related services; (c) products and services that improve credit decision making, automate cashier operations, and enhance patron marketing activities for gaming establishments; (d)promotion management software; compliance, audit, and data solutions;software; casino credit data and (e) online payment processing solutions for gaming operators in states that offer intrastate, Internet-based gaming,reporting services; marketing and lottery activities.promotional offering subscription-based services; and other ancillary offerings.
Everi Holdings was formed as a Delaware limited liability company on February 4, 2004 and was convertedWith respect to a Delaware corporation on May 14, 2004. Our principal executive offices are located at 7250 South Tenaya Way, Suite 100, Las Vegas, Nevada 89113. Our telephone number is (800) 833-7110. Our website address is www.everi.com. The information on our website is not partFinTech business, we have made the following updates to certain of this Annual Report on Form 10-K or our other filings with the SEC.
Our Business Segments
We report our financial performance,statement descriptions, where applicable: (i) “Cash access services” has become “Financial access services”; (ii) “ATM” has been renamed “Funds dispensed”; (iii) “Equipment” has been changed to “Hardware”; and organize(iv) “Information services and manageother” has been revised to “Software and other.” These naming convention changes better represent how our operations, across the following two business segments: (a) Games; and (b) FinTech. has evolved.
Impact of the Coronavirus Disease 2019 (“COVID-19”) Pandemic
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, temporarily lowered equity market valuations, created significant volatility in the financial markets, increased unemployment levels, and caused temporary, and in certain cases, permanent closures of many businesses. The initial impacts from the COVID-19 pandemic have begun to subside with certain aspects of the global economy, equity market valuations, and increased unemployment levels showing signs of recovery.The gaming industry was not immune to these factors as our casino customers closed their gaming establishments in the first quarter of 2020, with many beginning to reopen their operations over the remainder of 2020 and throughout 2021. As a result, our operations experienced significant disruptions in the first three quarters of 2020. At the immediate onset of the COVID-19 pandemic, we were affected by various measures, including, but not limited to: the institution of social distancing and sheltering-in-place requirements in many states and communities where we operate, which significantly impacted demand for our products and services, and resulted in office closures, the furlough of a majority of our employees, the implementation of temporary base salary reductions for our employees and the implementation of a work-from-home policy.
Since the onset of COVID-19, we have implemented measures to mitigate our exposure throughout the global pandemic. While there may be further uncertainty facing our customers as a result of COVID-19, we continue to evaluate our business strategies and the impacts of the global pandemic on our results of operations and financial condition and make business decisions to mitigate further risk. While gaming industry conditions improved significantly in 2021 compared to 2020, it is unclear if the customer volumes experienced will continue to exceed pre-COVID levels. Resurgences of COVID-19 and its variants could result in reduced patron demand for gaming and could also result in new closures of casinos by the various governmental and regulatory agencies overseeing our customers, or even by the casino operators themselves, in an effort to contain the COVID-19 global pandemic or mitigate its impact and the effect of vaccines on these matters.
As of December 31, 2021, excluding the few casinos that have permanently closed, there are only a minimal number of customer sites, located primarily in Canada and other international markets, whose operations still remain closed. Our revenues, cash flows, and liquidity for the fourth quarter of 2021 exceeded the fourth quarter of 2020, which were significantly impacted by the effects of COVID-19. At the onset of the pandemic, our customers implemented protocols intended to protect their patrons and guests from potential COVID-19 exposure and re-establish customer confidence in the gaming and hospitality industry. These measures included enhanced sanitization, limitations on public gathering and casino capacity, patron social distancing requirements, and limitations on casino operations and amenities, which have limited the number of patrons that are able or who desire to attend these venues. This has also impacted the pace at which demand for our products and services rebounds.
With various limitations still in effect, we expect that demand and supply for our products and services may be tempered in the short-term, to the extent gaming activity decreases at our customers’ locations, or fails to increase at expected rates, and to the extent our customers decide to continue to restrict their capital spending as a result of uncertainty in the industry, or that supply chain disruptions might impact customer deliveries, or otherwise. As a result, we continue to monitor and manage liquidity levels, and we may, from time to time, evaluate available capital resource alternatives on acceptable terms to provide additional financial flexibility.
The impact of the COVID-19 pandemic also exacerbates the risks disclosed in this Annual Report including, but not limited to: our ability to comply with the terms of our indebtedness; our ability to generate revenues, earn profits and maintain adequate liquidity; our ability to service existing and attract new customers and maintain our overall competitiveness in the market; the potential for significant fluctuations in demand for our products and services; overall trends in the gaming industry impacting our business; and potential volatility in our stock price, among other concerns such as cybersecurity exposure.
Our Products and Services
Everi Games
Our Games products and services include commercialelectronic gaming devices, such as Native American Class II offerings and other electronic bingo products, Class III slot machine offerings, video lottery terminals,VLTs, B2B digital online gaming activities, accounting and central determinant systems, and other back office systems. We conduct our Games segment business based on results generated from the following major revenue streams: (a)(i) Gaming Operations; (b)(ii) Gaming Equipment and Systems; and (c)(iii) Gaming Other.
Gaming Operations
With respect to our Gaming Operationsoperations revenue stream, we primarily offer: (a)provide: (i) leased gaming equipment, both Class II and Class III offerings, on a revenue participation or a fixed daily fee basis; (b)fixed-fee basis, including standard games and hardware and premium games and hardware, inclusive of local-area progressive, machines; (c) wide-area progressive machines (“WAP”); (d) TournEvent® machines; (e)(ii) accounting and central determinant systems; and (f) interactive(iii) digital online gaming activities.
In connection with our leased gaming equipment, we generally retain ownership of the machines installed at customer facilities. We receive recurring revenue based on a percentage of the netdaily win per dayunit (i.e., cash/coin-in less patron win and jackpots paid) generated by the leased gaming equipment, a percentage of the total cash/coin-in, a daily fixed-fee based upon the number of gaming machines placed or a fixed daily fee.combination of these methods. We expect to continue to (i) increase our investment in research and development in order to innovate and introduce new gaming hardware and theme content; (ii) expand our offering of new standard and premium game hardware and theme content; and (iii) extend and expand our game placements into new jurisdictions, increase investment in researchgaming markets and development, and introduce premium game hardware and theme content.additional jurisdictions. From our historical focus on placement of games intogame placements in the Oklahoma and Washington tribal markets,market, Everi Games has diversified its installed base in recent years with entry into newadditional commercial and tribal markets. As of December 31,
2021, approximately 10,394 units, or 61.5% of the total installed base, was outside of the Oklahoma tribal market. Additionally, Everi Games has grown its premium game installations, with approximately 2,8597,840 units installed (representing approximately 20.4%46.4% of our total installed base as of December 31, 2018) since entering the category approximately six years ago.2021).
In connection with our WAP offering, machines placed under such arrangements fall into the premium leased gaming equipment category and we retain ownership of such machines. We debuted our first WAP in Class II markets in 2017 and are now operating in Class III tribal markets as well. Spanning threeCurrently spanning four product lines, our WAP is offered to customers onthe Player Classic, Core HDX, andEmpire MPX, and Empire DCX cabinets. The original Class II offering, Jackpot Lockdown®, debuted with two themes — Jackpot Lockdown Mega Meltdown™ and Jackpot Lockdown High Voltage™. With the release of Diamond Blaze™ along with multiple other product offerings active on the link, the original Class II offering has expanded to Everi’s new premium sign package offering, Renegade 3600™.
Gaming operations also include revenues generated under our arrangement to provide the New York State Gaming Commission with an accounting anda central determinant, monitoring, and accounting system for the VLTs in operation at licensed State of New York gaming facilities. In January 2018, an amendment to theNovember 2019, a new agreement between Everi Games and the New York State Gaming Commission was approved and became effective.effective on January 1, 2020. Under this amendment,agreement, Everi Games will continue to provide and maintain the central determinant system for the New York Lottery through December 2019.2029. As of December 31, 2018, this system is2021, there were approximately 17,000 VLTs connected to approximately 18,500 VLTs and hasour central determinant system for the ability to interface with, provide outcomes to, and manage the VLTs.New York Lottery. Pursuant to our agreement with the New York State Gaming Commission, we receive a portion of the network-wide net win (generally, cash-in less prizes paid)paid per dayday) in exchange for provision and maintenance of the central determinant system. We also provide the central determinant system technology to Native American tribes in other licensed jurisdictions, for which we receive a portion of the revenue generated from the VLTs that are connected to the system.
In connection with our interactivedigital online gaming activities, Everi operates in the following two areas: (a) business-to-consumer (“B2C”);provides our games to business customers, including both regulated real money and (b) business-to-business (“B2B”). B2C relates to games offered directly to consumers through our social, mobile application, which can be played using virtual currency. The Company earns revenues by providing the virtual currency to the consumers, or the players, whenever the consumers purchase additional virtual currency. This offering is limited to the area of free-to-play also referred to as social casinos, and is offered through connectivity with Facebook as well as mobile platforms such as the Apple App Store for Apple devices and the Google Play Store for Android devices. B2B relates to games offered to the online business partners who thenwhich offer the games to consumers.consumers through their online gaming platforms. Everi has developed its own remote gaming server (“RGS”) leveragingthat allows us to deliver a selection of games from our extensive library of land-based content to our digital customers in a manner that is delivered throughallows for the RGS.game play features and functionality to operate in a manner similar to how these games were designed for our land based customers. This RGS library contains casino-themed social and mobile games, and games available for real money gaming (“RMG”) that are offered to the online business partners that operate in play-for-fun, or social casinos, and the regulated online casinos that operate in the RMG regulated markets.markets, and social games that are offered to our business customers that operate play-for-fun social casinos on their mobile apps and web sites. We enter into revenue share agreements with these online business partners offering Everi's virtual games.customers.
Gaming Equipment and Systems
With respect to our Gaming Equipmentequipment and Systems revenue stream, we enter into direct sales contracts generally forsystems revenues are derived from the sale of some combination of: (a)(i) gaming equipment and player terminals, including TournEvent® machines; (b)terminals; (ii) game content; (c)(iii) license fees; (d)and (iv) ancillary equipment;equipment, such as signage and (e) maintenance.lighting packages.
Gaming Other
With respect to
Gaming other revenues are generated from fees paid by casino customers that participate in our Gaming Other revenue stream, we offer our TournEvent of Champions® national slot tournament or who contract with us to provide certain service functions on games that allows winners ofare owned by the customer. Casinos, in partnership with Everi, host local and regional slot tournaments throughout the year, tofor which winners of these events participate in a national tournament that results in the determination of an ultimate champion. We did not conduct these tournaments throughout the years ended December 31, 2021 and 2020 as a final champion.direct result of the circumstances surrounding the global pandemic.
Games Products
Our Games products include:include mechanical and video reel games in both Class II and Class III configurations and are offered in a variety of differentiated cabinets:
Classic Mechanical Reel Games. Our full range of classic mechanical reel games provides players with a traditional, high denomination slot gaming experience.
•Player Classic: These games leverage our long-standing experience in building enduring brands, such as Black Diamond®and Wild Wild Gems®, and feature a unique takeperspective on traditional slot games with eye-catching features. Superfeatures, such as Cash Machine™, a three-reel, one-line mechanical slot game that offers “win what you see” gameplay.
•Skyline: These games utilize common recognizable light sequencing in the top box in sync with specific game themes such as Double Jackpot Series™ offers largeGems and Triple Double Patriot along with licensed game themes such as Casper and Smokin’ Hot Stuff.
•Skyline Revolve: Our premium linked progressives onproducts such as Cash Machine Jackpots and Gold Standard Jackpots builds upon the Player Classic®skyline cabinet packaged withand also includes a mechanical wheel top box and merchandising options for casino operators that can include overhead signage, to display rolling progressive meters and exciting win celebrations from across the casino floor. The premium Skyline™ top box is a vintage-inspired bezel for the Player Classic cabinet showcasing red green blue lighting and a 24-inch liquid crystal display (“LCD”) panel, with titles including Double Jackpot Gems®, Kingmaker®, Blazin’ Gems®,andlicensed brands, such as Smokin’ Hot Stuff®and Casper®.wedge kits.
Video Reel Games. We offer a growing range of dual-screen and portrait single screensingle-screen video reel games that provide a uniquely entertaining slot gaming experience. The most recent released titles leverage Core HDX®Below is a list of our video gaming cabinets and Empire MPX™ cabinets (E43 and E5527) that deliver eye-catching graphics and full, rich sound.A range of progressive features round out our library inselect games on these platforms.
•Empire 5527. The Empire 5527 cabinet features a portrait-oriented 55-inch upper display and a landscape-oriented 27-inch lower display, game-controlled lighting on the E43, such as Lighting Zap Jackpots™, Diamond Rain®, Diamond Rain Jackpot Wheel™, Cash Money®,and Diamond Money™. The E5527 cabinet includes titles, such as Smokin’ Hot Stuff Wicked Wheel®,base-game display, and the recently introduced Shark Week with the new Nitro™ technology enabling display features across multiple devices.
Core HDX. The Core HDX cabinetenhances the player gaming experience with its dual widescreen 23-inch monitors with 1080p high definition (“HD”) capability, integrated touchscreens, and premium 3-waya high-quality sound system. The eye-catching cabinet commands a presence on the casino floor with game-controlled lighting and a custom premium LCD topper, Apex N™. Select Core HDX games feature Everi Bet™, the bet configuration system that gives casino operators the power to optimize the casino floor for maximum returns. The vast majority of our standard video library on our MForce® software platform is designed to be playable on the Core HDX.
Empire MPX (E43). The Empire MPX debuted in April 2017with the launch of the Company’s first premium participation cabinet on its WAP, and then launched its for-sale category Empire MPX products in December 2017.The new cabinet features a single-screen 43-inch monitor, full 1080p HD graphics capabilities, and a fully-customizable touchscreen button panel. Its efficient design allows for tighter bank configuration. Empire MPX licensed video content includes Casablanca™, Penn & Teller®, Buffy the Vampire Slayer™, Singin’ in the Rain™, and Willie Nelson™.
Empire MPX (E5527). The E5527 is also uniquely designed to occupy less space on the casino floor, allowing for easy game bank and podmore flexible configurations. The all-new premium leaseEmpire 5527 includes the high-performing licensed game Smokin’ Hot Stuff Wicked Wheel®. We expanded the Empire 5527 into a banked product called Empire Arena™ that offers flexibility in banking configurations for casino operators, with three units and up to a total of eight units. The product is currently supported by successful game themes – Discovery Channel’s Shark Week®, which launched in October 2018, The Vault™, which launched in October 2019, along with several follow ups such as Jackpot Falls. These titles offer base games as well as competitive community-style bank-wide bonus features.
•Empire Flex. The Empire Flex cabinet, released in December 2019, is the latest video cabinet that is part of the Empire Cabinet Series. The cabinet features a portrait oriented 55-inch upper display49-inch flexed monitor capable of supporting 4K content, an enlarged glass button deck, and landscape oriented 27-inch lower displaycurved LED light bars that are sure to dazzle players.available in standard or extended options. The cabinet leverages proven technology from Everi’s officially launched with two games that are part of the Wicked Wheel™ Series.
•Empire MPX to deliver an exciting new player experience with visuals never before seen on an Everi gaming device. With its leading-edge cabinet design and innovative technology features, that both players and casino operators will appreciate, E5527 commands attention on the casino floor.
The Texan HDX™DCX. The Texan HDX Empire DCXis an 8-foot tall cabinet with dual 42-inch HD video screens and features a two-person bench seat, integrated touch screens, and a premium three-wayvideo cabinet that features dual curved 43-inch displays that support 4K content with integrated edge lighting, premium 4.1 surround sound, system.and enhanced game-controlled lighting. The cabinet is designed to showcase the Everi standard video library in an oversized format, allowing games to be prominently displayedavailable exclusively with licensed brand game themes having launched with The Mask® slot game, which is based on the casino floor.New Line Cinema’s 1994 hit comedy.
TournEvent®. Our slot tournament terminals and system that allowsallow gaming operators to switch from in-revenue gaming to out-of-revenue tournaments and to design and build a variety of flexible tournament formats, such as soloindividual or team tournament play, session or round winner advancement, and cumulative or maximum scoring, including providing bonus opportunities in tournament games that improve scores or automatically move a player to first place. The latestWe introduced TournEvent®5.0 game version includes6.0 in late 2019 with several new system enhancements, including the TournEvent Now™ feature that improve operator efficienciesenables operators to offer on-the-fly tournaments via their player tracking system. Casino operators can move large numbers of players through the first round of tournaments on the player’s time, at the player’s pace, and hardware and offers engaging tournament games that attractthen host a traditional final round for top-scoring players. With the wireless tablet option, casino operators will be able to sign up players for tournaments remotely, allowing for a more efficient tournament registration and an overall better tournament experience for the casinos and players alike. TournEvent® also is available with multiple sign options, consisting of a 65-inch television, lighted accent dividers, and the ability to be featured on new bank configurations.
Everi FinTech
Our FinTech products and services include solutions that we provide directlyoffer to gaming establishments to offerprovide their patrons with financial access and funds-based services supporting digital, cashless and physical cash access-related servicesoptions across mobile, assisted and self-service channels along with related loyalty and marketing tools, and other information-related products including:and services. In addition, we provide an end-to-end security suite to protect against an application and cyber-related attack and maintain the necessary secured environments to maintain compliance with applicable regulatory requirements. These solutions include: access to cash and cashless funding at gaming facilities via ATM cashdebit withdrawals, credit card cashfinancial access transactions, and POS debit card cash access transactions; check-related services;purchase at casino cage, kiosk and mobile POS devices; the CashClub Wallet, check warranty services, self-service ATM’s and fully integrated kioskskiosk and maintenance services; self-service loyalty tools and promotion management software; compliance, audit, and data software; casino credit data and reporting services; marketing and promotional offering subscription-based services; and other ancillary offerings. We conduct our FinTech segment business based on results generated from the following major revenue streams: (a) Cash Access; (b) Equipment;(i) Financial Access Services; (ii) Software and (c) InformationOther; and (iii) Hardware.
Financial Access Services and Other.
Cash Access
In connection with our CashFinancial Access services,Services, we offer the following:
ATM Cash WithdrawalsFunds Dispensed. ATM cash withdrawalFunds dispensed transactions represent the largest category of electronic payment transactions that we process, as measured by dollardollars processed and transaction volume. In an ATM cash withdrawala funds dispensed transaction, a patron directly accesses funds from either a standalone ATM or a device enabled with our ATMfunds dispensing service by either using an ATM card or a debit card to withdraw funds from the patron’s demand deposit account, or using a credit card to access the patron’s line of credit. In either event, the patron must use the personal identification number (“PIN”) associated with such card. Our processor then routes the transaction request through an electronic funds transfer (“EFT”) network to the patron’s bank or card issuer, as applicable.
Depending upon a number ofon several factors, including the patron’s account balance or credit limit and daily withdrawal limit (which limits are set by the bank or issuer, as applicable)card issuer), the bank orcard issuer will either authorize or decline the transaction. If the transaction is authorized, then the ATM-enabledfunds dispensing-enabled device dispenses the cash to the patron. For a transaction using an ATM card or a debit card, the patron’s demand deposit account is debited by the amount of cash disbursed plus a service fee that we assess the patron for the use of the ATMfunds dispensing service. For a transaction using a credit card with a PIN, the patron’s credit card account is charged by the amount of the cash disbursed plus a service fee that we assessfees assessed by the patronCompany and by the card issuer for the use of the ATMfunds dispensing service. In both cases, theour service fee is currently a fixed dollar amount and not a percentage of the transaction size. We also receive a fee from the card issuer, which we refer to as a reverse interchange reimbursement fee, from the patron’s card-issuing bank for accommodating the card issuer’s customer.customer (the patron). In most circumstances, we pay a percentage of the service feethat we receive received from the patron and, in somemany circumstances, a portion of the reverse interchange reimbursement fees we receive,received from the card issuer, as a commission to our gaming establishment customers for the right to operate on their premises.
Credit Card CashFinancial Access Transactions and POS Debit Card CashFinancial Access Transactions. Patrons can perform credit card cashfinancial access transactions and POS debit card cashfinancial access transactions using many of our enabled devices. A patron’s credit card cashfinancial access limit is usually a sub-limit of the total credit line and is set by the card-issuing bank,card issuer, not Everi FinTech. These limits vary significantly and can be larger or smaller than the POS debit cashfinancial access limit. A credit card cashfinancial access transaction obligates the patron to repay the issuing bankcard issuer over time on terms that are preset by the cardholder agreement. A patron’s POS debit card allows the patron to make cash withdrawals at the POSPOS-enabled device in an amount equal to the lesser of the amount of funds in the account, or a daily limit that is generally five to ten times as large as the patron’s daily ATM limit.
When a patron requests either a credit card cash access or POS debit card cashfinancial access transaction, our processor routes the transaction request through one of the card associations, or EFT networks, to the issuing bank.card issuer. Depending upon several factors, such as the available credit or bank account balance, the transaction is either authorized or declined by the issuing bank.card issuer. If authorized, the patron’s bank account is debited or the patron’s credit card balance is increased, in both cases, by an amount equal to the funds requested plus our service fee. TheOur service fee is a fixed dollar amount, a percentage of the transaction size, or a combination of a fixed dollar amount and percentage of the transaction size. If the transaction is authorized, the device informs the patron that the transaction has been approved. The device then further instructs the patron to proceed to the gaming establishment’s cashier or Company-operated satellite cage (“financial services center”), to complete the transaction, because both credit card cash access and POS debit card cashfinancial access transactions must, in most circumstances, be completed in a face-to-face environmentsenvironment and a unique signature must be received in order to comply with rules of the card associations. We receive the transaction amount and the service fee from the card issuer, and we reimburse the gaming establishment for the cash amount of cash that it provided to the patron, by paying the gaming establishment via wire transfer or other similar form of electronic payment. Inand in addition, wewill pay the gaming establishment a portion of the service fee we collected as a commission for the right to operate on its premises. We are also obligated to pay interchange fees to the issuing bankcard issuer and processing costs related to the electronic payment transaction to card associations.
Check-RelatedCheck Warranty Services. Patrons are ableEveri provides a check warranty service that allows gaming establishments to cashaccept personal and/or payroll checks at certain gaming establishments.without the risk of default. When a patron presents a check to the cashier the gaming establishment can accept or deny the transaction based on its own customer information and at its own risk, obtain third-party verification information about the check writer, the bank account number, and other information relating to the check to manage its risk, or obtain a warranty on payment of the check, which entitles the gaming establishment to reimbursement of the full amount of the check if it is dishonored.
If a gaming establishment, choosesthe check and patron information is sent through Everi’s system to haveour third-party partner. The partner evaluates the information and returns to the cashier a warranty limit that a check warranted, it sendsor multiple checks can be cashed for on that business day. The partner may also return a request to a check warranty service provider, inquiring whether it would be willingdecline code telling the cashier not to accept the risk of cashing the check. If the check warranty provider accepts the risk and warrants the check, the
For a gaming establishment negotiates the patron’s check by providing cash for the face amount of the check. If the check is dishonored by the patron’s bank upon presentment, the gaming establishment invokes the warranty, andthat subscribes to the check warranty service, provider purchasesEveri will warranty any dishonored check that was approved, eliminating any risk for the gaming establishment. Everi’s partner facilitates and manages the check from the gaming establishmentprocessing, deposits, redeposits, and collections for the full check amount and then pursues collection activities on its own.any checks.
For those gaming establishments that seek to manage their own risk, we provide a subscription check verification service via a database operated by our subsidiary, Central Credit, LLC (“Central Credit”), which is used by gaming establishments to make credit issuing decisions. Central Credit maintains information on the check cashing and credit history of many gaming establishment patrons. For those gaming establishments that prefer to obtain a warranty, we provide check warranty services through a third-party check warranty service provider. We pay this third-party provider to assist with the warranty decision, check processing, billing, and collection activities. On our behalf, thisour third-party provider charges our gaming establishment customers a fee for the check warranty services, which is typically a percentage of the face amount of the check being warranted. In such circumstances, we receive all of the check warranty revenue.revenue associated with the fees we charge our customers for the initial check warranty services. We are exposed to risk for the losses associated with any warranted itemschecks that cannot be collected from patrons issuing the items. Warranty expenses are defined as any amounts paid by the third-party provider to gaming establishments to purchase dishonored checks that will not be collectible from patrons and any expenses related to the collection on these amounts.patrons. We also pay certain fees and operating expenses to our third-party provider related toin connection with the provision of thesesuch services.
Casino Cash Plus 3-in-1 ATMs are unmanned, cash-dispensing machines that enable ATM cash withdrawals, POS debit card cash access transactions, and credit card cash access transactions directly or using our 3-in-1 Rollover functionality. Most financial institutions that issue debit cards impose daily ATM withdrawal limits, and, in some instances, aggregate and count Friday, Saturday, and Sunday as a single day in calculating such limits. If a patron has reached his or her daily ATM limit, our 3-in-1 Rollover functionality automatically enables the patron to obtain funds via a POS debit card cash access transaction or a credit card cash access transaction instead.
CashClub®CashClub® is a software payments platform that provides gaming establishments with a personal computer workstation software user interface and point-of-sale terminal that streamlines credit and debit card cashfinancial access transaction processing and check warranty transactions for casino patrons. It allows for electronic signature capture and dynamic currency conversion. It also interfaces with our Everi Compliance solutions (defined below) to assist casino operationsoperators with meeting regulatory requirements under Title 31 of the Bank Secrecy Act.
In connection with our Equipment, weCashClub Wallet® is a digital payments platform for gaming establishments to offer the following:
Fully Integrated Kiosks aretheir patrons a complete line of products that provide multiple functionsdigital cashless method to the casino floor. This includes cash access functionality, such as our 3-in-1 Rollover, which provides casino patrons access to perform cash advance, POS debit, and ATM transactions. The kiosks also provide functionality to perform check cashing transactions, slot machine ticket redemption, bill breaking, and loyalty program access as well as integration with mobile and wallet technology. The availability of our cash access platform on these slot ticket redemption devices provides us with additional points of contact with gaming patronsfund their entertainment experience, including funding at locations that are usually closer to gaming devices than traditional cash access devices that are typically located on the periphery of the gaming area within the casino floordevice, payments at point of sale for retail, online, hotel and also provides gamingfood/beverage, igaming, and sports wagering. The wallet allows patrons with more opportunities to access their cash with less cashier involvement.
Other Integrated Kiosk Solutions provide casinos with more efficient and streamlined methods for cash handling and transaction processing. These products are designed to be integrated with our cash access products and cage compliance software ensuring compliance with anti-money laundering regulations, and provide an automated way to process common tax forms, such as the Internal Revenue Service Form W-2G or Form 1042-S. In addition, we offer equipment in the form of standalone, non-ATM terminals that perform authorizations forvarious funding options including credit card cashfinancial access transactions and POS debit card cashfinancial access transactions. Our kiosktransactions, Automated Clearing House, and E-Check check warranty. It also interfaces with our Everi Compliance solutions include(defined below) to assist casino operators with meeting regulatory requirements under Title 31 of the following products:Bank Secrecy Act. The wallet also has capabilities to integrate with our Loyalty platform including our Enrollment and Promotional kiosks.
JackpotXchange family of kiosks, JXC 4.0,and JXC-L, enable casino personnel to efficiently access funds to pay out jackpots for their guests. These kiosks are integrated with all major slot systems to offer jackpot processingSoftware and pay-out in a combination of cash or slot tickets. These kiosks offer gaming operators the ability to reduce workload at the cage and for slot personnel.
OtherJackpotXpress is a full-featured jackpot payout and tax form management and filing platform that allows casino personnel to work through the complex jackpot process using a mobile tablet or kiosk. JackpotXpress allows gaming operators to reduce jackpot payout wait times, increase slot play, eliminate manually filling out cumbersome paper documents, and perform “know your customer” checks. It is fully integrated with our Everi Compliance (defined below), CageXchange, and JackpotXchange products.
In addition to making jackpot operations more efficient, JackpotXpress also helps operators increase customer engagement which leads to improved loyalty and service.CageXchange isLoyalty Platform provides a cash dispensing devicesoftware platform that helps streamlineenables gaming operators to adopt and deliver new promotional strategies to attract, engage, reward and retain their patrons. Gaming operators utilize the platform to deliver content and promotions on kiosks, tablets, and mobile devices. The software platform integrates with other casino cage operations. With CageXchange, cash is securely vaulted, creating increased security while also reducing cash shrinkageapplications to engage with patrons in a more relevant and helpingpersonalized fashion. We provide the operators with a control panel to improve cashier accuracy. Additional efficiencies are achieved from acceleratingassist with the processplanning, personalization, and optimization of cage cashiers obtaining money fromdelivering messages and content via interactions within our platform depending on patron’s value to the vault. CageXchangecasino. This allows our customers to unify the patron experience across all touchpoints within the casino and replaces outdated promotional and enrollment tactics by utilizing our content for promotions, drawings, targeted alerts, card signups, reprints, and geo-fencing. By providing a comprehensive set of integrated applications within our platform, we offer gaming operators the ease of use and simplicity to interact with their patrons. Additionally, our loyalty platform is integrated with CashClub® to create an efficient transactionother Everi applications for casino guests.
financial access and compliance tools.Our Cash Recycling Solutions allow casinos to fully automate the check in and check out process of money, saving time and expense. As gaming establishments vary in size and complexity, these Cash Recycling Solutions support a number of diverse resort operations such as retail, food and beverage, entertainment, and gaming operations.
Information Services and Other
In connection with our Information Services and Other solutions, we offer the following:
Maintenance provides for various formslevels of support to maintainand maintenance services for our fully integrated kiosks.kiosks, loyalty kiosks, and related equipment. Our support operations, field service, and customer engagement teams provide quarterly and annual preventative maintenance on these products and software systems to help maximize the efficiency of our products.
Everi Compliance is a leading AML management tool for the gaming industry. Everi Compliance is our suite of compliance software offerings for gaming operators that help gaming establishments comply with financial servicesencompasses many elements including filing Suspicious Activity Reports (“SARs”) and gaming regulations, which include software to assist with anti-money laundering regulations, such as filing currency transaction reportsCurrency Transaction Reports (“CTRs”), and suspicious activity reportsassisting our customers in performing Know Your Customer (“SARs”KYC”). activities. Everi Compliance automates much of the manual processes gaming establishments employ to be compliant with those requirements, thus saving time, improving accuracy, and allowing operators to manage their compliance programs much more efficiently. In addition, theseEveri Compliance gives operators the ability to enter Multiple Transaction Log and Negotiable Instrument Log transactions, file FinCEN reports electronically, conduct transaction analysis, complete compliance solutions assist with “know your customer” checks to ensure transactions are appropriately conducted.audits, and review reports.
Central Credit is our gaming patron credit bureau service which, on a subscription basis, allows gaming establishments to improve their credit-granting decisions by obtaining access to a database containing credit information and transaction data on millions of gaming patrons. Our gaming credit reports are comprised ofcomprise information recorded from patron credit histories at hundreds of gaming establishments. We provide such information to gaming establishments that subscribe to the service. These establishments then use that data, among other things, to determine how much credit, if any, they will grant to a gaming patron. We typically charge our customers for access to gaming patron credit reports on a monthly basis and our fees are generally comprised of a fixed minimum feeamount plus per-transaction charges for certain requests.
Hardware
Fully Integrated Kiosks are a complete line of products that provide multiple functions to gaming operators on their casino floors. This includes financial access functionality that enables funds dispensed cash withdrawals, POS debit card and credit card financial access transactions directly or by using our patented “Seamless Transition” technology, which is the Europay, MasterCard, and Visa global standard for cards equipped with security chip technology (“EMV”) corollary of our 3-in-1 Rollover functionality. The kiosks also provide functionality to perform check cashing transactions, slot machine ticket redemption, bill breaking, slot ticket purchase from a debit card, and loyalty program access, as well as integration with mobile and wallet technology. The availability of our financial access platform on these slot ticket redemption devices provides us with additional points of contact with gaming patrons at locations that are typically closer to gaming devices than traditional financial access devices that are generally located on the periphery of the gaming area and also provides gaming patrons with more opportunities to access their cash with less cashier involvement.
Other Integrated Kiosk Solutions provide casinos with more efficient and streamlined methods for cash handling and transaction processing. These products are designed to be integrated with our financial access products and cage compliance software ensuring compliance with anti-money laundering regulations, and provide an automated way to process common tax forms, such as the Internal Revenue Service Form W-2G or Form 1042-S. In addition, we offer hardware in the form of standalone, non-funds dispensing terminals that perform authorizations for credit card financial access and POS debit card financial access transactions. Our kiosk solutions include database servicesthe following products:
•JackpotXchange family of kiosks, JXC 4.0, and JXC-L, enable casino personnel to efficiently access funds to pay winning slot machine jackpots to their patrons. These kiosks are integrated with all major slot accounting systems to offer jackpot processing and payout in a combination of cash or slot tickets. These kiosks offer gaming operators the ability to reduce workload for cage operations and slot personnel.
•CageXchange is a cash dispensing device that helps streamline casino cage operations. With CageXchange, cash is securely vaulted, creating increased security while also reducing cash shrinkage and helping to improve cashier accuracy. Additional efficiencies are achieved from accelerating the process of cage cashiers obtaining money from the vault. CageXchange is integrated with CashClub® to create an efficient transaction for casino patrons.
•Our Cash Recycling Solutionsallow casinos to fully automate the check in and check out process of money, saving time and expense. As gaming establishments access to information from our proprietary patron transaction database for purposesvary in size and complexity, these Cash Recycling Solutions support a number of player acquisition, direct marketing, market share analysis,diverse operations such as retail, food and a variety of other patron promotional uses. Our proprietary patron transaction database includes information that is captured from transactions we process. Patrons may “opt out” of having their names included in marketing mailing lists. We also offer an online payment processing solution forbeverage, entertainment, and gaming operations.
Loyalty Kiosk and Related Equipment provide gaming operators in stateswith self-service loyalty enrollment, player card issuance, and marketing equipment that offer intra-state, Internet-basedmanages and delivers a gaming operator’s marketing programs through the patron interfaces. This loyalty-related equipment allows the customer to utilize and lottery activities.interact with the loyalty platform as the central hub for all of the marketing offerings.
Manufacturing
We utilize contract manufacturers•Enrollment Kiosk is a self-service kiosk that allows casino patrons to produceeither sign up for an initial loyalty card or print a replacement card. These kiosks provide an enhanced level of customer service when the cabinets that make up our electronic gaming machines (“EGMs”), kiosk products, and other sub-assemblies. We have assembly facilities in Austin, Texas and Las Vegas, Nevada, where we assembleclub desk is busy or closed by creating patron self-service locations throughout the EGMs and our kiosk products, which include the cabinets, computer assemblies, LCD screens, printers, bill validators and acceptors, and other wiring and harnesses. We believe that our sourcescasino floor without costly infrastructure or additional overhead costs. Such kiosks also assist with updating contact information of supply of component parts and raw materials for our products are generally adequate and we have few sole-sourced parts.
Research and Development
We conduct research and development activities primarily to develop gaming systems, game engines, casino data management systems, bingo outcome determination systems, video lottery outcome determination systems, gaming platforms, and gaming content,card holders and to enhance our existing product lines. We believe our abilityverify email or phone contact with a two-step verification process.
•Promotional Kiosk is a kiosk that engages casino patrons with the casino’s loyalty programs, unifying patron service functions into a simple self-service solution. With a range of promotions and offers, the kiosk enables the customer to deliverbetter manage their marketing efforts. A flexible interface and control panel functionality enable the kiosk to be responsive to customers’ changing business conditions or plans. With the drawings feature, multiple point to entry conversion ratios can be controlled by the hour, as well as scheduled prize earnings. Customized content is shared throughout the solution with property amenities that include menus, photos, and video content. With a graphic-rich, statistically-optimized, and exciting promotions catalog library of more than 300 games, critical assets for instant win, episodic board games, and earn and wins, customers’ patrons can easily access differentiated appealing products and services to the marketplace is based on our research and development investments, and we expect to continue to make such investments in the future. Research and development costs consist primarily of salaries and benefits, consulting fees, and game lab testing fees. Once the technological feasibility of a project has been established, it is capitalized until it becomes available for general release.content.
CustomersSales
As of December 31, 2018,2021, we served approximately 1,450 casinosmore than 1,700 casinos and other gaming properties primarily in the United States and Canada, with additional customers in the United Kingdom, Europe, Canada, the Caribbean, Central America, and Asia. In certain limited circumstances, we provide our products and services to non-gaming establishments, such as gas stations and other retail businesses associated with gaming establishment customers. However, the revenue generated from these operations is not material to our operations and we do not actively market or target non-gaming establishment customers.
Sales and Marketing
In our Games business,and FinTech businesses, we sell and market our products and services to gaming establishments primarily through the use of a direct sales force, which targets regulated gaming establishments in the United States, Canada, and in certain international markets. With respect to our gaming products, we participate in the Class II and Class III gaming machine markets, and the central determinant system market in North America, through participation, or revenue share, and fixed fee arrangements, and the sale of proprietary EGMs and systems.
In our FinTech business, we sell and market Cash Access (i.e., Cash Advance, ATM, and Check Services), Equipment (i.e., Kiosks Sales), Information Services and Other (i.e., Kiosk Services, Compliance Sales and Services, Central Credit Services, and Ancillary Services) through the use of a direct sales force, which targets gaming establishments in the United States and in certain international markets.
With respect to both our Games and FinTech businesses, ourOur sales and marketing efforts are directed by a team of customer service executives, each of whom has business development responsibility for gaming establishments in specified geographic regions.
These customer service executives direct their efforts at various levels of gaming establishment personnel, including: senior executives, finance professionals, marketing staff, slot directors, and cashiers, and seek to educate them on the benefits of our products and services. In some cases, our customer service executives are supported by field service and customer engagement teams, who provide on-site customer service to most of our customers.service. In other cases, our sales executives directly maintain the customer relationships. These customer service executives and field service and customer engagement teams generally reside in the vicinity of the specific gaming establishments they support to ensureprovide a prompt response to the needs of those gaming establishments. WeIn some situations, we also have joint sales efforts with a number of strategic partners, including independent sales organizations, which allow us to market our products and services to gaming establishments through channels other than our direct sales force.
Markets
Development Activities
We conduct research and development activities for both our Gaming and FinTech lines of business.
Our Games research and development activities are primarily to develop gaming systems, game engines, casino data management systems, central determination and other electronic bingo-outcome determination systems, video lottery outcome determination systems, gaming platforms and gaming content, and to enhance our existing product lines.
Our FinTech research and development activities are primarily to develop: (i) payments products, systems, and related capabilities including security, encryption, and business rule engines that deliver differentiated patron experiences and integrate with our other products; (ii) compliance products that increase efficiencies, profitability, enhance employee/patron relationships, and meet regulatory reporting requirements; and (iii) loyalty products, systems, and features that attract, engage, and retain patrons in more intuitive and contextual ways than our competition.
We believe our ability to deliver differentiated, appealing products and services to the marketplace is based on our research and development investments, and we expect to continue to make such investments in the future. Research and development costs consist primarily of salaries and benefits, consulting fees, certification and testing fees. Once the technological feasibility has been established, the project is capitalized until it becomes available for general release.
Competitive Conditions
With respect to our Games business, we compete across different gaming markets with a variety of gaming technology and equipment suppliers. Competition is generally based upon the: (a)(i) amount of revenue our products generate for our customers relative to the amount of revenue generated by our competitors’ products; (b)products, which correlate directly to the appeal of these products to gaming patrons and (ii) prices and fees we and our competitors charge for products and services offered;offered. To improve product attractiveness and (c) appeal of our competitors’ products to gaming patrons, which has a direct effect on the volume of play generated by a product and, accordingly, the revenues generated for our customers. To drive customer demand, and improve product attractiveness, we continually work to develop a consistent pipeline of new game themes, game engines,platforms, hardware platforms,cabinets, and systems that are expected to appeal to gaming patrons, all while working to releasepatrons; obtain appropriate gaming regulatory approvals for such products; and offer these new products to the marketplace in a timely manner.
With respect to our FinTech business, we compete with other providers of cashfinancial access services to the gaming industry as well as with financial institutions and other regional and local banks that operate ATMs on the premises of gaming establishments.industry. Some of these other providers and financial institutions have established cooperative relationships with each other to expand their service offerings. We also face increased competition from: (a) independent sales organizations, which provide basic services and aggressive pricing; (b)(i) other manufacturers that provide similar goods and services; (ii) independent sales organizations, which provide basic services often at aggressive pricing; and (c)(iii) traditional transaction processors that have entered the gaming patron cashfinancial access services market. This increased competition amongst these various providers of cash access services has resultedcan result in pricing pressure and margin erosion with respect to our core cashfinancial access products and services. In addition to competing with various providers of cashfinancial access services, FinTech has experiencedexperiences competition from either those same providers or stand-alonestandalone providers of anti-money laundering (“AML”) compliance products and self-service kiosks for ticket redemption and jackpot redemption.
Resources
Manufacturing
We have assembly facilities in Austin, Texas and Las Vegas, Nevada, where we assemble gaming machines and kiosk products, which comprise a variety of components, including cabinet hardware, computer assemblies, LCD screens, printers, bill validators and acceptors, power transformer and wiring harnesses. We believe that our sources of supply of component parts and raw materials for our products are generally adequate and we have few sole-sourced parts. We utilize contract manufacturers to produce the cabinet hardware that make up our gaming machines, kiosk products, and certain other sub-assemblies.
Intellectual Property
We believe the ability to introduce and respond to technological innovation in the gaming industry will be an increasingly important qualification for the future success of any provider of cashfinancial access and gaming-related products and services. Our continued competitiveness will depend on: (a)(i) the pace of our new product development; (b)(ii) our patent, copyright, trademark, and trade secret protection; and (c)(iii) our relationships with customers. Our business development personnel work with gaming establishments, our technology and other strategic partners, and the suppliers of the financial services upon which our cashfinancial access services rely, to design and develop innovative products and services that appeal to gaming patrons.
We rely on a combination of patents, trademarks, copyrights, trade secrets, and contractual restrictions to protect our intellectual property. The expiration dates of these patents vary and are based on their filing and issuances dates. We intend to continue to actively file for patent protection, when such filings are commercially reasonable, within and outside the United States. We also seek trademark protection for our names and products and have registered hundreds of trademarks in the United States and various foreign countries. Under permission or license agreements with third parties, we also sell gaming products covered by independently filed copyrights, trademarks, or patents. Typically, these contracts require us to pay royalties to the licensing party. Royalty expenses are included in the cost of gaming and systems in our Financial Statements included elsewhere in this Annual Report on Form 10-K. In addition to our patents, trademarks, and copyrights, we also rely on a broader scope of intellectual property including trade secrets, in-house know-how, and innovation.
Human Capital
Composition of our workforce
As of December 31, 2021, Everi employed approximately 1,550 people, a vast majority of which work in the United States. Approximately 652 people are employed within the Games segment and approximately 898 people are employed within the FinTech segment. None of our employees are party to a collective bargaining agreement and we have had no labor-related work stoppages.
Culture of our workplace
In 2021, we took a fresh look at our mission statement and made improvements to better align our employees’ collective imagination, talent, and innovation with our Company’s objectives. Everi’s new mission is “to lead the gaming industry through the power of people, imagination and technology”. This statement highlights our Company’s most important asset, our employees, while confirming our mission to offer innovative gaming, financial technology, digital, and loyalty solutions.
At Everi, we are guided by our values of collaboration, integrity, inclusion, excellence, and fun. We (i) Harness the power of collaboration; (ii) Act with integrity; (iii) Value Everi-One; (iv) Exceed expectations and be bold. When we deliver on these values consistently, we H.A.V.E. (v) Fun. We live these values by investing in programs and implementing standards to promote ethical business conduct, diversity, sustainability, giving and volunteerism, and responsible gaming. These programs support our long-term business success while also empowering our team members.
Inspired by Author Simon Sinek’s concept of the Golden Circle and the importance of identifying the “WHY” behind your business, Everi has established a company “WHY” Statement. As part of our continued growth and our desire to define and share our Company “WHY” statement more broadly, we launched a new Company “WHY” in 2021 that put our employees and their success front and center:
Elevate the Success of
Everi Employee
Everi Customer
Everi Day!
Diversity and Inclusion
At Everi, we embrace and live by one of our key Company values: Inclusion. We recognize that we can be at our best only when we embrace and reflect the diversity of our employees, customers, and the communities that we serve. We are an equal opportunity employer and are committed to maintaining a diverse and inclusive work environment. Our employees are to be treated with dignity and respect in an environment free from harassment and discrimination regardless of race, color, age, gender, disability, sexual orientation, or any other protected class.
The Company activates its commitment to diversity and inclusion by employing a multi-pronged strategy: (i) promoting a fun, friendly, and supportive environment; (ii) valuing inclusion as a top priority and expectation; (iii) focusing resources on recruiting and retaining qualified employees from diverse backgrounds; and (iv) continuously building awareness of the importance and benefits that diversity and inclusion provide to our Company and employees. In 2021, Everi hired a new leader to oversee Diversity, Inclusion and Talent Management who is focused on building an inclusive workplace for our employees and seeking out and welcoming new talent.
We require mandatory Company-wide diversity and inclusion training to cultivate an inclusive, engaging, and respectful workplace. This training addresses some of the biggest challenges to advancing inclusion and supporting diversity in the workplace, such as unconscious bias and micro-inequities. In addition, because hiring managers are faced with the critical responsibility of acknowledging and eliminating bias in the hiring process, we have developed manager training that establishes a foundational understanding of how bias affects decision-making, explores the impact of biases on the selection processes, and
illustrates the benefits of eliminating bias in hiring. The example we expect our employees to follow comes from the top, as demonstrated by our executive leadership team who also participated in training on inclusive leadership.
Everi is also working to increase the representation of women in our workforce. In 2017, the Company launched The Women’s Leadership Initiative (WLI), which seeks to develop and advance gender diversity and create new opportunities and a clearer path for advancement. The WLI is committed to promoting and advocating for gender diversity at all levels of leadership through awareness, training, development, and inspiration. Participants in the WLI engage and connect with other WLI members, Company employees and leaders, and diverse stakeholders in the gaming industry. WLI members also participate in educational programs such as “lunch and learn” events with internal business leaders and training opportunities with experts outside the industry. The WLI leads the Company’s mentorship program for U.S. employees, providing the benefit of advice and insights from Everi mentors to all mentees.
At Everi, we also take the time to acknowledge and celebrate the diverse heritage of our employees, customers, and communities. Throughout the year, the Company focuses on different heritage celebrations, holidays, and commemorations, and we connect with our employees to build awareness through educational webinars and guest lectures. We also engage with our communities by donating to charitable organizations that provide local support and services.
Employee Engagement
Aligning with our values of Inclusion and Collaboration, we seek continuous dialogue with our employees about their experience at Everi. With more than 70% of our employee population working remotely, maintaining strong employee engagement and offering methods for employee input are more important than ever. We utilize several effective employee feedback mechanisms, including employee surveys, Company-wide email communications and periodic town hall meetings. These tools and platforms provide important Company updates from leadership but also moments for employee participation and involvement. Everi’s leadership team directly addresses employee feedback provided through these mechanisms. In doing so, we strive to instill confidence that employee input leads to positive action. As a result of this responsiveness, we have seen an increase in employee participation in our employee surveys and an increase in positive scores.
Everi also participates in the “Top Workplaces” program, benchmarking our employee experience against thousands of other organizations across the U.S. In 2021, the Company received four separate awards, reflecting the belief of our employees in the Company’s direction, operations and future: Nevada Top Workplaces 2021; Greater Austin Top Workplaces 2021; a national Culture Excellence Award for Direction reflecting our employees’ strong belief in our future and our strategy; as well as a national Culture Excellence Award for Remote Work for creating a desirable culture in a remote work environment.
Employee Development and Training
We provide development and training opportunities for our employees through a variety of means. The Company offers leadership training and development for all newly hired and promoted leaders, as well as a catalog of courses through our online learning platform. This catalog of courses is available to all employees and includes a wide variety of leadership and professional development topics, such as conflict management, effective delegation, unconscious bias, effective recognition, coaching and delivering feedback. We believe in supporting each employee’s journey, so we also offer training courses on soft skills such as emotional intelligence, email etiquette, and developing presence.
Talent Acquisition and Diverse Recruiting
In 2021, the Recruitment Team implemented new tools to search for talent from a broader range of sources, knowing that many of the positions would be filled by individuals working remotely. These tools reduce geographic barriers in the talent acquisition process, yielding a larger talent pool to fill all roles, including those that require specific skills in the current competitive job market. We also continue to expand our Recruitment Team so that we can effectively identify new talent for our growing business.
At Everi, we know that creativity and innovation spring from diverse backgrounds and perspectives. With the goals of expanding diverse talent in the workplace, we continue to utilize a blind resume screening process for initial applicants to review talent, experience, and qualifications without certain demographic information. We also look for ways to expand the talent pool and reach new candidates: A member of our Recruitment Team is dedicated to working with different educational institutions, professional associations, student organizations and other entities to provide information and assistance to their diverse students and job seekers, and to identify new candidates for our open positions.
Employee Health and Wellness
Everi considers the health and safety of our employees to be of paramount importance. We have policies in place to monitor the working conditions of our employees and implement measures to protect their health, safety and well-being.
Our benefits are designed to recognize the diverse needs of our workforce. Our program provides competitive and comprehensive benefit options at a reasonable cost to our employees. Our benefits include an array of offerings, such as comprehensive medical, dental and wellness benefits, higher-than-average time off plans and paid holidays, a 401(k) retirement plan with a Company match, and financial wellness services. On an annual basis, we issue an employee benefits survey to gather feedback from our employees on our benefit offerings and use their input to make improvements.
Everi focuses on compliance with applicable laws and regulations regarding workplace health and safety as well as emergency and disaster recovery for its operations. We continue to rely upon guidance from national health organizations related to the COVID-19 pandemic with the goal of protecting our employees from potential COVID-19 exposure. We continue to evolve Company protocols and procedures to align with the latest guidance; these include the use of face coverings, maintaining cleaning and disinfecting protocols, continuing daily wellness checks and temperature checks for all employees coming into our buildings, and tracking isolation and quarantine of employees.
Seasonality
Our revenues and cash flows may fluctuate throughout the year driven by seasonality, in player demand and activity. Weamong other factors. Historically, we have generally experienceexperienced higher operating resultsincome during the first half of a year and lower operating results during the second half of a year,year; however, such fluctuations do not have a material impact on our revenues and cash flows.
Employees
As of December 31, 2018, we had approximately 1,250 employees. We believe that our relations with our employees are good. We have never experienced a work stoppage and none of our employees are subject to a collective bargaining agreement.
Available Information
Our website address is www.everi.com. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our earnings conference calls are web cast live via our website. In addition to visiting our website, you may read any document we file with the SEC at www.sec.gov.
REGULATIONGovernment Regulation
General
We believe that we are in substantial compliance with allthe material gaming and financial institution laws applicable to our business. We have a diligent internal compliance program to ensure compliance withgoverning our business activities, as well as legal requirements generally applicable to all publicly traded companies. The compliance program is directed on a day-to-day basis by our Chief Legal Officer, who also serves as Chief Compliance Officer. Legal advice is provided by attorneys from the Company’s legal department and outside experts. The compliance program is overseen by the Corporate Compliance Committee, which includes a gaming law expert as an independent member. WeWhile complying with these regulations can require significant time and resources, we do not believe it results in costs that materially impact our earnings, capital expenditures, or competitive position. Despite our compliance efforts, we can give no assurance, however, that our business activities or the activities of our customers in the gaming industry will not be subject to any regulatory or legal enforcement proceedings in the future and a violation of applicable laws by us or any of our subsidiaries could have a material adverse effect on our financial condition, prospects, and results of operations. Depending on the nature of any noncompliance, our failure to comply with such laws, regulations, and ordinances may result in the suspension or revocation of any license, registration, or other approval, a partial or complete cessation of our business, seizure of our assets, as well as the imposition of civil fines and criminal penalties.future.
Gaming Regulation
The gaming industry is highly regulated under legal systems that frequently evolve and change based on governmental public policies. Various aspects of our business are subject to comprehensive laws, regulations, and ordinances applicable to the ownership, management, and operation of gambling establishments, manufacture and distribution of gaming devices, as well as certain financial services conducted at such establishments. The stated policies and other purposes behind such laws, regulations, and ordinances are generally to: (i) ensuresecure the public’s trust and confidence in legalized gambling through a system of mandated regulation, internal controls, accounting practices, and operating procedures; and (ii) promote economic activity for the state, county, and local governments through revenue opportunities emanating from taxes, licensing fees, and other economic benefits arising out of gambling and related activities.
A description of the material regulations to which we are subject is set forth below.
Gaming Authorities. We are regulated by various city, county, state, provincial, federal, tribal, and foreign government agencies (collectively, “Gaming Authorities”) in the jurisdictions where we conduct business as either a: (i) manufacturer of gaming devices, in those jurisdictions where we manufacture gaming devices and systems; (ii) supplier of “associated equipment,” in those jurisdictions where we sell and service fully integrated kiosks and other integrated kiosk solutions; and (iii) non-gaming supplier or vendor, in those jurisdictions where we provide cashfinancial access and Central Credit services only. We must maintain those licenses, registrations, or other approvals in good standing to continue our business. Gaming Authorities have broad discretion in determining whether to grant a license, registration, or other approval. Subject to complying with certain procedural requirements, Gaming Authorities may deny any application, or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability, qualification, or other approval for any cause deemed reasonable to them.
Approvals, Licensing, and Suitability
The process of obtaining necessary licenses, registrations, or other approvals often involves substantial disclosure of confidential or proprietary information about us and our officers, directors, key personnel and, in certain instances, beneficial owners of our debt or equity securities, and requires a determination by the regulators as to our suitability as a manufacturer,
supplier, or vendor to gaming establishments. Gaming regulatory authoritiesAuthorities have broad discretion and may require any beneficial holder of our securities, regardless of the number of shares of common stock or amount of debt securities owned, to file an application, make personal or confidential disclosures, be investigated, and be subject to a determination of suitability. Many jurisdictions require any person who acquires beneficial ownership of more than a certain percentage (most commonly 5%) of voting securities of a publicly-traded gaming company and, in some jurisdictions, non-voting securities, typically 5%, to report the acquisition to Gaming Authorities, and Gaming Authorities may require such holders to apply for qualification or a finding of suitability, subject to limited exceptions for “institutional investors” that hold a company’s voting securities for investment purposes only.
Product Approvals
Our gaming devices and certain other products and technologies must be certified or approved by Gaming Authorities in many jurisdictions where we conduct business. These Gaming Authorities test the gaming devices, systems, and related equipment directly or through an independent testing laboratory and may also require a field trial under the regulator’s technical standards before allowing us to sell the product. Although we collaborate closely with the Gaming Authorities and independent testing laboratories, we cannot control whether our products will be approved or the length of time takenit will take to review our products for sale to third parties. Moreover, there are no guarantees that we will be successful in obtaining and maintaining all necessary licenses, permits, and approvals and to continueapprovals; or in continuing to hold other necessary gaming licenses, permits, and approvals to conduct our businesses either as currently being conducted by us or to expand our businesses.
Our Native American customers are regulated by the National Indian Gaming Commission (“NIGC”), which was established by the Indian Gaming Regulatory Act of 1988 (“IGRA”). The NIGC has regulatory authority over certain aspects of Native American gaming and defines the boundaries of our dealings with the Native American marketplace and the level of regulatory authority to which these games are subject. IGRA establishes three classes of gaming, each with a different regulatory framework:
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| | | | | | | | | | | | | |
| Class | | Type of Games | | Regulatory Oversight |
| I | | Social gaming for minimal prizes and traditional IndianNative American gaming. | | Exclusive regulation and oversight by tribal governments. |
| II | | Bingo (both in traditional and electronic form). | | Regulation by tribal governments with NIGC oversight. |
| III | | Casino style games (including slot machines, blackjack, craps, and roulette). | | Must be permitted by the state in which the tribe is located. The state and the tribe must have negotiated a compact approved by NIGC, and the tribe must have adopted a gaming ordinance approved by the NIGC. |
We sellprovide our gaming devices and systems in both Class II and Class III markets.
Class III gaming on Native American tribal lands is usually subject to the negotiation of a compact between the tribe and the proximate state attendant to where the tribe intends to operate a gaming facility. These tribal-state compacts typically include provisions entitling the state to receive significant sums of money in exchange for the tribe’s operation of Class III gaming. While tribal-state compacts are intended to document the agreement between the state and a tribe, these tribal-state compacts can be subject to disputes relative to permitted Class III gaming operations.
The Johnson Act. The Johnson Act, as amended by the federal Gambling Devices Act of 1962 (the “Johnson Act”), requires that we register annually with the Criminal Division of the United States Department of Justice, and requires a wide variety of record keeping and equipment identification efforts on our part. Registration is required in order for us to sell, distribute, manufacture, transport, or receive gaming equipment, machines, or components across state lines. If we fail to comply with the requirements set forth under the Johnson Act, we could become subject to a variety of penalties, including, but not limited to, the seizure and forfeiture of equipment.
Internet and Online Gaming Regulation. Several states have passed implementing legislation and regulations to allow certain intra-state, wager-based, online casino, or lottery games, such as online poker, online lottery, lottery ticket purchases, or lottery ticket subscriptions. To date, several states have authorized some form of Internet or online gaming or lottery activities.However, the legislative and regulatory framework governing these activities may continue to evolve in the future.
Financial Services Regulation
Our FinTech business is also subject to a number of financial services regulations:
Durbin Amendment. Rules promulgated by the Board of Governors of the Federal Reserve System, required as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), including the so-called Durbin
Amendment (the “Durbin Amendment”), establish, among other things, standards for assessing whether debit card interchange fees received by certain debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Debit card interchange fees are established by payment card networks and ultimately paid by merchants to debit card issuers for each debit transaction.
Anti-Money Laundering and Sanctions. The USA PATRIOT Act of 2001, other federal statutes, generally referred to as the Bank Secrecy Act, and implementing federal regulations require us to establish and maintain an anti-money laundering program. Our anti-money laundering program includes:includes the following: internal policies, procedures, and controls designed to identify and report money laundering, a designated compliance officer, an ongoing employee training program, andprograms, an independent audit function to test the program.program, and customer due diligence. In addition, the cashfinancial access services that we provide are subject to record keeping and reporting obligations under the Bank Secrecy Act. Our gaming establishment customers are required to file a SARSuspicious Activity Report (“SAR”) with the U.S. Treasury Department’s Financial Crimes Enforcement Network to report any suspicious transactions relevant to a possible violation of law or regulation. We are also required to file a SAR in certain circumstances where we provide our cashfinancial access services directly to patrons through financial services centers that we staff and operate. To be reportable, such a transaction must meet criteria that are designed to identify the hiding or disguising of funds derived from illegal activities. Our gaming establishment customers, in situations where our cashfinancial access services are provided through gaming establishment cashier personnel, and we, in situations where we provide our cashfinancial access services through a financial services center, are required to file a CTRCurrency Transaction Report (“CTR”) of each deposit, withdrawal, exchange of currency, or other payment or transfer by, through, or to us which involves a transaction in currency of more than $10,000 in a single day. Our CashClub®CashClub® product can assist in identifying transactions that give rise to reporting obligations.
We also have a program designed to comply with applicable economic and trade sanctions programs, including those administered and enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). These sanctions are usually targeted against foreign countries, terrorists, international narcotics traffickers, and those believed to be involved in the proliferation of weapons of mass destruction. Regulations generally require either the blocking of accounts or other property of specified entities or individuals, but they may also require the rejection of certain transactions involving specified entities or individuals. We maintain policies, procedures and other internal controls designed to comply with these sanctions programs.
Fund Transfers. Our POS debit card cashfinancial access transactions, credit card cashfinancial access transactions, and ATMfunds dispensing services are subject to the Electronic Fund Transfer Act, which provides cardholders with rights with respect to electronic fund transfers, including the right to dispute unauthorized charges, charges that list the wrong date or amount, charges for goods and services that are not accepted or delivered as agreed, math errors, and charges for which a cardholder asks for an explanation or written proof of transaction along with a claimed error or request for clarification. We believe the necessary policies and procedures have been implemented throughout our organization in order to comply with the regulatory requirements for fund transfers.
State Money Transmission Laws. Many states where we complete credit card cashfinancial access and POS debit card cashfinancial access transactions or offer our online payment processing solution require us to have a money transmitter license.license, typically issued by the state’s Financial Institutions Division. These state laws subject us to, among other requirements, examinations by state regulatory agencies, reporting requirements, net worth and bonding requirements, and consumer disclosure requirements.
Credit Reporting. Our Central Credit gaming patron credit bureau services and check verification and warranty services are subject to the Fair Credit Reporting Act (the “FCRA”) and the Fair and Accurate Credit Transactions Act of 2003 (the “FACTA”) and their implementing rules, which require consumer credit bureaus, such as Central Credit, to provide credit report information to businesses only for certain purposes and to otherwise safeguard credit report information, to disclose to consumers their credit report on request, and to permit consumers to dispute and correct inaccurate or incomplete information in their credit report. These laws and rules also govern the information that may be contained in a consumer credit report. We continue to implement policies and procedures as well as adapt our business practices in order to comply with these laws and regulations. In addition to federal regulations, our Central Credit gaming patron credit bureau services are subject to the state credit reporting regulations that impose similar requirements to the FCRA and the FACTA.
Debt Collection. We currently outsource most of our debt collection efforts to third parties. However, we do engage in debt collection to collect on chargebacks on our cashfinancial access products and unpaid balancesfor services performed for our check services, Central Credit services, compliance services, receivables relating to the sale and service of our fully integrated kiosks and other integrated kiosk solutions, and other amounts owing to us in connection withperforming various services for our customers. All such collection practices may be subject to the Fair Debt Collection Practices Act (the “FDCPA”), which prohibits unfair, deceptive, or abusive debt collection practices, as well as consumer-debt-collection laws and regulations adopted by the various states.
Consumer Financial Services. The Consumer Financial Protection Bureau and other federal, state, and local law enforcement and regulatory agencies have the authority to regulate consumer financial products. These agencies have broad statutory powers, including to promulgate rules, issue interpretations, and take enforcement actions that may affect our business.
Privacy Regulations. Our collection of information from patrons who use our financial products and services, such as our cashfinancial access services, are subject to the financial information privacy protection provisions of the Gramm-Leach-Bliley Act of 1999 (the “GLBA”) and its implementing federal regulations. We gather, as permitted by law, non-public, personally-identifiable financial information from patrons who use our cashfinancial access services, such as names, addresses, telephone numbers, bank and credit card account numbers, and transaction information. The GLBA requires us to safeguard and protect the privacy of such non-public personal information and also requires us to make disclosures to patrons regarding our privacy and information sharing policies and give patrons the opportunity to direct us not to disclose information about them to unaffiliated third parties in certain situations. We are also subject to state privacy regulations which, in some cases, may be even stricter than federal law.law, including without limitation, the California Consumer Privacy Act which became effective as of January 1, 2020. We continue to implement policies and programs as well as adapt our business practices in order to comply with federal and state privacy laws and regulations. In addition, we are also subject to foreign data protection and privacy laws including, but not limited to, the European Union General Data Protection Regulation, which became effective in May 2018 and requires companies to meet newcertain requirements regarding data privacy and security.
ATMFunds Dispensed Operations. The Electronic Fund Transfer Act requires us to disclose certain notices regarding the fees that we charge for performing an ATMa funds dispensed transaction as well as to incorporate such notices on the ATM screens to notify patrons of such fees prior to completing an ATMa funds dispensed transaction. Our ATMfunds dispensed services are also subject to applicable state banking regulations in each jurisdiction in which we operate ATMs which require, among other things, that we register with the state banking regulators as an operator of
ATMs, that we provide gaming patrons with notices of the transaction fees assessed upon use of our ATMs, that our transaction fees do not exceed designated maximums, that we offer gaming patrons a means of resolving disputes with us, and that we comply with prescribed safety and security requirements. In addition, the ATMs that we operate are subject to requirements of the Americans with Disabilities Act, which in general require that ATMs be accessible to individuals with disabilities, such as visually-impaired persons.
Check Cashing. In jurisdictions in which we serve as aprovide check casher,cashing services, we are required to be licensed by the applicable state banking regulator to operate as a check casher. Some states also impose restrictions on this activity, such as limits on the amounts of service fees that may be imposed on the cashing of certain types of checks, requirements as to records that must be kept with respect to dishonored checks, and requirements as to the contents of receipts that must be delivered to gaming patrons at the time a check is cashed.
Network and Card Association Regulations. In addition to the governmental regulationregulations described above, some of our services are also subject to rules promulgated by various payment networks, EFT networks, and card associations. For example, we must comply with the Payment Card Industry (“PCI”) Data Security Standard. We have been designated as a compliant service provider under the PCI Data Security Standard. We must be certified to maintain our status as a compliant service provider on an annual basis.
EMV,The Europay, MasterCard, and Visa global standard for cards equipped with security chip technology (“EMV”) is designed to deter fraudulent card transactions related to identity theft, counterfeit cards, and the misuse of lost or stolen cards via enhanced card authentication, transaction authorization, and cardholder verification using chip-based smart-cards. EMV has been adopted in many regions of the world as the global standard for fraud deterrence in chip-based smart-card payments. In October 2015, the network and card associations began shifting liability for fraudulent POS and ATM transactions generated through EMV-capable cards onto merchantspayments. Merchants whose devices are not capable of processing chip-based smart-card EMV transactions. This shifts the responsibility fortransactions are responsible for chargebacks due to fraudulent transactions on such cards from the card issuer onto the merchant.cards.
As a merchant of cashfinancial access transactions processed through MasterCard, Visa, Discover, and American Express, all who have adopted the EMV standard, and as an operator of ATMs, our POS, fully integratedfully-integrated kiosk, and ATM devices are subject to the EMV standard. This requires us to maintain our fleet of U.S.-based POS, fully integratedfully-integrated kiosk, and ATM devices to support the EMV standard.
International Regulation
We are also subject to a variety of gaming and financial services regulations and other laws, including the Foreign Corrupt Practices Act, in the international markets in which we operate. We expect to become subject to additional gaming and financial services regulations and other laws in the jurisdictions into which we expand our operations. Our expansion into new markets is dependent upon our ability to comply with the regulatory regimes adopted by such jurisdictions.
Available Information
Our website address is www.everi.com. We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed, or furnished, pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our earnings conference calls are webcast live via our website. The information on our website is not part of this Annual Report or our other filings with the SEC. In addition to visiting our website, you may read documents we file with the SEC at www.sec.gov.
Item 1A. Risk Factors.
The following section describes material risks and uncertainties that we believemake an investment in our securities risky and may adversely affect our business, financial condition, results of operations, or the market price of our stock. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. This section should be read in conjunction with our Financial Statements and Results of Operations included elsewhere in this Annual Report on Form 10-K.
Risks Related to Our Business
WeOverall
•The global COVID-19 pandemic has had, and may continue to, or in the future have, recorded net losses in eacha material adverse impact on our operations and financial performance, as well as on the operations and financial performance of many of the two fiscal years prior to fiscal year 2018customers and we may not generate profitssuppliers in the future.gaming industry that we serve. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely impact our business operations, financial performance, results of operations, financial position, and the achievement of our business objectives.
We had netThe COVID-19 pandemic has negatively impacted the global economy, with particular impact to the gaming industry, disrupted global supply chains, temporarily lowered equity market valuations, created significant volatility and disruption in the financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses, including those of our casino customers, and resulted in the institution of social distancing and sheltering-in-place requirements in many states, countries, and communities in which we operate. Consequently, demand for our products and services continues to be significantly impacted, which adversely affects our revenue and profitability was significantly impacted, especially in the first three quarters of 2020. Furthermore, the pandemic could impair our ability to maintain sufficient liquidity, particularly to the extent casinos and other gaming businesses must again close or, even when reopened, social distancing and other COVID-19 protective measures or a lack of consumer confidence in the gaming industry prevent them from opening at full capacity, the impact on the global economy worsens and impacts the disposable income available to our casino customers’ patrons. Additionally, resurgences of $12.4 millionCOVID-19 and net lossesits variants have, at times, caused federal, state, tribal, and municipal governments and regulatory agencies to close casinos or impose other restrictions. Some casinos have voluntarily closed in response to COVID-19 cases among guests or resurgences in the areas in which they operate and may do so again in the future. Similarly, because of $51.9 millionchanging economic and $249.5 million formarket conditions affecting the years ended December 31, 2018, 2017, and 2016, respectively.gaming industry, our ability to achieve our business objectives has been impacted. As a result of the interest payments onfinancial difficulties facing casino operators due to the indebtedness incurredpandemic, many of our customers have requested, that we offer our products and our services for less than we did prior to the pandemic, particularly as it relates to our recurring revenue products and the tolling of service fees during the pendency of their closures, which relief we have granted in certain circumstances. Our business operations have also been disrupted as significant portions of our workforce have been working from home, including to protect personal health and safety, and because of illness, quarantines, government actions, or other restrictions imposed in connection with Everi Holdings’ purchasethe pandemic. In response to the pandemic, we furloughed a majority our employees and reduced employee salaries through most of Everi Games Holdingthe second and third quarters of 2020, borrowed and repaid funds under existing and new credit facilities, adopted certain relief measures provided by the CARES Act and may seek additional funding, to the extent available, under the CARES Act or other new federal or state programs. Since the onset of the COVID-19 pandemic, we restored the employee base and repaid temporarily reduced salaries. In addition, we suspended share repurchases, as required under our credit facilities, and may take other capital actions in response to the COVID-19 pandemic. As a result of the pandemic, we canceled or delayed material capital expenditures and, as a result, we will not have the benefit of those investments to help our operations and financial performance in the future. The extent to which the COVID-19 pandemic further impacts our business, results of operations, and financial condition, as well as our capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Further, as a result of the inherent uncertainty of our expectations and assumptions regarding business plans, results of operations, and financial condition, any of which may prove to be inaccurate, we may be required to record non-cash impairment charges, among other items, in future periods, whether in connection with our normal review procedures periodically, or earlier, if an indicator of an impairment is present prior to such evaluation.
The COVID-19 pandemic may also exacerbate the risks disclosed in this section of our Annual Report, including, but not limited to: our ability to comply with the terms of our indebtedness, our ability to generate revenues, earn profits and maintain adequate liquidity, our ability to service existing and attract new customers and maintain our overall competitiveness in the market, the potential for significant fluctuations in demand for our services, overall trends in the gaming industry impacting our business, as well as potential volatility in our stock price, among other consequences such as cybersecurity exposure.
•If we are unable to develop and protect our intellectual property adequately or obtain intellectual property rights and agreements, we may lose valuable competitive advantages, be forced to incur costly litigation to protect our rights, or be restricted in our ability to provide various products in our markets.
Our success depends, in part, on developing and protecting our intellectual property. We rely on a combination of patents, trademarks, copyrights, trade secrets, and contractual restrictions to protect our intellectual property. We also rely on other confidentiality and contractual agreements and arrangements with our employees, affiliates, business partners, and customers to establish and protect our intellectual property and similar proprietary rights. We cannot assure you that we will be successful in protecting these rights and, despite our efforts, our trade secrets and proprietary know-how could become known to, or independently developed by, competitors through malfeasance by employees, contractors or other insiders who may have access to our intellectual property; industrial, corporate or other espionage events; or unauthorized intrusions into our networks or those of our third-party vendors. Any litigation relating to the defense of our intellectual property, whether successful or unsuccessful, could result in substantial costs to us and potentially cause a diversion of our resources.
In addition, we rely on intellectual property licenses from one or more third-party competitors, the loss of which could materially and adversely affect our business and the sale or placement of our products. Various third-party gaming manufacturers with which we compete are much larger than us and have substantially larger intellectual property assets. The gaming manufacturer industry is very competitive and litigious, and a lawsuit brought by one of our larger competitors, whether or not well-founded, may have a material adverse effect on our business, financial condition, operations, or cash flows and our ability to sell or place our products.
In addition, we have faced and may again face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. In the event a claim of infringement against us is successful, we may be required to pay royalties to use technology or other intellectual property rights that we had been using, or we may be required to enter into a license agreement and pay license fees, or we may be required to stop using the technology or other intellectual property rights that we had been using. We may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable amount of time. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to us and potentially cause a diversion of our resources.
•We rely on technology provided by third-party vendors, the loss of which could materially and adversely affect our business, increase our costs, and delay deployment or suspend development of our financial services products, gaming systems, and player terminals.
We have entered into license agreements with third parties for the exclusive use of their technology and intellectual property rights in the gaming industry, such as our license to use portions of the software infrastructure upon which our financial access systems operate, and we also rely on third-party manufacturers to manufacture our gaming devices, fully integrated kiosks, and other integrated kiosk solutions. We rely on these other parties to maintain and protect this technology and the related intellectual property rights. If our licensors fail to protect their intellectual property rights in material that we license and we are unable to protect such intellectual property rights, the value of our licenses may diminish significantly, and our business could be significantly harmed. In addition, if these agreements expire and we are unable to renew them, or if this software or hardware, or functional equivalents of this software or hardware, were either no longer available to us or no longer offered to us on commercially reasonable terms, we may lose a valuable competitive advantage and our business could be harmed.
To the extent there are adverse conditions present, which have begun to, and continue to, occur during the global pandemic, we may continue to experience, various difficulties, particularly with respect to international third-party suppliers of our components, that could cause significant production delays. If we are unable to obtain these components from our established third-party vendors, we could be required to either redesign our products to function with alternate third-party products or to develop or manufacture these components ourselves, which would result in increased costs and could result in delays in the deployment of our gaming systems and player terminals. Furthermore, we might be forced to limit the features available in our current or future offerings.
•Our net operating losses and other tax credit carry-forwards are subject to limitations that could potentially reduce these tax assets.
As of December 2014 (the “Merger”31, 2021, we had tax effected federal and state net operating loss (“NOL”), carry-forwards of approximately $75.8 million and $8.8 million, respectively, and federal research and development credit carry-forwards of approximately $14.7 million. The federal net operating losses can be carried forward and applied to offset taxable income for 20 years and will expire starting in 2032 (for losses incurred before 2018). Estimated federal losses incurred after 2017 of approximately $19.9 million, tax effected, can be carried forward indefinitely to offset taxable income. The state net operating loss carry-forwards will expire between 2022 and 2041. The federal research and development credits are limited to a 20 year carry-forward period and will begin to expire in varying amounts in 2029, if not utilized.
Based on the weight of available evidence, including both positive and negative indicators, if it is more likely than not that a portion, or all, of the deferred tax assets will not be realized, we must consider recording a valuation allowance. Greater weight is given to evidence that is objectively verifiable, most notably historical results. As of December 31, 2021, our U.S. operations emerged from a three-year cumulative loss position. Our U.S. federal and states operating businesses had deferred tax asset valuation allowances of approximately $68.7 million as of December 31, 2020. Based on our most recent analysis as of December 31, 2021, we removed the full valuation allowance in the federal and certain state jurisdictions, contributing to a $67.9 million reduction in our valuation allowance in 2021. Our ability to utilize these NOL and other tax credit carry-forwards to reduce taxable income in future years may be limited, including the possibility that projected future taxable income is insufficient to realize the benefit of these NOL carry-forwards prior to their expiration. To the extent our results of operations decline, we may not have the ability to meet the more likely than not accounting standard which would require us to record an additional valuation allowance in the future.
In addition, our ability to use these tax assets could be adversely affected by the limitations of Sections 382, 383 and 384 of the Internal Revenue Code. In addition, a portion of our NOL’s include amortization of intangible assetsgoodwill for tax purposes associated with a restructuring that occurred in 2004, which is subject to audit by the MergerIRS and thus may have an adverse effect on our NOL carry-forwards.
•We operate our business in regions subject to natural disasters, public health issues, political instability and other acquisitions,potentially catastrophic events. Any interruption to our business resulting from such an event will adversely affect our revenues and results of operations.
In the event of a natural or man-made disaster or other related acquisitioncatastrophic event, the operations of gaming establishments could be negatively impacted or consumer demand for gaming could decline, or both, and financing costs, asset impairment charges, depreciation,as a result, our business could be interrupted, which could materially and adversely affect our revenues and results of operations. Adverse weather conditions, particularly flooding, hurricanes, tornadoes, heavy snowfall, and other amortization,extreme weather conditions often deter our customer’s patrons from traveling to or make it difficult for them to frequent the sites where our games and FinTech equipment are installed. Similarly, public health crises, such as the outbreak of communicable diseases like the coronavirus, often deter patrons from visiting our customer’s gaming establishments. If any of those sites, where a significant number of our games and FinTech equipment is installed, either individually or simultaneously experienced adverse weather conditions, our results of business, financial condition, and operations could be materially and adversely affected. From time to time, the impact of weather-related natural disasters has resulted in business disruption at certain of our locations as well as our customers’ facilities and may do so in the future.
Similarly, many of the international third-party suppliers we rely on for the manufacture of our gaming and FinTech equipment are located in areas that are subject to natural disasters, public health issues, political instability and other potentially catastrophic events. When these events occur, our suppliers may not be able to fulfill their obligations to us, which could result in disruptions to our supply chain that adversely affect our results of business, financial condition, and operations.
•Our business is dependent upon consumer demand for gaming and overall economic trends specific to the gaming industry. Economic downturns or a decline in the popularity of gaming could reduce the number of patrons that use our products and services or the amounts of cash that they access using our services.
We provide our gaming-related and financial access products and services almost exclusively to regulated gaming establishments. As a result, our business depends on consumer demand for gaming. Gaming is a discretionary leisure activity, participation in which has in the past and may in the future decline during periods of (i) economic growth, due to changes in consumers’ spending preferences; (ii) economic downturns, due to decreases in our consumers’ disposable income or general tourism activities; and (iii) declining consumer confidence, due to general economic conditions, domestic- and geo-political concerns, or other factors. Gaming competes with other leisure activities as a form of consumer entertainment and may lose popularity as new leisure activities arise or as other leisure activities become more
popular. In addition, gaming in traditional gaming establishments (to which we sell our products and services) competes with Internet-based gaming. The popularity and acceptance of gaming is also influenced by the prevailing social mores and changes in social mores, including changes driven by social responsibility organizations that are dedicated to addressing problem gaming, which could result in reduced acceptance of gaming as a leisure activity or litigation or lobbying efforts focused on limiting gaming activities. To the extent that the popularity or availability of gaming in traditional gaming establishments declines as a result of any of these factors, the demand for our financial access and gaming-related products and services, or the willingness of our customers to spend new capital on acquiring gaming equipment or utilize revenue share agreements, may decline and our business may be harmed.
Games Business
•Most of our leased gaming device contracts with our customers are short-term, and if we are unable to maintain our current customers on terms that are favorable to us, our business, financial condition, operations, or cash flows may suffer a material adverse effect.
Most of our leased gaming device contracts with our customers are generally short-term, except for customers with whom we have entered into development and placement fee agreements. We do not rely upon the stated term of our gaming device contracts to retain the business of our customers. We rely instead upon providing competitive player terminals, games, and systems to give our customers the incentive to continue doing business with us. At any point in time, a significant portion of our gaming device business is subject to non-renewal, which may materially and adversely affect our earnings, financial condition, and cash flows. To renew or extend any of our customer contracts, generally, we may be required to accept financial and other terms that are less favorable to us than the terms of the expired contracts. In addition, we may not succeed in renewing customer contracts when they expire. If we are required to agree to other less favorable terms to retain our customers or we are not able to renew our relationships with our customers upon the expiration of our contracts, our business, financial condition, operations, or cash flows could suffer a material adverse effect.
•Tribal gaming customers who have historically operated large quantities of Class II gaming units may negotiate into arrangements with state governments or renegotiate existing gaming compacts that could impact the amount of Class II gaming devices currently supplied by the Company. If we are unable to maintain our existing placement of units, then our business, financial condition, operations, or cash flows may suffer an adverse effect.
As of December 31, 2021, we operated more than 9,700 Class II gaming units under lease or daily fixed-fee arrangements to our customers. Customers who enter into compacts with state governments may desire to change from Class II gaming units to Class III gaming units, as Class III units generally perform better than Class II units. This may result in the loss of placements under lease or daily fixed-fee arrangements as customers purchase or lease Class III units from other equipment suppliers to replace our existing Class II units. If we are unable to replace these lost units with our proprietary Class III units, then our business, financial condition, operations, or cash flows may suffer an adverse effect.
•Tribal gaming customers which operate Class III gaming units do so under compact arrangements with state governments. If these tribal gaming customers are unable to maintain or renew these existing gaming compacts, then our business, financial condition, operations, or cash flows may suffer an adverse effect.
As of December 31, 2021, we operated more than 7,100 Class III gaming units under lease or daily fixed-fee arrangements to our tribal gaming customers. As Class III units generally perform better than Class II units, the loss of these Class III placements under lease or daily fixed-fee arrangements, if these customers are unable to renew their Class III gaming compacts and we are unable to replace these lost units with our proprietary Class II units, then our business, financial condition, operations, or cash flows may be negatively impacted.
•We derive a significant portion of our revenue from Native American tribal customers, and our ability to effectively operate in Native American gaming markets is vulnerable to legal and regulatory uncertainties, including the ability to enforce contractual rights on Native American land.
We derive a significant percentage of our revenue from the provision of financial access and gaming-related products and services to gaming facilities operated on Native American lands. Native American tribes that are federally-recognized are considered “domestic dependent nations” with certain sovereign rights and, in the absence of a specific grant of authority by Congress to a state or a specific compact or agreement between a tribal entity and a state that would allow the state to regulate activities taking place on Native American lands, such tribes can enact their own laws and regulate gaming operations and contracts. In this capacity, Native American tribes generally enjoy a degree of sovereign immunity, which, among other things, recognizes a tribe’s inherent authority of self-determination and self-governance, immunizes the tribe from certain lawsuits outside of tribal jurisdiction, and generally authorizes a tribe’s powers of
taxation and spending over its federally-recognized nation. Accordingly, before we can seek to enforce contract rights with a Native American tribe, or an agency or instrumentality of a Native American tribe, we must obtain from the Native American tribe a general or limited waiver of its sovereign immunity with respect to the matter in dispute, which we are not always able to do. Without a general or limited waiver of sovereign immunity, or if such waiver is held to be ineffective, we could be precluded from judicially enforcing any rights or remedies against a Native American tribe, including the right to enter Native American lands to retrieve our property in the event of a breach of contract by the tribal party to that contract. Governing law and venue provisions in our contracts with Native American tribal customers vary widely and may not be enforceable.
Government enforcement, regulatory action, judicial decisions, and proposed legislative action have in the past affected, and will likely continue to affect our business, financial condition, operations, cash flows, and prospects in Native American tribal lands. The legal and regulatory uncertainties surrounding our Native American tribal agreements could result in a significant and immediate material adverse effect on our business, financial condition, operations, or cash flows. For example, certain of our agreements with Native American tribes are subject to review by regulatory authorities. Additionally, such uncertainties could increase our cost of doing business and could take management’s attention away from operations. Regulatory action against our customers or equipment in these or other markets could result in machine seizures and significant revenue disruptions, among other adverse consequences. Moreover, Native American tribal policies and procedures, as well as tribal selection of gaming vendors, are subject to the political and governance environment within each Native American tribe. Changes in tribal leadership or tribal political pressure can affect our business relationships within Native American markets.
•We may not realize sufficient returns or be successful in renewing our existing or future placement and development fee arrangements with casino operators to expand or develop gaming facilities.
In our gaming business, we have entered into placement fee agreements with several customers to secure long-term revenue share arrangements which include a fixed number of player terminal placements in the gaming facility. These placement fee arrangements sometimes provide for the removal of our player terminal placements in the event of poor game performance with no further obligation of the gaming customer.
FinTech Business
•An unexpectedly high level of chargebacks, as a result of fraud or otherwise, could materially and adversely affect our Financial Access business.
When patrons use our financial access services, we either dispense cash or produce a negotiable instrument that can be exchanged for cash. If a completed financial access transaction is subsequently disputed, and if we are unsuccessful in establishing the validity of the transaction, we may not be able to generate profitscollect payment for such transaction and such transaction becomes a chargeback. In the event that we incur chargebacks in excess of specified levels, we could lose our sponsorship into the future.card associations or be censured by the card associations by way of fines or otherwise. Our ability to continue to generate net profits in the future will depend, in part, on our ability to:
establish strategic business relationships with new and existing customers;
sell our products and services into new markets and to new customers in existing markets and retain our existing customers;
develop new games or license third-party content in our Games business and develop new products and services in our FinTech business;
effectively manage a larger and more diversified workforce and business;
react to changes, including technological and regulatory changes, in the markets we target or operate in;
respond to competitive developments and challenges;
continue to comply with the EMV global standard for cards equipped with security chip technology; and
attract and retain experienced and talented personnel.
We may not be able to do any of these successfully, and our failure to do soadequately manage our chargebacks could have a material adverse effect on our business, financial condition, operations, or cash flows,flows.
•Changes in consumer willingness to pay a convenience fee to access their funds could reduce the demand for our Financial Access products and services.
Our financial access business depends upon the willingness of patrons to pay a convenience fee to access their own funds on the premises of a gaming establishment. In most retail environments, consumers typically do not pay an additional fee for using non-cash payment methods such as credit cards, POS debit cards, or checks. Gaming patrons could bring more cash with them to gaming establishments or access cash outside of gaming establishments without paying a fee for the convenience of not having to leave the gaming establishment. To the extent that gaming patrons become unwilling to pay these convenience fees or lower cost financial access alternatives become available, the demand for financial access services within gaming establishments will decline and our business could suffer.
•We maintain a significant amount of cash within our ATMs, which is subject to potential loss due to theft or other events, including natural disasters.
A loss of cash from the ATMs we own and for which we provide the cash to operate from our vault cash arrangements is generally our responsibility. We typically require that our service providers, who either transport the cash or otherwise have access to the ATM safe, maintain adequate insurance coverage in the event cash losses occur as a result of theft, misconduct or negligence on the part of such providers. Cash losses at the ATM could amongoccur in a variety of ways, such as natural disaster (hurricanes, floods, etc.), fires, vandalism, and theft. Our insurance policies may not cover losses that
may occur to the equipment, and any losses to the cash contained in those devices would be borne by us. An increase in the frequency and/or amounts of theft and other things, affectlosses could lead to a material loss of cash and negatively impact our abilityoperating results.
Risks Related to make payments underOur Capital Structure
•The leverage restrictions on our outstanding debt could have significant adverse effects on our business, financial condition and results of operations.
As of December 31, 2021, our total indebtedness was approximately $1.0 billion, which included the New Credit Facilities (defined herein) orand the 20172021 Unsecured Notes (as discussed and defined herein).
in “Note 12 - Long Term Debt”), each of which contain restrictive covenants. Our substantial leverageexisting borrowings could adversely affectimpact our ability to raise additional capital to fund our operations, limit our ability to react to changes in our industry or the economy, expose us to interest rate risk to the extent of our variable rate debt, and prevent us from meeting our obligations with respect to our indebtedness. Asindebtedness, any of December 31, 2018, our total indebtedness was approximately $1.2 billion, which included the New Credit Facilities and the 2017 Unsecured Notes, each of which contain restrictive covenants. Our high degree of leverage could have significant adverse effects on our business, including:financial condition and results of operations.
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore, reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;
making it more difficult for us to satisfy our obligations with respect to our indebtedness and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the New Credit Facilities and the indentures governing the 2017 Unsecured Notes;
increasing our vulnerability to adverse economic, industry, or competitive developments;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged or may have more resources than us and who therefore may be able to take advantage of opportunities that our leverage prevents us from exploiting, including pursuit and execution of potential future acquisitions.
•We may not be able to generate sufficient cash to service all of our indebtedness, including the New Credit Facilities and the 20172021 Unsecured Notes (defined herein), and fund our working capital and capital expenditures, and we may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on our indebtedness including the New Credit Facilities and the 2017 Unsecured Notes, will depend upon our future operating performance and on our ability to generate cash flow in the future, which is subject to general economic, financial, business, competitive, legislative, regulatory, and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings, including those under the New Credit Facilities, will be available to us in an amount sufficient to pay our indebtedness or to fund other liquidity needs.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investment and capital expenditures or to dispose of material assets or operations, seek additional equity capital, or restructure or refinance our indebtedness. We may not be able to affect any such alternative
measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. The New Credit Facilities and the indenture governing the 2017 Unsecured Notes restrict our ability to dispose of assets and use the proceeds from any such disposition.
If we cannot make scheduled payments on our debt, we will be in default. As a result, the holders of the 2017 Unsecured Notes could declare all outstanding principal and interest to be due and payable; the lenders under the New Credit Facilities could declare all outstanding amounts under such facilities due and payable and terminate their commitments to loan money; and, in each case, could foreclose against the assets securing the borrowings under the New Credit Facilities. Such actions could force us into bankruptcy or liquidation.
If our indebtedness is accelerated, we may need to refinance all or a portion of our indebtedness before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.
•The agreements and instruments governing our debt impose restrictions that may limit our operating and financial flexibility.
The New Credit Facilities and the indenture governing the 20172021 Unsecured Notes contain a number of significant restrictions and covenants that limit our ability, among other considerations, 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 our subsidiaries;
incur liens;
prepay, redeem or repurchase subordinated debt; and
enter into certain types of transactions with our affiliates.
These covenants could have the effect of limiting our flexibility in planning for or reacting to changes in our business and the markets in which we compete.
In addition, to the New Credit Facilities require us to comply with a financial maintenance covenant under certain circumstances. Operating results below current levels or other adverse factors, including a significant increase in interest rates, could result in our being unable to comply with the financial covenants contained in the New Credit Facilities, if applicable. Ifextent we violate this covenant and are unable to obtain a waiver from our lenders, our debt under the New Credit Facilities would befound in default and could be accelerated by our lenders. Based on cross-default provisions in the agreements and instruments governing our indebtedness, a default under one agreement or instrument could result in a default under, and the acceleration of, our other indebtedness. In addition, the lenders under the New Credit Facilities could proceed against the collateral securing that indebtedness.
Ifif our indebtedness is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, on terms that are acceptable to us, or at all. If our debt is in default for any reason, our business, financial condition, and results of operations could be materially and adversely affected. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
Risks Related to Our net operating losses and other tax credit carry-forwards are subject to limitations that could potentially reduce these tax assets.Information Technology
As of December 31, 2018, we had tax effected federal and state net operating loss (“NOL”) carry-forwards of approximately $83.0 million and $14.1 million, respectively, federal research and development credit carry-forwards of approximately $8.5 million, and foreign tax credit carry-forwards of approximately $0.5 million. The federal net operating losses can be carried forward and applied to offset taxable income for 20 years and will expire starting•We have experienced in 2022 (for losses incurred before 2018). An estimated federal loss incurred in 2018 of approximately $8.2 million, tax effected, can be carried forward indefinitely to offset taxable income. The state net operating loss carry-forwards will expire between 2019 and 2039. The federal research and development credits are limited to a 20 year carry-forward period and will begin to expire in varying amounts in 2029, if not utilized. The foreign tax credits, which have a full valuation allowance, can be carried forward 10 years and will expire in 2020, if not utilized.
Based on the weight of available evidence, including both positive and negative indicators, if it is more likely than not that a portion, or all, of the deferred tax assets will not be realized, we must consider recording a valuation allowance. Greater weight is given to evidence that is objectively verifiable, most notably historical results. We are in a cumulative loss position and we have decreased our valuation allowance for deferred tax assets related to these NOL and other tax credit carry-forwards, excluding the 2018 federal NOL, by $10.1 million during 2018. Our ability to utilize the remaining NOL and other tax credit carry-forwards to reduce taxable income in future years may be further limited, including the possibility that projected future taxable income is insufficient to realize the benefit of these NOL carry-forwards prior to their expiration. To the extent our results of operations do not improve, we may not have the ability to overcome the more likely than not accounting standard that would allow us to reverse the valuation allowancepast and may be subject to record an additional valuation allowanceexperience in the future.
Our ability to use these tax assets could be adversely affected by the limitations of Sections 382, 383, and 384 of the Internal Revenue Code. In addition, a portion of our NOL’s include amortization of goodwill for tax purposes associated with a restructuring that occurred in 2004, which could be subject to audit by the IRS and thus may have an adverse effect on our NOL carry-forwards.
The Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) could adversely affect our business and financial condition.
Due to the 2017 Tax Act, net operating losses arising in taxable years beginning after December 31, 2017 are limited in use to offset 80% of taxable income without the ability to carryback such net operating losses, however, with an indefinite carry-forward of such net operating losses (instead of the former 2-year carryback and 20-year carry-forward for net operating losses arising in taxable years beginning before December 31, 2017). The amount of the net U.S. federal interest expense deduction is generally limited to (a) 30% of adjusted taxable income, calculated without regard to depreciation, amortization, depletion or interest, effective for tax years beginning after December 31, 2017 and before January 1, 2022 and (b) 30% of adjusted taxable income, calculated without regard to interest (reduced by depreciation, amortization and depletion), effective for tax years beginning after December 31, 2021. Disallowed amounts may be carried forward indefinitely, subject to ownership change limitations.U.S. corporations are also subject to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries and a base erosion anti-avoidance tax. The 2017 Tax Act changes are complex and subject to additional guidance to be issued by the U.S. Treasury and the Internal Revenue Service. In addition, the individual states’ reactions to the federal tax changes are evolving. As a result, the overall long-term impact of the 2017 Tax Act is uncertain. It is possible that the application of any new rules may have a material and adverse impact on our operating results, cash flows, and financial condition.
We may experiencefuture network or system failures, or service interruptions, including cybersecurity attacks, or other technology and privacy risks. Our inability to protect our systems and data against such risks could harm our business and reputation.
Our ability to provide uninterrupted and high levels of services depends upon the performance of our internal network, systems and related infrastructure, and those of our third-party vendors. Any significant interruptions in, or degradation of, the quality of the services, including infrastructure storage and support, that these third parties provide to us could severely harm our business and reputation and lead to the loss of customers and revenue. Our internal network, systems, and related infrastructure, in addition to the networks, systems, and related infrastructure of our third-party technology vendors, may be vulnerable to computer viruses and other malware that infiltrate such systems and networks, as well as physical or electronic security breaches, natural disasters, and similar disruptions. They have been and may continue to be the target of attempts to identify and exploit network and system vulnerabilities, penetrate or bypass security measures in order to interrupt or degrade the quality of the services we receive or provide, or otherwise gain unauthorized access to our networks and systems or those of our third-party vendors. These vulnerabilities or other attempts at access may result from, or be caused by, human error or technology failures, however, they may also be the product of malicious actions
by third parties intending to harm our business. The methods that may be used by these third parties to cause service interruptions or failures or to obtain unauthorized access to information change frequently, are difficult to detect, evolve rapidly, and are increasingly sophisticated and hard to defend against. Although we have not incurred material losses or liabilities as a result ofOur investment in security breaches or attempted security breaches, we cannot be certain that ourmeasures and other defensive measures, and those employed by our third-party vendors, willmay not be sufficient to defend against all such current and future methods.
Our careful vetting of third parties to provide technology services and the contractual requirements related to the security that we impose on our third-party vendors who have access to this data may not be sufficient to protect us from network or system failures or service interruptions.
Any actual or perceived security breach, whether experienced by us or a third-party vendor,vendor; the reporting or announcement of such an event, or reports of perceived security vulnerabilities of our systems or the systems of our third-party service providers whether accurate or not; or our failure or perceived failure to respond or remediate an event or make adequate or timely disclosures to the public, Gaming Authorities, regulatory or law enforcement agencies following any such event may be material and lead to harm to our financial condition, business reputation, and prospects of future business due to, among other factors: loss of customer confidence arising from interruptions or outages of our services, delays, failure to meet contractual obligations, and loss of data or public release of confidential data; increase regulatory scrutiny on us; compromise ourcompromised trade secret and intellectual property; expose usexposure to costly uninsured liabilities such as material fines, penalties, liquidated damages, and overall margin compression due to renegotiation of contracts on less favorable terms or loss of business; and liability for claims relating to misuse of personal information in violation of contractual obligations or data privacy laws. laws; and potential theft of our intellectual property.
A security breach could occur and persist for an extended period of time without detection. We expect that any investigation of a security breach could take a substantial amount of time, and during such time we may not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, all of which could further increase the costs and consequences of such a breach. Further, detecting and remediating such incidents may require specialized expertise and there can be no assurance that we will be able to retain or hire individuals who possess, or otherwise internally develop, such expertise. Our remediation efforts therefore may not be successful. The inability to implement, maintain, and upgrade adequate safeguards could have a material and adverse impact on our business, financial condition and results of operations. Moreover, there could be public announcements regarding any data security-related incidents and any steps we take to respond to or remediate such incidents.
The occurrence of any such failure may also subject us to costly lawsuits
and claims for contractual indemnities, and may negatively impact the status of our gaming regulatory licenses up to and including revocation, as well as divert valuable management, engineering, information technology, and marketing resources toward addressing these issues delayingand delay our ability to achieve our strategic initiatives. In the event our EGMs or cashfinancial access products, systems, or networks are compromised, gaming establishments may require us to remediate any abnormality, downtime, loss of use, or suspicious activity, or require us to indemnify casino operators for lost business and, potentially, their patrons. In addition, we gather, as permitted by law, non-public, personally-identifiable financial information from patrons who use our cashfinancial access services, such as names, addresses, telephone numbers, bank and credit card account numbers and financial transaction information, and the compromise of such data, which may subject us to fines and other related costs of remediation.
TheOur insurance we maintaincoverage may be insufficient to protect us against cybersecurity and related risks may not cover all losses and costs stemming from security breaches, cyberattacks and other types of unlawful activity, or any resulting disruptions from such events. We cannot be certain that wecyber insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could suffer.have a material and adverse effect on our business, financial condition and results of operations.
Risks Related to Competition
•The gaming industry is intensely competitive, and if we are unable to compete effectively, our business could be negatively impacted.
The market for gaming devices, cashfinancial access products, and related services is highly competitive, and we expect competition to increase and intensify in the future. In both our Games and FinTech businesses, some of our competitors and potential competitors have significant advantages over us, including greater name recognition; longer operating histories; pre-existing relationships with current or potential customers with respect to other financial services; greater financial, research, design, development, marketing, technological, and other resources; and more ready access to capital resources, which allow them to respond more quickly to new or changing opportunities, be in a better position to compete and, in respect of our cashfinancial access business, to pay higher commissions or other incentives to gaming establishments in order to gain new customers. In our FinTech business, we compete with other established providers of cashfinancial access products and services, including third-party transaction processors, financial institutions, and other regional and local banks that operate ATMs on the premises of gaming establishments. To the extent that we lose customers to these competitors, or competitive pressures force us to offer incentives or less favorable pricing terms tofor us to establish or maintain relationships with gaming establishments, our business, financial condition, operations, or cash flows could be materially and adversely affected.
•Consolidation among our customers or competitors could have a material adverse effect on our revenues and profitability.
We often execute contracts with customers pursuant to which we provide products and services at multiple gaming establishments. Accordingly, the expiration or termination of a single key contract can mean the loss of multiple gaming facilities at which many of our products and services are used. Consolidation among operators of gaming establishments may also result in the loss of customers, if one of our customers is acquired by a business that utilizes one of our competitors, or significant margin compression, if rates vary between acquiring and acquired customers. Consolidation among our competitors in either the Games or FinTech sectors will only increase advantages these competitors may have over us as we compete for these customers, including even greater financial, research, design, development, marketing, technological, and other resources, and the ability to offer customers more favorable rates and prices due to lower operating costs resulting from efficiencies of scale and varying margins of a larger product portfolio, among other factors.
•Our business depends on our ability to introduce new, commercially viable games, products and services in a timely manner.
Our success is dependent on our ability to develop and sell new games, products, and services that are attractive not only to our customers, but also to their customers, the gaming patrons. If our games, products, and services do not appeal to gaming operators and patrons, or do not meet or sustain revenue and profitability of contractual obligations and expectations, we may lose business to our competitors. Additionally, we may be unable to enhance existing games, products, and services in a timely manner in response to changing regulatory or legal orrequirements, market conditions, or customer requirements, or new games, products and services may not achieve market acceptance in new or existing markets. Delay in regulatory approvals of new gaming devices and equipment may adversely impact new product deployment. If we are unable to keep pace with rapid innovations in new technologies or product design and deployment or if we are unable to quickly adapt our development, manufacturing or sales processes to compete, our business, financial condition, operations or cash flows could suffer a material adverse effect.
Our business is dependent upon consumer demand for gaming and overall economic trends specific to the gaming industry. Economic downturns or a decline in the popularity of gaming could reduce the number of patrons that use our products and services or the amounts of cash that they access using our services.
We provide our gaming-related and cash access products and services almost exclusively to gaming establishments. As a result, our business depends on consumer demand for gaming. Gaming is a discretionary leisure activity, participation in which has in the past and may in the future decline during periods of (i) economic growth, due to changes in consumers’ spending habits; (ii) economic downturns, due to decreases in our customers’ disposable income or general tourism activities; and (iii) declining consumer confidence, due to general economic conditions, domestic- and geo-political concerns, or other factors. Gaming competes with other leisure activities as a form of consumer entertainment and may lose popularity as new leisure activities arise or as other
leisure activities become more popular. In addition, gaming in traditional gaming establishments (to which we sell our products and services) competes with Internet-based gaming. The popularity and acceptance of gaming is also influenced by the prevailing social mores and changes in social mores, including changes driven by social responsibility organizations that are dedicated to addressing problem gaming, which could result in reduced acceptance of gaming as a leisure activity or litigation or lobbying efforts focused on limiting gaming activities. To the extent that the popularity or availability of gaming in traditional gaming establishments declines as a result of any of these factors, the demand for our cash access and gaming-related products and services, or the willingness of our customers to spend new capital on acquiring gaming equipment or utilize revenue share agreements, may decline and our business may be harmed.
We may not successfully enter new markets and potential new markets may not develop quickly, or at all.
If and as new and developing domestic markets develop, competition among providers of gaming-related and cash access products and services will intensify. We will face a number of hurdles in our attempts to enter these markets, including the need to expand our sales and marketing presence, compete against pre-existing relationships that our target customers may have with our competitors, the uncertainty of compliance with new or developing regulatory regimes (including regulatory regimes relating to Internet gaming) with which we are not currently familiar, and oversight by regulators that are not familiar with us or our businesses. Each of these risks could materially impair our ability to successfully expand our operations into these new and developing domestic markets.
In addition, as we attempt to sell our gaming-related and cash access products and services into international markets in which we have not previously operated, we may become exposed to political, economic, tax, legal, and regulatory risks not faced by businesses that operate only in the United States. The legal and regulatory regimes of foreign markets and their ramifications on our business may be less certain. Our international operations may be subject to a variety of risks, including different regulatory requirements and interpretations, trade barriers, difficulties in staffing and managing foreign operations, higher rates of fraud, compliance with anti-corruption and export control laws, fluctuations in currency exchange rates, difficulty in enforcing or interpreting contracts or legislation, political and economic instability, and potentially adverse tax consequences. Difficulties in obtaining approvals, licenses, or waivers from the monetary and Gaming Authorities of other jurisdictions, in addition to other potential regulatory and quasi-regulatory issues that we have not yet ascertained, may arise in international jurisdictions into which we attempt to enter. In these new markets, our operations will rely on an infrastructure of, among other things, financial services and telecommunications facilities that may not be sufficient to support our business needs. In these new markets, we may additionally provide services based upon interpretations of applicable law, which interpretation may be subject to regulatory or judicial review. These risks, among others, could materially and adversely affect our business, financial condition, and operations. In connection with our expansion into new international markets, we may forge strategic relationships with business partners to assist us. The success of our expansion into these markets therefore may depend in part upon the success of the business partners with whom we forge these strategic relationships. If we do not successfully form strategic relationships with the right business partners or if we are not able to overcome cultural or business practice differences, our ability to penetrate these new international markets could suffer.
We are subject to the risk that the domestic or international markets we attempt to enter or expand into may not develop as quickly as anticipated, or at all. The development of new gaming markets is subject to political, social, regulatory, and economic forces beyond our control. The expansion of gaming activities in new markets can be very controversial and may depend heavily on the support and sponsorship of local government, and may be based upon interpretations of newly enacted laws, the interpretation of which may be subject to regulatory or judicial review. Changes in government leadership, failure to obtain requisite voter support in referendums, failure of legislators to enact enabling legislation, and limitations on the volume of gaming activity that is permitted in particular markets may inhibit the development of new markets. Further, our estimates of the potential future opportunities in new markets are based on a variety of assumptions that may prove to be inaccurate. To the extent that we overestimate the potential of a new market, incorrectly gauge the timing of the development of a new market, or fail to anticipate the differences between a new market and our existing markets, we may fail in our strategy of growing our business by expanding into new markets. Moreover, if we are unable to meet the needs of our existing customers as they enter markets that we do not currently serve, our relationships with these customers could be harmed.
We may not realize satisfactory returns on money loaned or otherwise funded to new and existing customers to develop or expand gaming facilities.
In our gaming business, we enter into placement fee agreements typically to secure a long-term revenue share percentage and a fixed number of player terminal placements in the gaming facility. These placement fee arrangements may provide for the removal of our player terminal placements in the event of poor game performance with no further obligation of the gaming customer. Additionally, we have historically entered into development fee arrangements and may continue to do so in the future. Under the development fee arrangements, we provide financing for construction, expansion, or remodeling of gaming facilities in exchange for a long-term revenue share percentage and a fixed number of player terminal placements in the gaming
facility until the development fee is repaid to us. The success of these ventures is dependent upon the timely completion of the gaming facility, the placement and performance of our player terminals, and a favorable regulatory environment. Our development and placement efforts and financing activities may result in operating difficulties, financial and regulatory risks, or required expenditures that could materially and adversely affect our liquidity. In connection with one or more of these transactions, and to obtain the necessary development and placement fee funds, we may need to extend secured and unsecured credit to potential or existing customers that may not be repaid, incur debt on terms unfavorable to us, incur difficulties in perfecting security interests in collateral on Indian lands, or that we are unable to repay, or incur other contingent liabilities. The failure to maintain controls and processes related to our collection efforts or the deterioration of regulatory or financial condition of our customers could negatively impact our business.
If we are unable to develop and protect our intellectual property adequately or obtain intellectual property rights and agreements, we may lose valuable competitive advantages, be forced to incur costly litigation to protect our rights, or be restricted in our ability to provide various products in our markets.
Our success depends, in part, on developing and protecting our intellectual property. We rely on a combination of patents, trademarks, copyrights, trade secrets, and contractual restrictions to protect our intellectual property. We also rely on other confidentiality and contractual agreements and arrangements with our employees, affiliates, business partners, and customers to establish and protect our intellectual property and similar proprietary rights. We cannot assure you that we will be successful in protecting these rights and, despite our efforts, our trade secrets and proprietary know-how could become known to, or independently developed by, competitors. Any litigation relating to the defense of our intellectual property, whether successful or unsuccessful, could result in substantial costs to us and potentially cause a diversion of our resources.
In addition, we may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. In the event a claim of infringement against us is successful, we may be required to pay royalties to use technology or other intellectual property rights that we had been using, or we may be required to enter into a license agreement and pay license fees, or we may be required to stop using the technology or other intellectual property rights that we had been using. We may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable amount of time. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to us and potentially cause a diversion of our resources.
We rely on technology provided by third-party vendors, the loss of which could materially and adversely affect our business, increase our costs, and delay deployment or suspend development of our financial services products, gaming systems, and player terminals.
We have entered into license agreements with third parties for the exclusive use of their technology and intellectual property rights in the gaming industry, such as our license to use portions of the software infrastructure upon which our cash access systems operate, and we also rely on third-party manufacturers to manufacture our gaming devices, fully integrated kiosks, and other integrated kiosk solutions. We rely on these other parties to maintain and protect this technology and the related intellectual property rights. If our licensors fail to protect their intellectual property rights in material that we license and we are unable to protect such intellectual property rights, the value of our licenses may diminish significantly and our business could be significantly harmed. In addition, if these agreements expire and we are unable to renew them, or if the manufacturers of this software or hardware, or functional equivalents of this software or hardware, were either no longer available to us or no longer offered to us on commercially reasonable terms, we may lose a valuable competitive advantage and our business could be harmed.
Acts of God, adverse weather and shipping difficulties, particularly with respect to international third-party suppliers of our components, could cause significant production delays. If we are unable to obtain these components from our established third-party vendors, we could be required to either redesign our product to function with alternate third-party products or to develop or manufacture these components ourselves, which would result in increased costs and could result in delays in the deployment of our gaming systems and player terminals. Furthermore, we might be forced to limit the features available in our current or future offerings.
We rely on intellectual property licenses from one or more third-party competitors, the loss of which could materially and adversely affect our business and the sale or placement of our products. Various third-party gaming manufacturers with which we compete are much larger than us and have substantially larger intellectual property assets. The gaming manufacturer industry is very competitive and litigious, and a lawsuit brought by one of our larger competitors, whether or not well-founded, may have a material adverse effect on our business, financial condition, operations, or cash flows and our ability to sell or place our products.
Our inability to identify business opportunities and future acquisitions, or successfully execute any of our identified business opportunities or future acquisitions could limit our future growth.
From time to time, we pursue strategic acquisitions in support of our strategic goals. In connection with any such acquisitions, we could face significant challenges in timely securing required approvals of Gaming Authorities, or managing and integrating our expanded or combined operations, including acquired assets, operations, and personnel. There can be no assurance that acquisition opportunities will be available on acceptable terms or at all or that we will be able to obtain necessary financing or regulatory approvals to complete potential acquisitions.
We may not achieve the intended benefits of our acquisitions, if any, nor may we be able to integrate those businesses successfully, and any such acquisitions may disrupt our current plans and operations.
Our ability to succeed in implementing our strategy will depend to some degree upon the ability of our management to successfully integrate commercially viable acquisitions. Acquisition transactions may disrupt our ongoing business and distract management from other responsibilities. The expected cost synergies associated with such acquisitions may not be fully realized in the anticipated amounts or within the contemplated timeframes or cost expectations, which could result in increased costs and have an adverse effect on our prospects, results of operations, cash flows, and financial condition. Our businesses may be negatively impacted if we are unable to effectively manage our expanded operations. The integration of these acquisitions will require significant time and focus from management and may divert attention from the day‑to‑day operations of the combined business or delay the achievement of our strategic objectives. We expect to incur incremental costs and capital expenditures related to our contemplated integration activities.
The risks we commonly encounter in acquisitions include:
if, in addition to our current indebtedness, we incur significant debt to finance a future acquisition and our combined business does not perform as expected, we may have difficulty complying with debt covenants;
we may be unable to make a future acquisition which is in our best interest due to our current level of indebtedness;
if we use our stock to make a future acquisition, it will dilute existing stockholders;
we may have difficulty assimilating the operations and personnel of any acquired company;
the challenge and additional investment involved with integrating new products and technologies into our sales and marketing process;
we may have difficulty effectively integrating any acquired technologies or products with our current products and technologies, particularly where such products reside on different technology platforms or overlap with our products;
our ongoing business may be disrupted by transition and integration issues;
the costs and complexity of integrating the internal information technology infrastructure of each acquired business with ours may be greater than expected and may require additional capital investments;
we may not be able to retain key technical and managerial personnel from an acquired business;
we may be unable to achieve the financial and strategic goals for any acquired and combined businesses;
we may have difficulty in maintaining controls, procedures, and policies during the transition and integration period following a future acquisition;
our relationships with partner companies or third-party providers of technology or products could be adversely affected;
our relationships with employees and customers could be impaired;
our due diligence process may fail to identify significant issues with product quality, product architecture, legal, or tax contingencies, customer obligations, and product development, among other things;
as successor we may be subject to certain liabilities of our acquisition targets;
we may face new intellectual property challenges; and
we may be required to sustain significant exit or impairment charges if products acquired in business combinations are unsuccessful.
Our failure to effectively integrate any future acquisition would adversely affect the benefit of such transaction, including potential synergies or sales growth opportunities, in the time frame anticipated.
We operate our business in regions subject to natural disasters. Any interruption to our business resulting from a natural disaster will adversely affect our revenues and results of operations.
In the event of a natural disaster, the operations of gaming establishments could be negatively impacted or consumer demand for gaming could decline, or both, and as a result, our business could be interrupted, which could materially and adversely affect our revenues and results of operations. Adverse weather conditions, particularly flooding, hurricanes, tornadoes, heavy snowfall, and other extreme weather conditions often deter our customer’s end users from traveling or make it difficult for them to frequent the sites where our games and FinTech equipment are installed. If any of those sites experienced prolonged adverse weather conditions, or if the sites in the State of Oklahoma, where a significant number of our games and FinTech equipment are installed, simultaneously experienced adverse weather conditions, our results of business, financial condition, and operations could be materially and adversely affected. During 2018, the impact of weather-related natural disasters resulted in business disruption at certain of our customers’ facilities.
We derive a significant portion of our revenue from Native American tribal customers, and our ability to effectively operate in Native American gaming markets is vulnerable to legal and regulatory uncertainties, including the ability to enforce contractual rights on Native American land.
We derive a significant percentage of our revenue from the provision of cash access and gaming-related products and services to gaming facilities operated on Native American lands.
Native American tribes that are federally recognized are considered “domestic dependent nations” with certain sovereign rights and, in the absence of a specific grant of authority by Congress to a state or a specific compact or agreement between a tribal entity and a state that would allow the state to regulate activities taking place on Native American lands, such tribes can enact their own laws and regulate gaming operations and contracts. In this capacity, Native American tribes generally enjoy a degree of sovereign immunity, which, among other things, recognizes a tribe’s inherent authority of self-determination and self-governance, immunizes the tribe from certain lawsuits outside of tribal jurisdiction, and generally authorizes a tribe’s powers of taxation and spending over its federally-recognized nation. Accordingly, before we can seek to enforce contract rights with a Native American tribe, or an agency or instrumentality of a Native American tribe, we must obtain from the Native American tribe a general or limited waiver of its sovereign immunity with respect to the matter in dispute, which we are not always able to do. Without a general or limited waiver of sovereign immunity, or if such waiver is held to be ineffective, we could be precluded from judicially enforcing any rights or remedies against a Native American tribe, including the right to enter Native American lands to retrieve our property in the event of a breach of contract by the tribal party to that contract. Governing law and venue provisions in our contracts with Native American tribal customers vary widely and may not be enforceable.
Further, certain Native American tribes require us to contract or subcontract to provide all or some portion of our services with entities that are owned, controlled, or managed by tribal members or related parties. Our ability to provide our services is dependent upon our relationship with these third parties and their ability to provide services in accordance with the terms of our contractual arrangement with these third parties and, in some instances, the third parties’ relationship or contractual arrangement with the applicable tribal gaming casino or tribe.
Government enforcement, regulatory action, judicial decisions, and proposed legislative action have in the past, and will likely continue to affect our business, financial condition, operations, cash flows, and prospects in Native American tribal lands. The legal and regulatory uncertainties surrounding our Native American tribal agreements could result in a significant and immediate material adverse effect on our business, financial condition, operations, or cash flows. For example, certain of our agreements with Native American tribes are subject to review by regulatory authorities. Additionally, such uncertainties could increase our cost of doing business and could take management’s attention away from operations. Regulatory action against our customers or equipment in these or other markets could result in machine seizures and significant revenue disruptions, among other adverse consequences. Moreover, Native American tribal policies and procedures, as well as tribal selection of gaming vendors, are subject to the political and governance environment within each Native American tribe. Changes in tribal leadership or tribal political pressure can affect our business relationships within Native American markets.
Most of our leased gaming device contracts with our customers are short-term, and if we are unable to maintain our current customers on terms that are favorable to us, our business, financial condition, operations, or cash flows may suffer a material adverse effect.
Most of our leased gaming device contracts with our customers are generally short-term, except for customers with whom we have entered into development and placement fee agreements. We do not rely upon the stated term of our gaming device contracts to retain the business of our customers. We rely instead upon providing competitive player terminals, games, and systems to give
our customers the incentive to continue doing business with us. At any point in time, a significant portion of our gaming device business is subject to nonrenewal, which may materially and adversely affect our earnings, financial condition, and cash flows. To renew or extend any of our customer contracts, generally, we may be required to accept financial and other terms that are less favorable to us than the terms of the expired contracts. In addition, we may not succeed in renewing customer contracts when they expire. If we are required to agree to other less favorable terms to retain our customers or we are not able to renew our relationships with our customers upon the expiration of our contracts, our business, financial condition, operations, or cash flows could suffer a material adverse effect.
Tribal gaming customers who have historically operated large quantities of Class II gaming units may negotiate into arrangements with state governments or renegotiate existing gaming compacts that could impact the amount of Class II gaming devices currently supplied by the Company. If we are unable to maintain our existing placement of units, then our business, financial condition, operations, or cash flows may suffer an adverse effect.
As of December 31, 2018, we operated 9,370 Class II gaming units under lease or daily fixed fee arrangements to our customers. Customers who enter into compacts with state governments may desire to change from Class II gaming units to Class III gaming units, as Class III units generally perform better than Class II units. This may result in the loss of placements under lease or daily fixed fee arrangements as customers purchase or lease Class III units from other equipment suppliers to replace our existing Class II units. If we are unable to replace these lost units with our proprietary Class III units, then our business, financial condition, operations, or cash flows may suffer an adverse effect.
If we are unable to renew our contract with the New York State Gaming Commission, our revenues, financial condition, operations, or cash flows may suffer an adverse effect.
Our contract to provide an accounting and central determinant system for the VLTs in the State of New York has provided Games segment revenues of approximately $18.5 million for the year ended December 31, 2018 and $18.1 million for the years ended December 31, 2017 and 2016. In January 2018, an amendment to the agreement between Everi Games and the New York State Gaming Commission was approved and became effective. Under this amendment, Everi Games will continue to provide and maintain the central determinant system for the New York Lottery through December of 2019. Upon its expiration, if we are unsuccessful in renewing the contract, our business, financial condition, operations, or cash flows may suffer an adverse effect.
An unexpectedly high level of chargebacks, as the result of fraud or otherwise, including in connection with new technology standards being implemented in the United States regarding chip-based cards, could materially and adversely affect our cash access business.
In 1994, Europay, MasterCard, and Visa jointly developed EMV, designed to deter fraudulent card transactions related to identity theft, counterfeit cards, and the misuse of lost or stolen cards via enhanced card authentication, transaction authorization, and cardholder verification using chip-based smart-cards. EMV has been adopted in many regions of the world as the global standard for fraud deterrence in chip based smart-card payments. To encourage adoption in the U.S., effective October 1, 2015, the U.S. payment card industry implemented new rules which shifted the liability for fraudulent transactions onto merchants if they elect to process transactions using the magnetic stripe when presented with a EMV chip-based smart-card. This shifted the responsibility for chargebacks due to fraudulent transactions on such cards from the card issuer onto the merchant. If we are unable to maintain compliant status with the EMV regulations, our cash access business may be adversely affected.
When patrons use our cash access services, we either dispense cash or produce a negotiable instrument that can be exchanged for cash. If a completed cash access transaction is subsequently disputed, and if we are unsuccessful in establishing the validity of the transaction, we may not be able to collect payment for such transaction and such transaction becomes a chargeback. In the event that we incur chargebacks in excess of specified levels, we could lose our sponsorship into the card associations or be censured by the card associations by way of fines or otherwise. Our failure to adequately manage our chargebacks could have a material adverse effect on our business, financial condition, operations, or cash flows.
Changes in consumer willingness to pay a convenience fee to access their funds could reduce the demand for our cash access products and services.
Our cash access business depends upon the willingness of patrons to pay a convenience fee to access their own funds on the premises of a gaming establishment. In most retail environments, consumers typically do not pay an additional fee for using non-cash payment methods such as credit cards, POS debit cards, or checks. Gaming patrons could bring more cash with them to gaming establishments or access cash outside of gaming establishments without paying a fee for the convenience of not having
to leave the gaming establishment. To the extent that gaming patrons become unwilling to pay these convenience fees or lower cost cash access alternatives become available, the demand for cash access services within gaming establishments will decline and our business could suffer.
Our 3-in-1 Rollover patent expired in early 2018 and our business, financial condition, operations, or cash flows may suffer an adverse effect from our competitors’ use of this technology.
We no longer have the ability to extend our existing 3-in-1 Rollover patent, which allows a patron that has reached his or her daily ATM limit to obtain funds via a POS debit card cash access transaction or a credit card cash access transaction instead. As a result of the patent expiration, our competitors will have the ability to emulate this technology; and our business, financial condition, operations, or cash flows may suffer an adverse effect.
Risks Related to the Regulation of Our IndustryBusiness
•Unauthorized disclosure of cardholder and patron data or similar violations of applicable data privacy laws, whether through a security breach of our computer systems, our third-party processor’s computer systems or otherwise, or through our unauthorized use or transmission of such data could subjectsubjects us to costly fines, penalties, and legal claims.
We collect and store personally identifiable information about cardholders and patrons that perform certain cashfinancial access and Central Credit transactions, including names, addresses, social security numbers, driver’s license numbers, and account numbers, and we maintain a database of cardholder and patron data, including account numbers, in order to process our cashfinancial access and Central Credit transactions. We also rely on our third-party processor and certain other technology partners to process and store cardholder and patron data relating to our cashfinancial access and Central Credit transactions. As a result, we, as well as our third-party processor, certain of our other technology providers, and some of our gaming establishment customers, are required to comply with various foreign, federal, and state privacy statutes and
regulations and the PCI Data Security Standard. Compliance with these regulations and requirements, which are subject to change at any time, is often difficult and costly, and our failure, or the failure of these other third parties, to comply may result in significant fines or civil penalties, regulatory enforcement action, liability to our sponsor bank, and termination of our agreements with our gaming establishment customers, each of which could have a material adverse effect on our business, financial condition, operations, or cash flows. If our computer systems or those of our third-party processor or other technology providers suffer a security breach, we may be subject to liability, including claims for unauthorized transactions with misappropriated bank card information, impersonation, or similar fraud claims, as well as for any failure to comply with laws governing required notifications of such a breach, and these claims could result in protracted and costly litigation, penalties, or sanctions from the card associations and EFT payment networks, and damage to our reputation, which could reduce and limit our ability to provide cashfinancial access and related services to our gaming establishment customers.
The personally identifiable information we collect also includes our patrons’ transaction behavioral data and credit history data, which we may use to provide marketing and data intelligence services to gaming establishments. This information is increasingly subject to federal, state, and card association laws and regulations, as well as laws and regulations in numerous jurisdictions around the world. Governmental regulations are typically intended to protect the privacy and security of such data and information as well as to regulate the collection, storage, transmission, transfer, use, and distribution of such data and information. We could be materially and adversely affected if domestic or international laws or regulations are expanded to require changes in our business practices, or if governing jurisdictions interpret or implement their laws or regulations in ways that negatively affect our business or even prohibit us from offering certain marketing and data intelligence or other services. Similarly, if we are required to allocate significant resources to modify our internal operating systems and procedures to enable enhanced protection of patron data that we transmit, store, and use, our business results could be adversely affected. In addition, we may face requirements that pose compliance challenges in new international markets that we seek to enter as various foreign jurisdictions have different laws and regulations concerning the storage, transmission, and use of gaming patron data. Such variation could subject us to costs, liabilities, or negative publicity that could impair our ability to expand our operations into some countries; therefore, it could limit our future growth.
•We are subject to extensive governmental gaming regulation, which may harm our business.
Our ability to conduct both our gaming and cashfinancial access businesses, expand operations, develop and distribute new games, products and systems, and expand into new gaming markets is also subject to significant federal, state, local, Native American, and foreign regulations which vary from jurisdiction to jurisdiction. In the United States and many other countries, gaming must be expressly authorized by law. Once authorized, such activities are subject to extensive and evolving governmental regulation. The gaming laws, regulations, and ordinances generally concern the antecedents, acumen, financial stability, and character of our owners, officers, and directors, as well as those persons financially interested or involved in our companies; dictate the technical standards and regulations of our electronic player terminals, gaming systems, and certain other products; and set forth the process and manner by which the Gaming Authorities issue such licenses, findings of suitability, and product approvals. In addition, the suspension, revocation, nonrenewalnon-renewal or limitation of any of our licenses or product approvals, or the inability to obtain or maintain requisite
license or product approvals could have a material adverse effect on our business operations, financial condition, and results of operations, and our ability to maintainretain key employees. The Gaming Authorities may deny, limit, condition, suspend, or revoke a gaming license or related approval for violations of applicable gaming laws and regulations, and may impose substantial fines and take other actions, any one of which could have a significant adverse effect on our business, financial condition, and results of operations.
Further, changes in existing gaming laws or regulations, or new interpretations of existing gaming laws may hinder or prevent us from continuing to operate in those jurisdictions where we currently do business, which could harm our operating results. In particular, the enactment of unfavorable legislation or government efforts affecting or directed at manufacturers or gaming operators, such as referendums to increase gaming taxes, or requirements to use local distributors, or uncertainty as to the means and manner in which existing gaming laws may be interpreted and applied, either singly or together, could have a negative impact on our operations.
In May 2018, the United States Supreme Court struck down the Professional and Amateur Sports Protection Act (“PASPA”) as unconstitutional, which led many states to quickly propose and, in some instances, pass legislation authorizing sports betting. Consequently, gaming regulators, many of our operator customers, and many of our competitors dedicated resources to service this new market, as did we. However, in January 2019, the Office of Legal Counsel of the Department of Justice (“OLC”) published an opinion reversing its prior 2011 opinion interpreting the Federal Wire Act. The 2019 opinion now indicates that the Wire Act is applicable to any wire communication across state lines and specifically indicating that the Unlawful Internet Gambling Enforcement Act (“UIGEA”) does not modify the Wire Act, violations of which may be subject to criminal prosecution. The specific comment regarding UIGEA implicates UIGEA’s carve out for “unlawful Internet gambling” and “intermediate routing” (i.e., the ancillary crossing of state lines of transmissions between intra-state communications points). In reliance on the 2011 Wire Act opinion, several states legalized online gaming, and the proposed legislation in many jurisdictions in response to the May 2018 PASPA decision included online sports betting. The impact of the 2019 Wire Act opinion is currently unclear, and may implicate lottery, land-based, and online gaming as well as banks and payment processors that services these market segments. The Deputy Attorney General of the United States delayed implementation of the 2019 opinion through June 14, 2019, and several states’ attorney general have, or are contemplating, action in response to the 2019 opinion, including litigation. Interpretations and resultant enforcement of the Wire Act as may relate to intermediate routing transactions could negatively impact our WAP games business as well as our FinTech cash access business and our interactive real money gaming business.
Moreover, in addition to the risk of enforcement action, we are also at risk of loss of business reputation in the event of any potential legal or regulatory investigation, whether or not we are ultimately accused of or found to have committed any violation. For a summary of gaming regulations that could affect our business, see “Item“Item 1. Business — Regulation.”
•Many of the financial services that we provide are subject to extensive rules and regulations, which may harm our business.
Our Central Credit gaming patron credit bureau and check verification and warranty services are subject to the FCRA, the FACTA, and similar state laws. The collection practices that are used by our third-party providers and us may be subject to the FDCPA and applicable state laws relating to debt collection. All of our cashfinancial access services and patron marketing services are subject to the privacy provisions of state and federal law, including the Gramm-Leach-Bliley Act. Our POS debit card cashfinancial access transactions and ATMfunds dispensed withdrawal services are subject to the Electronic Fund Transfer Act. Our ATMfunds dispensed services are subject to the applicable state banking regulations in each jurisdiction in which we operate ATMs. Our ATMfunds dispensed services may also be subject to state and local regulations relating to the imposition of daily limits on the amounts that may be withdrawn from ATMs, the location of ATMs, our ability to surcharge cardholders who use our ATMs, and the form and type of notices that must be disclosed regarding the provision of our ATMfunds dispensed services. The cashfinancial access services we provide are subject to record keeping and reporting obligations under the Bank Secrecy Act and the USA PATRIOT Act of 2001.2001, including as relates to our federally-mandated internal anti-money laundering program. We are required to file SARs with respect to transactions completed at all gaming establishments where we provide our cashfinancial access services through a gaming establishment’s cashier or financial services center. If we are found to be noncompliant in any way with these laws, we could be subject to substantial civil and criminal penalties. In jurisdictions in which we serve as a check casher, we are subject to the applicable state licensing requirements and regulations governing check cashing activities. We are also subject to various state licensing requirements and regulations governing money transmitters. We may be required to obtain additional licenses from federal or state financial authorities in connection with our products and services. There can be no assurance that we will be able to obtain any such licenses, and, even if we were able to do so, there could be substantial costs and potential product changes involved in maintaining such licenses, which could have a material and adverse effect on our business.
We are subject to formal or informal audits, inquiries, examinations, or reviews from time to time by the regulatory authorities that enforce these financial services rules and regulations. In the event that any regulatory authority determines that the manner in which we provide cashfinancial access, patron marketing, or gaming patron credit bureau services is not in compliance with existing rules and regulations, or the regulatory authorities adopt new rules or regulations that prohibit or restrict the manner in which we provide cashfinancial access, patron marketing, or gaming patron credit bureau services, then these regulatory authorities may force us to modify the manner in which we operate or force us to stop processing certain types of cashfinancial access transactions or providing patron marketing or gaming patron credit bureau services altogether. We may also be required to pay substantial penalties and fines if we fail to comply with applicable rules and regulations. For example, if we fail to file CTRs or SARs on a timely basis or if we are found to be
noncompliant in any way with either the Bank Secrecy Act or the USA PATRIOT Act of 2001, we could be subject to substantial civil and criminal penalties. In addition, our failure to comply with applicable rules and regulations could subject us to private litigation.
•Gaming and financial services laws and regulations are subject to change and uncertain application.
Gaming and financial services laws and regulations are subject to change and evolving interpretations and application, including through legislative amendments, new and proposed regulations, executive orders, and agency interpretations, and it can be difficult to predict how they may be applied to our business. We may not be able to respond quickly or effectively to regulatory, legislative, and other developments, and these changes may in turn impair our ability to offer our existing or proposed products and services and/or increase our expenses in providing these products and services.
•We are subject to extensive rules and regulations of card associations, including VISA, MasterCard, and EFT networks that are always subject to change, which may harm our business.
Our cashfinancial access business is subject to the extensive rules and regulations of the leading card associations, VISA and MasterCard. The rules and regulations do not expressly address some of the contexts and settings in which we process cashfinancial access transactions or do so in a manner subject to varying interpretations. As an example, we and certain of our providers must comply with the PCI Data Security Standard. The failure by any of such providers to comply with such standards could result in our being fined or being prohibited from processing transactions through VISA, MasterCard, and other card and payment networks. We also process transactions involving the use of the proprietary credit cards such as those offered by Discover Card and American Express, as well as other regional cards issued in certain international markets. The rules and regulations of the proprietary credit card networks that service these cards present risks to us that are similar to those posed by the rules and regulations of VISA, MasterCard, and other payment networks.
The card associations’ and payment networks’ rules and regulations are always subject to change, and the card associations or payment networks may modify their rules and regulations from time to time. Our inability to anticipate changes in rules and regulations, or the interpretation or application thereof, may result in substantial disruption to our business. In the event that the card associations, payment networks or our sponsoring banks determine that the manner in which we process certain types of card transactions is not in compliance with existing rules and regulations, or if the card associations or payment networks adopt new rules or regulations that prohibit or restrict the manner in which we process certain types of card transactions, we may be forced to pay a fine, modify the manner in which we operate our business, or stop processing certain types of cashfinancial access transactions altogether, any of which could have a material adverse effect on our business, financial condition, operations, or cash flows.
•Card associationsassociation and EFT networks may changenetwork changes to interchange reimbursement rates or network operating fees or assess new fees associated with the processing and settlement of our cashfinancial access transactions or otherwise changeother changes to their operating rules and regulations without our consent and such changes may affect our revenues, cost of revenues (exclusive of depreciation and amortization), net income, and our business generally.
We receive income from issuers of ATM, credit, and debit cards for certain transactions performed on our ATMs related to cash dispensing or certain other non-financial transactions such as balance inquiries. The EFT networks may also charge certain fees related to the performance of these transactions. We refer to the net of this income and fees as reverse interchange.interchange reimbursement fees. The amount of this reverse interchange reimbursement fee income is determined by the card associations and EFT networks, and this income is subject to decrease at their discretion.
We pay interchange and other network fees for services to the credit card associations and EFT networks that they provide in settling transactions routed through their networks. Collectively, we call these charges interchange fees. Subject to the limitations imposed by federal regulations such as the Durbin Amendment or other regulations that may be enacted, the amounts of these interchange fees are determined based upon the sole discretion of the card associations and EFT networks and are subject to increase at any time. We have been seeing such card association interchange fee increases with higher frequency in recent years and with disproportionate negative impact upon transaction categories into which our financial access transactions typically fall. Competitive pressures might prevent us from passing all or some of these fees through to our customers in the future. To the extent that we are unable to pass through to our customers all or any portion of any increase in interchange or other network processing fees, our cost of revenues (exclusive of depreciation and amortization) would increase and our net income would decrease, assuming no change in transaction volumes. Any such decrease in net income could have a material adverse effect on our business, financial condition, operations, or cash flows. In addition, proposed changes to the Dodd-Frank Act, such as the repeal of the Durbin Amendment, if adopted, or other regulation that could be implemented to limit the amount of surcharge or service fees charged for our cashfinancial access transactions could have a negative impact on revenue and gross margins (exclusive of depreciation and amortization) as a result of reduced service fee revenue and potential increases in interchange rates merchants pay for debit card transactions.
The card associations and EFT networks may also elect to impose new membership or other fees, or implement new rules and regulations with respect to processing transactions through their networks, and any such new fees, rules, or regulations could have a material adverse effect on our business, financial condition, operations, or cash flows.
•The provision of our credit card access, POS debit, and ATMfunds dispensed services are dependent upon our continued sponsorship into the VISA and MasterCard card associations, and the suspension or termination of our sponsorship would result in a material adverse effect on our business, financial condition, operations, or cash flows.
We process virtually all of our credit card cashfinancial access, POS debit, and ATMfunds dispensed service transactions through the VISA and MasterCard card associations, both domestically and internationally, and virtually all of the revenue that we derive from our credit card cash
financial access, POS debit, and ATMfunds dispensed services is dependent upon our continued sponsorship into the VISA and MasterCard associations. We cannot provide these services without sponsorship into the VISA and MasterCard associations by a member financial institution. Our failure to maintain our current sponsorship arrangements or secure alternative sponsorship arrangements into the VISA and MasterCard associations could have a material adverse effect on our business, financial condition, operations, or cash flows.
•Our ATMfunds dispensed service business is subject to extensive rules and regulations, which may harm our business.
Our ATMfunds dispensed services are subject to the applicable federal, state, and local banking regulations in each jurisdiction in which we operate ATMs, which regulations relate to the imposition of daily limits on the amounts that may be withdrawn from ATMs, the location of ATMs, our ability to surcharge cardholders who use our ATMs, and the form and type of notices that must be disclosed with respect to the fees we charge to patrons in connection with our ATM
funds dispensed services. ATMs are also subject to requirements of the Americans with Disabilities Act, which in general require that ATMs be accessible to individuals with disabilities, such as visually-impaired persons. These laws and regulations may impose significant burdens on our ability to operate ATMs profitably in some locations, or at all, and our business, financial condition, operations, or cash flows could be materially adversely affected. Moreover, because these regulations are subject to change, we may be forced to modify our ATMfunds dispensed operations in a manner inconsistent with the assumptions upon which we relied when entering into contracts to provide ATMfunds dispensed services at gaming establishments. If federal, state, local, or foreign authorities adopt new laws or regulations, or raise enforcement levels on existing laws and regulations that make it more difficult for us to operate our ATMfunds dispensed business, then our revenues and earnings may be negatively affected. If legislation or regulations are enacted in the future that adversely impact our ATMfunds dispensed business, we may be forced to modify our operations in a manner inconsistent with the assumptions upon which we relied when entering into contracts to provide ATMs at gaming establishments and our business, financial condition, operations, or cash flows could suffer a material adverse effect.
Consumer•Changes to consumer privacy laws may change, requiringrequire us to change our business practices or expend significant amounts on compliance with such laws.
Our patron marketingCertain of our products and database services depend on ourthe ability to collect and use non-public personal, financial transaction, and other information relating to patrons who use our productspatrons. To the extent that we collect, control, or process such information, federal, state, and services and the transactions they consummate using our services. We are required by federal and stateforeign privacy laws and rulesregulations, including without limitation CCPA and GDPR, require us to make disclosures regarding our privacy and information sharing practices, safeguard and protect the privacy of such information, to make disclosures to patrons regarding our privacy and information sharing policies and, in some cases, to provide patrons anthe opportunity to “opt out” of the use of their information for certain purposes. We must comply with federal, state, and foreign requirements regarding notice and consent to obtain, use, share, transmit and store such information.
Consumer protection and data privacy laws are rapidly evolving due to recent high-profile thefts and losses of sensitive consumer information from protected databases. Such laws may broaden the scope of protected information; impose new and/or stricter standards concerning the collection, control, use, sharing, and protection of consumer information; and/or require patrons to “opt-in” to the use of their information for specific purposes. Our compliance with any or all of such laws may be costly and challenging to operationalize across the uneven requirements of the numerous domestic and international jurisdictions in which we do business.
Changes in consumer protection and data privacy laws may require us to narrow or limit the data we collect; limit how, or how long, we may use it; or require us to purge data from our systems in response to consumer requests, which may hamper our provision of certain of our data-related services or diminish the value of such services to our customers and result in loss of business. To the extent that patrons exercise their right to “opt out,” or are required to “opt in,” our ability to leverage existing and future databases of information would be curtailed. Further, in order to continue to provide such products and services, we may be required to make material modifications to the products and services we offer in order to meet the changing standards, which may result in significant redesign and redeployment costs to us.
To the extent that we fail to comply with applicable consumer protection and data privacy laws, we may become subject to actions by individuals or regulatory authorities, which may result in the payment of fines or the imposition of other monetary or non-monetary penalties.
The failure or circumvention of the means by which we safeguard and protect the privacy of information we gather may result in the dissemination of non-public personal information, which may harm our reputation and may expose us to liability to the affected individuals and regulatory enforcement proceedings or fines. Regulators reviewing
General Risk Factors
•We have recorded net losses in previous years and we may not generate profits in the future.
We had a net income of $152.9 million for the year ended December 31, 2021, a net loss of $81.7 million for the year ended December 31, 2020 and net income of $16.5 million for the year ended December 31, 2019. As a result of the interest payments on our policiesindebtedness, amortization of intangible assets incurred in connection with Everi Holdings’ purchase of Everi Games in December 2014 (the “Merger”) and practicesother acquisitions, other related acquisition and financing costs, asset impairment charges, depreciation, and other amortization, we may require usnot be able to modify our practicesgenerate profits in a material or immaterial manner or impose fines or other penalties if they believe that our policies and practices do not meet the necessary standard. To the extent that our patron marketing and database services have failed, are now failing, orfuture. Our ability to continue to generate net profits in the future faildepends, in part, on our ability to: establish strategic business relationships with new and existing customers; retain our existing customers and expand our relationships with existing customers; provide our products and services in new markets and to new customers in existing markets; develop new games or license third-party content in our Games business and develop new products and services in our FinTech business; effectively manage a larger and more diverse workforce and business; react to changes,
including technological and regulatory changes, in the markets we target or operate in; respond to competitive developments and challenges; continue to comply with applicable law,the EMV global standard for cards equipped with security chip technology; and attract and retain experienced and talented personnel.
We may not be able to do any of these successfully, and our privacy policiesfailure to do so could have a material adverse effect on our business, financial condition, operations, or the notices that we provide to patrons, we may become subject to actions by a regulatory authority or patronscash flows, which cause us to pay monetary penalties or require us to modify the manner in which we provide patron marketing and database services. To the extent that patrons exercise their right to “opt out,”could, among other things, affect our ability to leverage existing and future databases of information would be curtailed. Consumer and data privacy laws are evolving, and due to recent high profile thefts and losses of sensitive consumer information from protected databases, such laws may be broadened in their scope and application, impose additional requirements and restrictions on gathering, encrypting and using patron informationmake payments under our New Credit Facilities (defined herein) or narrow the types of information that may be collected or used for marketing or other purposes or require patrons to “opt-in” to the use of their information for specific purposes, or impose additional fines or potentially costly compliance requirements which will hamper the value of our patron marketing and database services.2021 Unsecured Notes (defined herein).
Risks Related to Our Stock
Our common stock has been publicly traded since September 2005, and we expect that the•The price of our common stock willmay continue to fluctuate substantially.significantly.
There has been a public market for our common stock since September 2005. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including, but not limited to those described above under “—Risks Related to Our Business,” “—Risks Related to Regulation of Our Industry”, and the following:in previous risk factor sub-captions.
our failure to maintain our current customers, including because of consolidation in the gaming industry;
increases in commissions paid to gaming establishments as a result of competition;
increases in interchange rates, processing fees, or other fees paid by us;
decreases in reverse interchange rates paid to us;
actual or anticipated fluctuations in our or our competitors’ revenue, operating results, or growth rate;
our inability to adequately protect or enforce our intellectual property rights;
any adverse results in litigation initiated by us or by others against us;
our inability to make payments on our outstanding indebtedness as they become due or our inability to undertake actions that might otherwise benefit us based on the financial and other restrictive covenants contained in the New Credit Facilities and the indenture governing the 2017 Unsecured Notes;
the loss, or failure, of a significant supplier or strategic partner to provide the goods or services that we require from them;
our inability to introduce successful, new products and services in a timely manner or the introduction of new products or services by our competitors that reduce the demand for our products and services;
our failure to successfully enter new markets or the failure of new markets to develop in the time and manner that we anticipate;
announcements by our competitors of significant new contracts or contract renewals or of new products or services;
changes in general economic conditions, financial markets, the gaming industry, or the payments processing industry;
the trading volume of our common stock;
sales of common stock or other actions by our current officers, directors, and stockholders;
acquisitions, strategic alliances, or joint ventures involving us or our competitors;
future sales of our common stock or other securities;
the failure of securities analysts to cover our common stock or changes in financial estimates or recommendations by analysts;
our failure to meet the revenue, net income, or earnings per share estimates of securities analysts or investors;
departures of key personnel or our inability to attract or retain key personnel;
our ability to prevent, mitigate, or timely recover from cybersecurity breaches, attacks, and compromises with respect to our infrastructure, systems, and information technology environment;
terrorist acts, theft, vandalism, fires, floods, or other natural disasters; and
rumors or speculation as to any of the above which we may be unable to confirm or deny due to disclosure restrictions imposed on us by law or which we otherwise deem imprudent to comment upon.
Some provisions of our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent transactions that many stockholders may favor.
Some provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying, discouraging, or preventing a merger or acquisition that our stockholders may consider favorable or a change in our management or our Board of Directors. These provisions:
divide our Board of Directors into three separate classes serving staggered three-year terms, which will have the effect of requiring at least two annual stockholder meetings instead of one, to replace a majority of our directors, which could have the effect of delaying or preventing a change in our control or management;
provide that special meetings of stockholders can only be called by our Board of Directors, Chairman of the Board, or Chief Executive Officer. In addition, the business permitted to be conducted at any special meeting of stockholders is limited to the business specified in the notice of such meeting to the stockholders;
provide for an advance notice procedure with regard to business to be brought before a meeting of stockholders which may delay or preclude stockholders from bringing matters before a meeting of stockholders or from making nominations for directors at a meeting of stockholders, which could delay or deter takeover attempts or changes in management;
eliminate the right of stockholders to act by written consent so that all stockholder actions must be effected at a duly called meeting;
provide that directors may only be removed for cause with the approval of stockholders holding a majority of our outstanding voting stock;
provide that vacancies on our Board of Directors may be filled by a majority, although less than a quorum, of directors in office and that our Board of Directors may fix the number of directors by resolution;
allow our Board of Directors to issue shares of preferred stock with rights senior to those of the common stock and that otherwise could adversely affect the rights and powers, including voting rights and the right to approve or not to approve an acquisition or other change in control, of the holders of common stock, without any further vote or action by the stockholders; and
do not provide for cumulative voting for our directors, which may make it more difficult for stockholders owning less than a majority of our stock to elect any directors to our Board of Directors. In addition, we are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our voting stock, the person is an “interested stockholder” and may not engage in “business combinations” with us for a period of three years from the time the person acquired 15% or more of our voting stock.
These provisions may have the effect of entrenching our management team and may deprive our stockholders of the opportunity to sell shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a premium could reduce the price of our common stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We occupy real estate properties mostly in the United States and, to a lesser degree, internationally that are under lease agreements. We believe that these facilities are adequate for our business needs as presently conducted.
We primarily occupy the following leased real estate properties:
|
| | | | | | | | | | |
| Location | Sq. Ft | Purpose | Segment |
| Austin, Texas | 204,256249,616 | Games Headquarters and Operations | Games |
| Las Vegas, Nevada | 106,873143,712 | Corporate Headquarters; FinTech Headquarters and Operations | FinTech; Games |
Reno, Nevada | 17,138 | Game Design Studio | Games |
Chicago, Illinois | 17,124 | Game Design Studio | GamesFinTech |
In addition, we lease several otheradditional less significant real estate properties that are used to support our products and services.
Item 3. Legal Proceedings.
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 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed for trading on the New York Stock Exchange under the symbol “EVRI.” On March 1, 2019,February 24, 2022, there were eight8 holders of record of our common stock. Because manyMany of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the totalwhich results in a significantly larger number of beneficial stockholders represented by these record holders.holders of record.
Dividends
We have not declared or paid any cash dividends on our capital stock as we intend to retain our earnings and utilize them for the repayment of outstanding debt and to finance the growth and development of our business. Any future change in our dividend policy will be made at the discretion of our Board of Directors, and will depend on our contractual restrictions, results of operations, earnings, capital requirements, and other factors considered relevant by our Board of Directors. In addition, the New Credit Facilities and the indenture governing the 2021 Unsecured Notes limit our ability to declare and pay cash dividends.
Common Stock Repurchases
There were no share repurchases during the year ended December 31, 2021.
On February 28, 2020, our Board of Directors authorized and approved a share repurchase program granting us the authority to repurchase an amount not to exceed $10.0 million of outstanding Company common stock with no minimum number of shares that the Company is required to repurchase and no expiration date. This repurchase program commenced in the first quarter of 2020 and authorizes us to buy our common stock from time to time in open market transactions, block trades or in private transactions in accordance with trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended, or by a combination of such methods, including compliance with the Company’s finance agreements. The share repurchase program is subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors, and may be suspended or discontinued at any time without prior notice. In light of COVID-19, we suspended our share repurchase program.
We did not have a share repurchase program in effect for the yearsyear ended December 31, 2018, 2017, and 2016.2019.
Issuer Purchases and Withholding of Equity Securities
We repurchased or withheld from restricted stock awards 17,552, 15,457,493,662, 193,809, and 18,71795,734 shares of our common stock at an aggregate purchase price of $0.1approximately $9.4 million for the year ended December 31, 2021 and approximately $1.3 million and $1.1 million for the years ended December 31, 2018, 2017,2020 and 2016,2019, respectively, to satisfy the minimum applicable tax withholding obligations incident to the vesting of such restricted stock awards. The following table includes the monthly repurchases or withholdings of our common stock during the fourth quarter ended December 31, 2018: 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Number of Shares Purchased (1) (in thousands) | | Average Price Paid per Share (2) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3) | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | | |
| Tax Withholdings | | | | | | | | |
| 10/1/21 - 10/31/21 | | 13.4 | | | $ | 24.29 | | | — | | | — | |
| 11/1/21 - 11/30/21 | | 2.8 | | | $ | 21.81 | | | — | | | — | |
| 12/1/21 - 12/31/21 | | 2.8 | | | $ | 21.21 | | | — | | | — | |
| Total | | 19.0 | | | $ | 23.48 | | | — | | | — | |
(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.
|
| | | | | | | |
| | | Total Number of Shares Purchased (1) (in thousands)
| | Average Price per Share (2) |
| | | | | |
| Tax Withholdings | | |
| | |
|
| 10/1/18 - 10/31/18 | | 6.4 |
| | $ | 7.04 |
|
| 11/1/18 - 11/30/18 | | 0.6 |
| | $ | 7.41 |
|
| 12/1/18 - 12/31/18 | | 3.1 |
| | $ | 5.26 |
|
| Total | | 10.1 |
| | $ | 6.52 |
|
| |
(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. |
Stock Performance Graph
The line graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the Standard & Poor’s (“S&P”) 500 Index, the S&P 1000 Index, and the S&P Information Technology Index during the five-year period ended December 31, 2018.2021. We included an additional reference point, the S&P 1000 Index, as it is a comparable metric that includes small and mid-capitalization stocks, similar in capitalization to our Company.
The graph assumes that $100 was invested on December 31, 20132016 in our common stock, in the S&P 500 Index, the S&P 1000 Index, and the S&P Information Technology Index, and that all dividends were reinvested. Research Data Group, Inc. furnished this datadata; and the cumulative total stockholder returns for our common stock, the S&P 500 Index, the S&P 1000 Index, and the S&P Information Technology Index are based on the calendar month end closing prices. The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.
The performance graph and the related chart and text are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and are not being filed for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference in any filing by us under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Item 6. Selected Financial Data.Reserved.
The following selected historical financial data has been derived from, and should be read in conjunction with, our Financial Statements and Results of Operations included elsewhere in this Annual Report on Form 10-K. Our selected consolidated financial data may not be indicative of our future financial condition or results of operations (in thousands, except per share amounts).
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018(1) | | 2017(2) | | 2016(3) | | 2015(4)(5) | | 2014(6) |
| Income Statement Data | | |
| | |
| | |
| | |
| | |
|
| Revenues | | $ | 469,515 |
| | $ | 974,948 |
| | $ | 859,456 |
| | $ | 826,999 |
| | $ | 593,053 |
|
| Operating income (loss) | | 85,813 |
| | 81,819 |
| | (118,555 | ) | | (9,730 | ) | | 33,782 |
|
| Net income (loss) | | 12,356 |
| | (51,903 | ) | | (249,479 | ) | | (104,972 | ) | | 12,140 |
|
| Basic earnings (loss) per share | | 0.18 |
| | (0.78 | ) | | (3.78 | ) | | (1.59 | ) | | 0.18 |
|
| Diluted earnings (loss) per share | | 0.17 |
| | (0.78 | ) | | (3.78 | ) | | (1.59 | ) | | 0.18 |
|
| Weighted average common shares outstanding | | | | | | | | | | |
| Basic | | 69,464 |
| | 66,816 |
| | 66,050 |
| | 65,854 |
| | 65,780 |
|
| Diluted | | 73,796 |
| | 66,816 |
| | 66,050 |
| | 65,854 |
| | 66,863 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | At and For the Year Ended December 31, |
| | | 2018(1) | | 2017(2) | | 2016(3) | | 2015(4)(5)(6) | | 2014(7) |
| Balance sheet data | | |
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | $ | 297,532 |
| | $ | 128,586 |
| | $ | 119,051 |
| | $ | 102,030 |
| | $ | 89,095 |
|
| Working capital | | 17,304 |
| | (12,040 | ) | | (1,875 | ) | | 2,452 |
| | 12,550 |
|
| Total assets | | 1,548,261 |
| | 1,537,074 |
| | 1,408,163 |
| | 1,550,385 |
| | 1,707,285 |
|
| Total borrowings | | 1,163,216 |
| | 1,167,843 |
| | 1,121,880 |
| | 1,139,899 |
| | 1,188,787 |
|
| Stockholders’ (deficit) equity | | (108,895 | ) | | (140,633 | ) | | (107,793 | ) | | 137,420 |
| | 231,473 |
|
| Cash flow data | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 294,286 |
| | $ | 95,828 |
| | $ | 131,711 |
| | $ | 124,587 |
| | $ | 24,531 |
|
| Net cash used in investing activities | | (123,350 | ) | | (109,979 | ) | | (88,054 | ) | | (85,549 | ) | | (1,085,847 | ) |
Net cash provided by (used in) financing activities | | 11 |
| | 22,394 |
| | (24,922 | ) | | (24,551 | ) | | 1,037,423 |
|
| |
(1) | On January 1, 2018, we adopted ASC 606 using the modified retrospective method, which resulted in the recording of an immaterial cumulative adjustment in the amount of approximately $4.4 million to accumulated deficit as of the adoption date. Our prior period results were not recast to reflect the new revenue recognition standard under the modified retrospective method. |
| |
(2) | During 2017, we refinanced our senior secured term loan, senior secured notes and senior unsecured notes, which resulted in approximately $51.8 million of loss on extinguishment of debt. |
| |
(3) | During 2016, the Games reporting unit had a goodwill impairment of $146.3 million. |
| |
(4) | 2015 amounts include a full year of financial results for Everi Games. |
| |
(5) | During 2015, the Games reporting unit had a goodwill impairment of $75.0 million. |
| |
(6) | We reclassified $23.7 million of debt issuance costs related to our outstanding debt from the non-current portion of other assets to contra-liabilities included in long-term debt as of December 31, 2015 in connection with our retrospective adoption of Accounting Standards Update (“ASU”) No. 2015-03 in 2016. This reclassification decreased the December 31, 2015 balance of both total assets and total borrowings. |
| |
(7) | 2014 amounts affected by the Merger for which total merger consideration of $1.1 billion on December 19, 2014 was paid and results of operations were recorded from the date of acquisition through December 31, 2014. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with “Item 1. Business,” “Item 6. Selected Financial Data,”Business” and our Financial Statements included elsewhere in this Annual Report on Form 10-K and the information included in our other filings with the SEC.
This discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosure and information contained and referenced in “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” included elsewhere in this Annual Report on Form 10-K.
Overview
Everi is a leading supplier of imaginative entertainment and trusted technology solutions for the casino and digital gaming industry. We provideEveri’s mission is to lead the gaming industry through the power of people, imagination and technology. Focused on player engagement and assisting our casino operators withcustomers operate more efficiently, the Company develops entertaining game content and gaming machines, gaming systems and services for land-based and iGaming operators. The Company is also a diverse portfoliopreeminent and comprehensive provider of products including innovative gaming machinestrusted financial technology solutions that power the casino floor while improving operational efficiencies and fulfilling regulatory compliance requirements, including products and services that facilitate convenient and secure cash and cashless financial transactions, self-service player loyalty tools and applications, and regulatory and intelligence software.
Everi reports its financial performance, and organizes and manages its operations, across the following two business segments: (i) Games and (ii) Financial Technology Solutions (“FinTech”).
Everi Games provides gaming operators with gaming technology and entertainment products and services, including: (i) gaming machines, primarily comprising Class II and Class III slot machines placed under participation or fixed-fee lease arrangements or sold to casino customers; (ii) providing and maintaining the central determinant systems for the video lottery terminals (“VLTs”) installed in the State of New York and similar technology in certain tribal jurisdictions; and (iii) business-to-business (“B2B”) digital online gaming activities.
Everi FinTech provides gaming operators with financial technology products and services, including: (i) financial access and related services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels; (ii) loyalty and marketing software and tools, regulatory and compliance (“RegTech”) software solutions, other information-related products and services, and hardware maintenance services; and (iii) associated casino patron self-service hardware that utilizes our financial access, software and other services. Our services operate as part of an end-to-end security suite to protect against cyber-related attacks and maintain the necessary secured environments to maintain compliance with applicable regulatory requirements. These solutions include: access to cash and cashless funding at gaming facilities via Automated Teller Machine (“ATM”) debit withdrawals, credit card financial access transactions, and point of sale (“POS”) debit card purchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check warranty services, self-service ATMs and fully integrated kiosk and maintenance services; self-service loyalty tools and promotion management software; compliance, audit, and data software; casino credit data and reporting services; marketing and promotional offering subscription-based services; and other ancillary offerings.
With respect to our FinTech business, we have made the following updates to certain of our financial statement descriptions, where applicable: (i) “Cash access services” has become “Financial access services”; (ii) “ATM” has been renamed “Funds dispensed”; (iii) “Equipment” has been changed to “Hardware”; and (iv) “Information services and other” has been revised to “Software and other.” These naming convention changes better represent how our business has evolved.
Impact of the Coronavirus Disease 2019 (“COVID-19”) Pandemic
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, temporarily lowered equity market valuations, created significant volatility in the financial markets, increased unemployment levels, and caused temporary, and in certain cases, permanent closures of many businesses. The initial impacts from the COVID-19 pandemic have begun to subside with certain aspects of the global economy, equity market valuations, and increased unemployment levels showing signs of recovery. The gaming industry was not immune to these factors as our casino customers closed their gaming establishments in the first quarter of 2020, with many beginning to reopen their operations over the remainder of 2020 and throughout 2021. As a result, our operations experienced significant disruptions in the first three quarters of 2020. At the immediate onset of the COVID-19 pandemic, we were affected by various measures, including, but not limited to: the institution of social distancing and sheltering-in-place requirements in many states and communities where we operate, which significantly impacted demand for our products and services, and resulted in office closures, the furlough of a majority of our employees, the implementation of temporary base salary reductions for our employees and the implementation of a work-from-home policy.
Since the onset of COVID-19, we have implemented measures to mitigate our exposure throughout the global pandemic. While there may be further uncertainty facing our customers as a result of COVID-19, we continue to evaluate our business strategies and the impacts of the global pandemic on our results of operations and financial condition and make business decisions to
mitigate further risk. While gaming industry conditions have improved significantly in 2021 compared to 2020, it is unclear if the customer volumes experienced will continue to exceed pre-COVID levels. Resurgences of COVID-19 and its variants could result in reduced patron demand for gaming and could also result in new closures of casinos by the various governmental and regulatory agencies overseeing our customers, or even by the casino operators themselves, in an effort to contain the COVID-19 global pandemic, or mitigate its impact and the effect of vaccines on these matters.
As of December 31, 2021, excluding the few casinos that have permanently closed, there are only a minimal number of customer sites, located primarily in Canada and other international markets, whose operations still remain closed. Our revenues, cash flows, and liquidity for the fourth quarter of 2021 exceeded the fourth quarter of 2020, which were significantly impacted by the effects of COVID-19. At the onset of the pandemic, our customers implemented protocols intended to protect their patrons and guests from potential COVID-19 exposure and re-establish customer confidence in the gaming and hospitality industry. These measures included enhanced sanitization, limitations on public gathering and casino operationalcapacity, patron social distancing requirements, and management systems that include comprehensive end-to-end payments solutions, critical intelligence offerings, and gaming operations efficiency technologies. Everi’s mission is to be a transformative force forlimitations on casino operations by facilitating memorable player experiences, delivering reliable protection and security,amenities, which have limited the number of patrons that are able or who desire to attend these venues. This has also impacted the pace at which demand for our products and strivingservices rebounds.
With some limitations still in effect, we expect that demand and supply for our products and services may be tempered in the short-term, to the extent gaming activity decreases at our customers’ locations or fails to increase at expected rates and to the extent our customers decide to continue to restrict their capital spending as a result of uncertainty in the industry, or supply chain disruptions that might impact customer satisfactiondeliveries or otherwise. As a result, we continue to monitor and operational excellence. We are divided into two primary business segments: “Everi Games” or “Games”manage liquidity levels and “Everi FinTech” or “FinTech”.
we may, from time to time, evaluate available capital resource alternatives on acceptable terms to provide additional financial flexibility.
The impact of the COVID-19 pandemic also exacerbates the risks disclosed in the Annual Report, including, but not limited to: our ability to comply with the terms of our indebtedness; our ability to generate revenues, earn profits and maintain adequate liquidity; our ability to service existing and attract new customers and maintain our overall competitiveness in the market; the potential for significant fluctuations in demand for our products and services; overall trends in the gaming industry impacting our business; and potential volatility in our stock price, among other concerns such as cybersecurity exposure.
Additional Items Impacting Comparability of Results of Operations and Financial Condition
Our Financial Statements included in this report that present our financial condition and results of operations reflect the following transactions and events:additional items impacting the comparability of results of operations:
On January 1, 2018,•In 2021, we adopted ASC 606 using the modified retrospective method,decreased our valuation allowance for our deferred tax assets by approximately $67.9 million, of which requires us to evaluate whether any cumulative adjustment is required to be recorded to retained earnings (or accumulated deficit) as a result of applying the provisions set forth under ASC 606 for any existing arrangements not yet completed as of the adoption date of January 1, 2018. As a result, we recorded an immaterial cumulative adjustment in the amount of approximately $4.4$63.5 million to accumulated deficit as of the adoption date. Revenues and costs related to certain contracts are recognized at a point in time under ASC 606 as the performance obligations related to certain types of sales are satisfied; whereas, previously these revenues and costs were recognized over a period of time under ASC 605.
Further, we previously reported costs and expenses related to our cash access services - which include commission expenses payable to casino operators, interchange fees payable to the network associations, and processing and related costs payable to other third party partners - as a cost of revenues. Under ASC 606, such costs are reflected as reductions to cash access services revenues on a net basis of presentation, since we do not control the cash advance and ATM services provided to a customer and, therefore, are acting as an agent whose performance obligation is to arrange for the provision of these services. In addition, we previously reported certain costs incurred in connection with our WAP platform, consisting primarily of the jackpot expenses, as cost of revenues. Under ASC 606, such costs are reflected as reductions to gaming operations revenues on a net basis of presentation. Our prior period results were not recast to reflect the new revenue recognition standard under the modified retrospective method.
Duringwas released during the fourth quarter of 2017,2021, due to the removal of the full valuation allowance on our federal and certain states deferred tax assets.
•During the third quarter of 2021, we completed a refinancing of our prior credit facilities and entered into a credit agreement and a letter of credit (the “New Credit Agreement”). The New Credit Agreement provides for: (i) a seven-year $600 million senior secured term loan due 2028 issued at 99.75% of par (the “New Term Loan”); and (ii) a $125 million senior secured revolving credit facility due 2026, which was undrawn at closing (the “New Revolver” and together with the New Term Loan, the “New Credit Facilities”). The fees associated with the New Credit Facilities were approximately $13.9 million, which included discounts of approximately $1.5 million.
• During the third quarter of 2021, we completed a refinancing of our 7.50% senior unsecured notes due in 2025 (the “2017 Unsecured Notes”) with an offering of $400 million in aggregate principal, issued at par, of 5.00% senior unsecured notes due 2029 (the “2021 Unsecured Notes”). The fees associated with the 2021 Unsecured Notes included debt issuance costs of approximately $5.9 million.
• During the third quarter of 2021, in connection with these refinancing and repayment activities, the total fees were approximately $40.6 million, comprised of approximately $20.8 million of early redemption penalties and make-whole interest associated with the prior debt instruments and approximately $19.8 million of capitalized debt issuance costs attributable to the new debt instruments.
• During the third quarter of 2021, in connection with these refinancing and repayment activities, we recorded a $37.2 million loss on extinguishment of debt consisting of a $26.3approximately $34.4 million, comprised of cash charges of approximately $20.8 million for prepayment penalties and make-whole premiuminterest and non-cash charges of approximately $13.6 million related to the satisfaction and redemption of the 2014 Unsecured Notes (defined herein) and approximately $10.9 million for the write-off of related unamortized debt issuance costs and fees. An additional $14.6 million loss on extinguishment of debt was incurred indiscounts associated with the second quarter of 2017 forprior credit facility (the “Prior Term Loan”), the unamortized deferred financing fees and discounts related to the extinguishedprior incremental term loan under the Prior Credit Facilityfacility (the “Prior Incremental Term Loan”) and the redeemed Refinanced Secured Notes (both defined herein). Repricing of the New Term Loan Facility (defined herein) during the second quarter of 2018 did not result in a material loss on extinguishment of debt.2017 Unsecured Notes.
In October of each year, we conduct our annual impairment test for our reporting units. Based on the results of our testing, there was no goodwill impairment for 2018 and 2017. We recorded goodwill impairment of approximately $146.3 million related to our Games segment in 2016.
The income tax benefit was $9.7 million for the year ended December 31, 2018, as compared to an income tax benefit of $20.2 million in the prior year period. The income tax benefit for the year ended December 31, 2018 reflected an effective income tax rate of negative 367.0%, which was less than the statutory federal rate of 21.0% primarily due to a decrease in the valuation allowance for deferred tax assets and an increase in a federal research credit. The income tax benefit for the year ended December 31, 2017 reflected an effective income tax rate of 28.0%, which was less than the statutory federal rate of 35.0%, primarily due to a decrease in the carrying value of our deferred tax liabilities as a result of the enactment of the 2017 Tax Act, offset by an increase in our valuation allowance for deferred tax assets.
As a result of these events, together with the above transactions and events, theimpacts of COVID-19, our results of operations and earnings per share in the periods covered by our Financial Statements may not be directly comparable.
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 FinTech businesses. Below we have identified a number of trends that could have a material impact on our business:
•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, gaming establishment capital budgets, and ultimately the demand for new gaming equipment, which impacts both of our segments.
•The total North American installed slot base was slightly higherlower at the end of 2020 than for 2019, due to reduced capital spending and equipment removals by casino operators due to the impact of COVID-19 restrictions and casino closures. The total base had previously increased in 2018 whenboth 2019 and 2018. In 2021, the North American installed base increased modestly compared to 20172020 and 2016. Wewe expect flatslight to moderate growth in the forward replacement cycle for EGMs,slot machines in 2022 and in the total installed base compared to 2021, which hascould have a directpositive impact on the operations of our Games segment.
The volume of sales and installations tosegment while new machine demand associated with new casino openings and new marketmajor expansions along with replacementsis likely to the existing gaming operatorsbe relatively flat year-over-year in North America is expected to continue to trend slightly upward in 2019. This could2022.
positively impact the overall demand for slot machines in North America during 2019, which in turn may contribute to improved operations of our Games segment.
•We face continued competition from smaller competitors in the gaming cashfinancial access market, and face additional competitionas well as from larger gaming equipment manufacturers and systems providers. This increased competition has resulted incontinues to contribute to ongoing pricing pressure for both our Games and FinTech businesses.
Governmental oversight•Concerns related to COVID-19 have increased interest in self-service and cashless alternatives by casino operators and casino patrons. With the costintroduction of transactionour cashless, touchless CashClub Wallet solution, this could have a positive impact on our FinTech segment, but could also result in added competition from new competitors.
•Disruption of global supply chains experienced in 2021 related to COVID-19 may negatively impact the anticipated increase in sales of gaming equipment in the beginning of 2022. No material worsening of supply chain disruption is expected and improvements could have a positive impact on our ability to maintain year over year growth in sales of gaming equipment.
•Transaction processing and related fees to the consumer hashave increased in recent years. We expect the financial services and payments industry to respond to these legislative acts by changing other fees and costs, whichchanges, including in ways that may negatively impact our FinTech business in the future.
•Governmental and regulatory oversight on cash transactions, financial services, and payments processing may provide continued motivation for gaming establishments to consider additional products and services that facilitate regulatory compliance and operational efficiencies.
•We derive a significant portion of our revenue from Native American tribal customers, and our ability to effectively operate in Native American gaming markets is vulnerable to legal and regulatory uncertainties, including the ability to enforce contractual rights on Native American land.
•Casino operators continue to try to broaden their appeal by focusing on investments in the addition of non-gaming amenities tofor their facilities, which could impact casino operator’s capital allocationallocations for games and payment solution products and services that impact both of our operating segments.
Impact•Inflation has increased significantly over prior years, including as a result of ASC Topic 842recovery from the negative impacts of COVID-19.This is placing pressure on the Comparability of Our Results of Operationscompetitive wages, and will likely lead to increases in Future Periods
As discussed in “Note 2 — Basis of Presentationwages and Summary of Significant Accounting Policies – Recent Accounting Guidance – Recent Accounting Guidance Not Yet Adopted,” in Item 8: Financial Statementsother costs incurred to develop produce and Supplementary Data, on January 1, 2019, the Company implemented the new lease accounting standard promulgated by the FASB. The Company adopted ASC 842 using the adoption date method. While we are finalizing the adoption procedures, we expect that the standard will have a material impact onship our Balance Sheets, however, we do not expect that the standard will have a material impact on our Statements of Income (Loss). The most significant impact will be the recognition of right-of-use (“ROU”) assets and lease liabilities of operating leases, which are expected to be within a range of approximately 1% to 2% of total assets. We elected the practical expedients offered in the guidance, including the transition package.products.
Operating Segments
Results of Operations
Year ended December 31, 20182021 compared to the year ended December 31, 20172020
The following table presents our Results of Operations as reported for the year ended December 31, 20182021 compared to the year ended December 31, 2017 as reported and as adjusted for the retrospective impact of ASC 606 to reflect the prior period results on a net basis of presentation2020 (amounts in thousands)*:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | |
| | | December 31, 2021 | | December 31, 2020 | | 2021 vs 2020 |
| | | $ | | % | | $ | | % | | $ | | % |
| Revenues | | | | | | | | | | | | |
| Games revenues | | | | | | | | | | | | |
| Gaming operations | | $ | 272,767 | | | 41 | % | | $ | 156,199 | | | 41 | % | | $ | 116,568 | | | 75 | % |
| Gaming equipment and systems | | 103,844 | | | 16 | % | | 44,006 | | | 11 | % | | 59,838 | | | 136 | % |
| Gaming other | | 118 | | | — | % | | 96 | | | — | % | | 22 | | | 23 | % |
| Games total revenues | | 376,729 | | | 57 | % | | 200,301 | | | 52 | % | | 176,428 | | | 88 | % |
| FinTech revenues | | | | | | | | | | | | |
| Financial access services | | 178,019 | | | 28 | % | | 112,035 | | | 30 | % | | 65,984 | | | 59 | % |
| Software and other | | 67,797 | | | 10 | % | | 47,041 | | | 12 | % | | 20,756 | | | 44 | % |
| Hardware | | 37,840 | | | 6 | % | | 24,297 | | | 6 | % | | 13,543 | | | 56 | % |
| FinTech total revenues | | 283,656 | | | 43 | % | | 183,373 | | | 48 | % | | 100,283 | | | 55 | % |
| Total revenues | | 660,385 | | | 100 | % | | 383,674 | | | 100 | % | | 276,711 | | | 72 | % |
| Costs and expenses | | | | | | | | | | | | |
Games cost of revenues (1) | | | | | | | | | | | | |
| Gaming operations | | 21,663 | | | 3 | % | | 15,192 | | | 4 | % | | 6,471 | | | 43 | % |
| Gaming equipment and systems | | 60,093 | | | 9 | % | | 25,680 | | | 7 | % | | 34,413 | | | 134 | % |
| Gaming other | | — | | | — | % | | 456 | | | — | % | | (456) | | | (100) | % |
| Games total cost of revenues | | 81,756 | | | 12 | % | | 41,328 | | | 11 | % | | 40,428 | | | 98 | % |
FinTech cost of revenues (1) | | | | | | | | | | | | |
| Financial access services | | 6,779 | | | 1 | % | | 6,755 | | | 2 | % | | 24 | | | — | % |
| Software and other | | 4,129 | | | — | % | | 3,029 | | | 1 | % | | 1,100 | | | 36 | % |
| Hardware | | 22,785 | | | 3 | % | | 14,724 | | | 3 | % | | 8,061 | | | 55 | % |
| FinTech total cost of revenues | | 33,693 | | | 5 | % | | 24,508 | | | 6 | % | | 9,185 | | | 37 | % |
| Operating expenses | | 188,900 | | | 29 | % | | 152,546 | | | 40 | % | | 36,354 | | | 24 | % |
| Research and development | | 39,051 | | | 6 | % | | 27,943 | | | 7 | % | | 11,108 | | | 40 | % |
| Depreciation | | 61,487 | | | 9 | % | | 67,459 | | | 17 | % | | (5,972) | | | (9) | % |
| Amortization | | 57,987 | | | 9 | % | | 75,305 | | | 20 | % | | (17,318) | | | (23) | % |
| Total costs and expenses | | 462,874 | | | 70 | % | | 389,089 | | | 101 | % | | 73,785 | | | 19 | % |
| Operating income (loss) | | 197,511 | | | 30 | % | | (5,415) | | | (1) | % | | 202,926 | | | 3,747 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | 2018 As Reported vs |
| | | December 31, 2018 | | December 31, 2017 | | 2017 As Adjusted |
| | | $ | | % | | $ | | % | | $ | | $ | | % | | $ | | % |
| | | As Reported | | As Reported | Adjustments | As Adjusted | | | | |
| Revenues | | |
| | |
| | |
| | |
| | | | | | | | |
| | |
|
| Games revenues | |
|
| | | | | | | | | | | | | |
|
| |
|
|
| Gaming operations | | $ | 168,146 |
| | 36 | % | | $ | 148,654 |
| | 15 | % | | $ | (565 | ) | | $ | 148,089 |
| | 36 | % | | $ | 20,057 |
| | 14 | % |
| Gaming equipment and systems | | 87,038 |
| | 18 | % | | 70,118 |
| | 7 | % | | — |
| | 70,118 |
| | 17 | % | | 16,920 |
| | 24 | % |
| Gaming other | | 3,794 |
| | 1 | % | | 4,005 |
| | 1 | % | | — |
| | 4,005 |
| | 1 | % | | (211 | ) | | (5 | )% |
| Games total revenues | | 258,978 |
| | 55 | % | | 222,777 |
| | 23 | % | | (565 | ) | | 222,212 |
| | 54 | % | | 36,766 |
| | 17 | % |
| | | | | | | | | | | | | | | | | | | |
| FinTech revenues | | | | | | | | | | | | | | | | | | |
| Cash access services | | 156,806 |
| | 34 | % | | 707,222 |
| | 73 | % | | (563,637 | ) | | 143,585 |
| | 35 | % | | 13,221 |
| | 9 | % |
| Equipment | | 20,977 |
| | 4 | % | | 13,258 |
| | 1 | % | | — |
| | 13,258 |
| | 3 | % | | 7,719 |
| | 58 | % |
| Information services and other | | 32,754 |
| | 7 | % | | 31,691 |
| | 3 | % | | — |
| | 31,691 |
| | 8 | % | | 1,063 |
| | 3 | % |
| FinTech total revenues | | 210,537 |
| | 45 | % | | 752,171 |
| | 77 | % | | (563,637 | ) | | 188,534 |
| | 46 | % | | 22,003 |
| | 12 | % |
| | |
| | | |
| | | | | | | | | | | | |
| Total revenues | | 469,515 |
| | 100 | % | | 974,948 |
| | 100 | % | | (564,202 | ) | | 410,746 |
| | 100 | % | | 58,769 |
| | 14 | % |
| | | |
| | |
| | |
| | |
| | | | | | | | |
| | |
|
| Costs and expenses | |
|
| | | | | | | | | | | | | |
|
| |
|
|
Games cost of revenues(1) | | | | | | | | | | | | | | | | | | |
| Gaming operations | | 17,603 |
| | 4 | % | | 15,741 |
| | 2 | % | | (565 | ) | | 15,176 |
| | 4 | % | | 2,427 |
| | 16 | % |
| Gaming equipment and systems | | 47,121 |
| | 9 | % | | 35,707 |
| | 3 | % | | — |
| | 35,707 |
| | 8 | % | | 11,414 |
| | 32 | % |
| Gaming other | | 3,285 |
| | 1 | % | | 3,247 |
| | 1 | % | | — |
| | 3,247 |
| | 1 | % | | 38 |
| | 1 | % |
| Games total cost of revenues | | 68,009 |
| | 14 | % | | 54,695 |
| | 6 | % | | (565 | ) | | 54,130 |
| | 13 | % | | 13,879 |
| | 26 | % |
| | | | | | | | | | | | | | | | | | | |
FinTech cost of revenues(1) | | | | | | | | | | | | | | | | | | |
| Cash access services | | 9,717 |
| | 2 | % | | 572,880 |
| | 59 | % | | (563,637 | ) | | 9,243 |
| | 2 | % | | 474 |
| | 5 | % |
| Equipment | | 12,601 |
| | 3 | % | | 7,717 |
| | 1 | % | | — |
| | 7,717 |
| | 2 | % | | 4,884 |
| | 63 | % |
| Information services and other | | 4,110 |
| | 1 | % | | 3,253 |
| | — | % | | — |
| | 3,253 |
| | 1 | % | | 857 |
| | 26 | % |
| FinTech total cost of revenues | | 26,428 |
| | 6 | % | | 583,850 |
| | 60 | % | | (563,637 | ) | | 20,213 |
| | 5 | % | | 6,215 |
| | 31 | % |
| | | | | | | | | | | | | | | | | | | |
| Operating expenses | | 142,298 |
| | 30 | % | | 118,935 |
| | 12 | % | | — |
| | 118,935 |
| | 29 | % | | 23,363 |
| | 20 | % |
| Research and development | | 20,497 |
| | 4 | % | | 18,862 |
| | 2 | % | | — |
| | 18,862 |
| | 5 | % | | 1,635 |
| | 9 | % |
| Depreciation | | 61,225 |
| | 14 | % | | 47,282 |
| | 5 | % | | — |
| | 47,282 |
| | 11 | % | | 13,943 |
| | 29 | % |
| Amortization | | 65,245 |
| | 14 | % | | 69,505 |
| | 7 | % | | — |
| | 69,505 |
| | 17 | % | | (4,260 | ) | | (6 | )% |
| Total costs and expenses | | 383,702 |
| | 82 | % | | 893,129 |
| | 92 | % | | (564,202 | ) | | 328,927 |
| | 80 | % | | 54,775 |
| | 17 | % |
| Operating income | | 85,813 |
| | 18 | % | | 81,819 |
| | 8 | % | | — |
| | 81,819 |
| | 20 | % | | 3,994 |
| | 5 | % |
* Rounding may cause variances.
(1) Exclusive of depreciation and amortization.
| | | | | Year Ended | | 2018 As Reported vs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2018 | | December 31, 2017 | | 2017 As Adjusted | | Year Ended | | |
| | | $ | | % | | $ | | % | | $ | | $ | | % | | $ | | % | | December 31, 2021 | | December 31, 2020 | | 2021 vs 2020 |
| | | As Reported | | As Reported | Adjustments | As Adjusted | | | | | | | $ | | % | | $ | | % | | $ | | % |
| Other expenses | | | | | | | | | | | | | | | | | | | Other expenses | | | | | | | | | | | | |
| Interest expense, net of interest income | | 83,001 |
| | 18 | % | | 102,136 |
| | 11 | % | | — |
| | 102,136 |
| | 24 | % | | (19,135 | ) | | (19 | )% | Interest expense, net of interest income | | 62,097 | | | 9 | % | | 74,564 | | | 19 | % | | (12,467) | | | (17) | % |
| Loss on extinguishment of debt | | 166 |
| | — | % | | 51,750 |
| | 5 | % | | — |
| | 51,750 |
| | 13 | % | | (51,584 | ) | | (100 | )% | Loss on extinguishment of debt | | 34,389 | | | 5 | % | | 7,457 | | | 2 | % | | 26,932 | | | 361 | % |
| Total other expenses | | 83,167 |
| | 18 | % | | 153,886 |
| | 16 | % | | — |
| | 153,886 |
| | 37 | % | | (70,719 | ) | | (46 | )% | Total other expenses | | 96,486 | | | 15 | % | | 82,021 | | | 21 | % | | 14,465 | | | 18 | % |
| | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income tax | | 2,646 |
| | 1 | % | | (72,067 | ) | | (7 | )% | | — |
| | (72,067 | ) | | (18 | )% | | 74,713 |
| | (104 | )% | Income (loss) before income tax | | 101,025 | | | 15 | % | | (87,436) | | | (23) | % | | 188,461 | | | 216 | % |
| | | | | | | | | | | | | | | | | | | | |
| Income tax (benefit) provision | | (9,710 | ) | | (2 | )% | | (20,164 | ) | | (2 | )% | | — |
| | (20,164 | ) | | (5 | )% | | 10,454 |
| | (52 | )% | |
| Income tax benefit | | Income tax benefit | | (51,900) | | | (8) | % | | (5,756) | | | (2) | % | | 46,144 | | | 802 | % |
| Net income (loss) | | $ | 12,356 |
| | 3 | % | | $ | (51,903 | ) | | (5 | )% | | — |
| | $ | (51,903 | ) | | (13 | )% | | $ | 64,259 |
| | 124 | % | Net income (loss) | | $ | 152,925 | | | 23 | % | | $ | (81,680) | | | (21) | % | | $ | 234,605 | | | 287 | % |
* Rounding may cause variances.
(1) ExclusiveWe continued to experience a certain level of depreciationrecovery from the global pandemic for the year ended December 31, 2021, and amortization.as a result, our revenues, costs and expenses were stronger than expected in the current year, as compared to the prior year, which were negatively impacted at the onset of COVID-19. As of December 31, 2021, excluding the few casinos that have permanently closed, there are only a minimal number of customer sites, located primarily in Canada and other international markets, whose operations still remain closed.
Total Revenues
Total revenues increased by $58.8approximately $276.7 million, or 14%72%, to $469.5approximately $660.4 million for the year ended December 31, 2018,2021, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606. year. This was primarily due to the higher Games and FinTech revenues.revenues described below.
Games revenues increased by $36.8approximately $176.4 million, or 17%88%, to $259.0approximately $376.7 million for the year ended December 31, 2018,2021, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606. year. This was primarily due to contributions from our gaming operations revenues that included: (i) an increase in both unit salesthe total number of units in our installed base and average selling prices and an increase in the average daily win per unit, onparticularly associated with a greater mix of premium units; (ii) an increase in our New York Lottery results as business reopened in late 2020 and operating restrictions to mitigate the impact of COVID-19 were reduced; and (iii) greater B2B digital and interactive results as we began to provide our services to new markets. In addition, we had an increase in the number of machines sold with a higher installed base of leased machines.average selling price per unit from our gaming equipment revenues.
FinTech revenues increased by $22.0approximately $100.3 million, or 12%55%, to $210.5approximately $283.7 million for the year ended December 31, 2018,2021, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606.year. This was primarily due to highercontributions that included: (i) an increase in both transaction and dollar volumes in base, new and renewed business from cashour financial access services revenues; (ii) higher software sales and increasedsupport related service fees attributable to our compliance, Central Credit, kiosk and loyalty solutions from our software and other revenues; and (iii) an increase in unit sales of both our kiosk and loyalty equipment sales.with a mix of more higher priced loyalty equipment sold from our hardware revenues.
Costs and Expenses
Total costs and expenses increased by approximately $73.8 million, or 19%, to approximately $462.9 million for the year ended December 31, 2021, as compared to the prior year. This was primarily due to higher Games and FinTech costs and expenses described below.
Games cost of revenues increased by $13.9approximately $40.4 million, or 26%98%, to $68.0approximately $81.8 million for the year ended December 31, 2018,2021, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606.year. This was primarily due to the additional variable costs associated with the additionalhigher unit sales from our gaming equipment and an increase in costs related to our leased machines as a result of the increase in revenue.systems revenues.
FinTech cost of revenues increased by $6.2approximately $9.2 million, or 31%37%, to $26.4approximately $33.7 million for the year ended December 31, 2018,2021, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606.year. This was primarily due to the additional variable costs associated with the additional equipment sales.higher unit sales from our hardware revenues, partially offset by reduced warranty expense from our check warranty solutions from our financial access services.
Operating expenses increased by $23.4approximately $36.4 million, or 20%24%, to $142.3approximately $188.9 million for the year ended December 31, 2018,2021, as compared to the same periodprior year. This was primarily due to higher payroll and related expenses to support our Games and FinTech businesses. In addition, the increase was associated with the prior year as many of the Company’s employees were still on furlough, and those that remained were on reduced pay levels during that time period. This increase in operating expenses was partially offset by the recovery of a settlement from a dispute with an insurance carrier for a payment associated with the Fair and Accurate Credit Transactions Act legal matter of approximately $1.9 million, which was offset by approximately $0.8 million of additional legal fees related to the settlement and collection of this recovery for our FinTech segment.
Research and development expense increased by approximately $11.1 million, or 40%, to approximately $39.1 million for the year ended December 31, 2021, as compared to the prior year. This was primarily due to higher payroll and related expenses, consulting fees, advertising, promotioncertification charges and trade showtesting costs and software license fees for bothfrom our Games and FinTech segments. Our Games segment also incurred an increase in costs related to inventory disposals and leased assets impairment charges.
Research and development increasedDepreciation expense decreased by $1.6approximately $6.0 million, or 9%, to $20.5approximately $61.5 million for the year ended December 31, 2018,2021, as compared to the same periodprior year. This was primarily associated with certain of our fixed assets that were fully depreciated in our Games segment.
Amortization expense decreased by approximately $17.3 million, or 23%, to approximately $58.0 million for the year ended December 31, 2021, as compared to the prior year. This was primarily due to higher payroll and related expenses for our Games segment.
Depreciation increased by $13.9 million, or 29%, to $61.2 million forcertain intangible assets recorded in connection with the year ended December 31, 2018, as compared to the prior year period. This was primarily driven by the increase in the installed base of leased gaming machines and adjustments to the remaining useful lives of certainacquisition of the gaming fixed assets related to our Games segment.
Amortization decreased by $4.3 million, or 6%, to $65.2 million for the year ended December 31, 2018, as compared to the prior year period. This was primarily due to assetsbusiness being fully amortized related to both our Games and FinTech segments.
amortized.
Primarily as a result of the factors described above, our operating income increased by $4.0approximately $202.9 million, or 5%3,747%, to $85.8and resulted in an operating income of approximately $197.5 million for the year ended December 31, 2018,2021, as compared to the prior year as adjusted for the net versus gross retrospective impact of ASC 606.year. The operating income margin decreased from 20% to 18%was 30% for the year ended December 31, 2018, as adjusted2021 compared to an operating loss margin of 1% for the net versus gross retrospective impact of ASC 606.prior year.
Interest expense, net of interest income, decreased by $19.1approximately $12.5 million, or 19%17%, to $83.0approximately $62.1 million for the year ended December 31, 2018,2021, as compared to the prior year period. year. This was primarily due to lower debt balances and more favorable variable interest expenserates in effect for certain of our debt instruments and a reduction in the LIBOR floor on our Prior Term Loan as a result of our debta repricing transaction in February 2021, a refinancing transactionsof the 2017 Unsecured Notes in 2017 and an additional repricingJuly 2021 with the issuance of our 2021 Unsecured Notes and entering into the New Term Loan Facilities in 2018, partially offset by an increase in our cash usage fees in connection with our commercial cash arrangements and the impact of the London Interbank Offered Rate (“LIBOR”) increases during the past year.August 2021.
Loss on extinguishment of debt was $0.2increased by $26.9 million, or 361%, to approximately $34.4 million for the year ended December 31, 2018 in connection with the repricing transaction completed in May 20182021, as compared to $51.8the prior year. This was primarily due to increased loss from the refinancing of our 2017 Unsecured Notes in July 2021 and entering into our New Term Loan in August 2021.
Income tax benefit increased by $46.1 million, or 802%, to approximately $51.9 million for the year ended December 31, 2017, which consisted of $26.3 million make-whole premium related to the satisfaction and redemption of the 2014 Unsecured Notes, approximately $10.9 million for the write-off of related unamortized debt issuance costs and fees in the fourth quarter of 2017 and approximately $14.6 million for the unamortized deferred financing fees and discounts related to our extinguished term loan under the Prior Credit Facility and the redeemed Refinanced Secured Notes in the second quarter of 2017.
Income tax benefit was $9.7 million for the year ended December 31, 2018,2021, as compared to
an income tax benefit of $20.2 million in the prior
year period.year. The income tax benefit for the year ended December 31,
20182021 reflected an effective income tax rate of negative
367.0%51.4%, which was less than the statutory federal rate of 21.0%, primarily due to a decrease in our valuation allowance
foras we removed the full valuation allowance on our federal and certain states deferred tax
assetsassets. For additional information, refer to “Part II — Item 8 — Financial Statements and a research credit. The decrease in our valuation allowance is primarily dueSupplementary Data — Notes to the net operating loss during the year and the interest deduction limitation (deferred tax assets) which can be offset against our indefinite lived deferred tax liabilities. The tax benefit for the year ended December 31, 2017 reflected an effective income tax rate of 28.0%, which was less than the statutory federal rate of 35.0%, primarily due to a decrease in the carrying value of our deferred tax liabilities as a result of the enactment of the 2017 Tax Act, offset by an increase in the valuation allowance for deferred tax assets.Consolidated Financial Statements — Note 17 — Income Taxes”.Primarily as a result of the foregoing, our net loss decreased by $64.3 million, or 124%, to afactors described above, we had net income of $12.4approximately $152.9 million for the year ended December 31, 2018,2021, as compared to thea prior year period.net loss of approximately $81.7 million.
Year ended December 31, 20172020 compared to year ended December 31, 2016:2019:
The following table presents our Results of Operations as reported for the year ended December 31, 20172020 compared to the year ended December 31, 2016 as reported and as adjusted for the retrospective impact of ASC 606 to reflect the prior period results on a net basis of presentation2019 (amounts in thousands)*:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | |
| | | December 31, 2020 | | December 31, 2019 | | 2020 vs 2019 |
| | | $ | | % | | $ | | % | | $ | | % |
| Revenues | | | | | | | | | | | | |
| Games revenues | | | | | | | | | | | | |
| Gaming operations | | $ | 156,199 | | | 41 | % | | $ | 188,874 | | | 35 | % | | $ | (32,675) | | | (17) | % |
| Gaming equipment and systems | | 44,006 | | | 11 | % | | 90,919 | | | 17 | % | | (46,913) | | | (52) | % |
| Gaming other | | 96 | | | — | % | | 3,326 | | | 1 | % | | (3,230) | | | (97) | % |
| Games total revenues | | 200,301 | | | 52 | % | | 283,119 | | | 53 | % | | (82,818) | | | (29) | % |
| FinTech revenues | | | | | | | | | | | | |
| Financial access services | | 112,035 | | | 30 | % | | 164,741 | | | 31 | % | | (52,706) | | | (32) | % |
| Software and other | | 47,041 | | | 12 | % | | 47,502 | | | 9 | % | | (461) | | | (1) | % |
| Hardware | | 24,297 | | | 6 | % | | 37,865 | | | 7 | % | | (13,568) | | | (36) | % |
| FinTech total revenues | | 183,373 | | | 48 | % | | 250,108 | | | 47 | % | | (66,735) | | | (27) | % |
| Total revenues | | 383,674 | | | 100 | % | | 533,227 | | | 100 | % | | (149,553) | | | (28) | % |
| Costs and expenses | | | | | | | | | | | | |
Games cost of revenues (1) | | | | | | | | | | | | |
| Gaming operations | | 15,192 | | | 4 | % | | 18,043 | | | 3 | % | | (2,851) | | | (16) | % |
| Gaming equipment and systems | | 25,680 | | | 7 | % | | 50,826 | | | 10 | % | | (25,146) | | | (49) | % |
| Gaming other | | 456 | | | — | % | | 3,025 | | | — | % | | (2,569) | | | (85) | % |
| Games total cost of revenues | | 41,328 | | | 11 | % | | 71,894 | | | 13 | % | | (30,566) | | | (43) | % |
FinTech cost of revenues (1) | | | | | | | | | | | | |
| Financial access services | | 6,755 | | | 2 | % | | 14,236 | | | 3 | % | | (7,481) | | | (53) | % |
| Software and other | | 3,029 | | | 1 | % | | 3,964 | | | 1 | % | | (935) | | | (24) | % |
| Hardware | | 14,724 | | | 3 | % | | 22,292 | | | 4 | % | | (7,568) | | | (34) | % |
| FinTech total cost of revenues | | 24,508 | | | 6 | % | | 40,492 | | | 8 | % | | (15,984) | | | (39) | % |
| Operating expenses | | 152,546 | | | 40 | % | | 162,184 | | | 30 | % | | (9,638) | | | (6) | % |
| Research and development | | 27,943 | | | 7 | % | | 32,505 | | | 6 | % | | (4,562) | | | (14) | % |
| Depreciation | | 67,459 | | | 17 | % | | 63,198 | | | 12 | % | | 4,261 | | | 7 | % |
| Amortization | | 75,305 | | | 20 | % | | 68,937 | | | 13 | % | | 6,368 | | | 9 | % |
| Total costs and expenses | | 389,089 | | | 101 | % | | 439,210 | | | 82 | % | | (50,121) | | | (11) | % |
| Operating (loss) income | | (5,415) | | | (1) | % | | 94,017 | | | 18 | % | | (99,432) | | | (106) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | 2017 As Adjusted vs |
| | | December 31, 2017 | | December 31, 2016 | | 2016 As Adjusted |
| | | $ | | % | | $ | | $ | | % | | $ | | % | | $ | | $ | | % | | $ | | % |
| | | As Reported | Adjustments | As Adjusted | | As Reported | Adjustments | As Adjusted | | | | |
| Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
| Games revenues | | | | | | | | | | | | | | | | | | | | | | | | |
| Gaming operations | | $ | 148,654 |
| | 15 | % | | $ | (565 | ) | | $ | 148,089 |
| | 36 | % | | $ | 152,514 |
| | 18 | % | | — |
| | $ | 152,514 |
| | 40 | % | | $ | (4,425 | ) | | (3 | )% |
Gaming equipment and
systems | | 70,118 |
| | 7 | % | | — |
| | 70,118 |
| | 17 | % | | 56,277 |
| | 6 | % | | — |
| | 56,277 |
| | 15 | % | | 13,841 |
| | 25 | % |
| Gaming other | | 4,005 |
| | 1 | % | | — |
| | 4,005 |
| | 1 | % | | 4,462 |
| | 1 | % | | — |
| | 4,462 |
| | 1 | % | | (457 | ) | | (10 | )% |
| Games total revenues | | 222,777 |
| | 23 | % | | (565 | ) | | 222,212 |
| | 54 | % | | 213,253 |
| | 25 | % | | — |
| | 213,253 |
| | 56 | % | | 8,959 |
| | 4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| FinTech revenues | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash access services | | 707,222 |
| | 73 | % | | (563,637 | ) | | 143,585 |
| | 35 | % | | 601,874 |
| | 70 | % | | (476,380 | ) | | 125,494 |
| | 32 | % | | 18,091 |
| | 14 | % |
| Equipment | | 13,258 |
| | 1 | % | | — |
| | 13,258 |
| | 3 | % | | 14,995 |
| | 2 | % | | — |
| | 14,995 |
| | 4 | % | | (1,737 | ) | | (12 | )% |
| Information services and other | | 31,691 |
| | 3 | % | | — |
| | 31,691 |
| | 8 | % | | 29,334 |
| | 3 | % | | — |
| | 29,334 |
| | 8 | % | | 2,357 |
| | 8 | % |
| FinTech total revenues | | 752,171 |
| | 77 | % | | (563,637 | ) | | 188,534 |
| | 46 | % | | 646,203 |
| | 75 | % | | (476,380 | ) | | 169,823 |
| | 44 | % | | 18,711 |
| | 11 | % |
| | |
| | | |
| | | | | | | | | | | | | | | |
| | |
| Total revenues | | 974,948 |
| | 100 | % | | (564,202 | ) | | 410,746 |
| | 100 | % | | 859,456 |
| | 100 | % | | (476,380 | ) | | 383,076 |
| | 100 | % | | 27,670 |
| | 7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs and expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Games cost of revenues(1) | | | | | | | | | | | | | | | | | | | | | | | | |
| Gaming operations | | 15,741 |
| | 2 | % | | (565 | ) | | 15,176 |
| | 4 | % | | 15,265 |
| | 2 | % | | — |
| | 15,265 |
| | 4 | % | | (89 | ) | | (1 | )% |
| Gaming equipment and systems | | 35,707 |
| | 4 | % | | — |
| | 35,707 |
| | 8 | % | | 31,602 |
| | 4 | % | | — |
| | 31,602 |
| | 8 | % | | 4,105 |
| | 13 | % |
| Gaming other | | 3,247 |
| | — | % | | — |
| | 3,247 |
| | 1 | % | | 3,441 |
| | — | % | | — |
| | 3,441 |
| | 1 | % | | (194 | ) | | (6 | )% |
| Games total cost of revenues | | 54,695 |
| | 6 | % | | (565 | ) | | 54,130 |
| | 13 | % | | 50,308 |
| | 6 | % | | — |
| | 50,308 |
| | 13 | % | | 3,822 |
| | 8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
FinTech cost of revenues(1) | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash access services | | 572,880 |
| | 59 | % | | (563,637 | ) | | 9,243 |
| | 2 | % | | 485,061 |
| | 57 | % | | (476,380 | ) | | 8,681 |
| | 2 | % | | 562 |
| | 6 | % |
| Equipment | | 7,717 |
| | 1 | % | | — |
| | 7,717 |
| | 2 | % | | 9,889 |
| | 1 | % | | — |
| | 9,889 |
| | 3 | % | | (2,172 | ) | | (22 | )% |
| Information services and other | | 3,253 |
| | — | % | | — |
| | 3,253 |
| | 1 | % | | 3,756 |
| | — | % | | — |
| | 3,756 |
| | 1 | % | | (503 | ) | | (13 | )% |
| FinTech total cost of revenues | | 583,850 |
| | 60 | % | | (563,637 | ) | | 20,213 |
| | 5 | % | | 498,706 |
| | 58 | % | | (476,380 | ) | | 22,326 |
| | 6 | % | | (2,113 | ) | | (9 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | 118,935 |
| | 12 | % | | — |
| | 118,935 |
| | 28 | % | | 118,709 |
| | 14 | % | | — |
| | 118,709 |
| | 31 | % | | 226 |
| | — | % |
| Research and development | | 18,862 |
| | 2 | % | | — |
| | 18,862 |
| | 5 | % | | 19,356 |
| | 2 | % | | — |
| | 19,356 |
| | 5 | % | | (494 | ) | | (3 | )% |
| Goodwill impairment | | — |
| | — | % | | — |
| | — |
| | — | % | | 146,299 |
| | 17 | % | | — |
| | 146,299 |
| | 38 | % | | (146,299 | ) | | (100 | )% |
| Depreciation | | 47,282 |
| | 5 | % | | — |
| | 47,282 |
| | 12 | % | | 49,995 |
| | 6 | % | | — |
| | 49,995 |
| | 13 | % | | (2,713 | ) | | (5 | )% |
| Amortization | | 69,505 |
| | 7 | % | | — |
| | 69,505 |
| | 17 | % | | 94,638 |
| | 11 | % | | — |
| | 94,638 |
| | 25 | % | | (25,133 | ) | | (27 | )% |
| Total costs and expenses | | 893,129 |
| | 92 | % | | (564,202 | ) | | 328,927 |
| | 80 | % | | 978,011 |
| | 114 | % | | (476,380 | ) | | 501,631 |
| | 131 | % | | (172,704 | ) | | (34 | )% |
| Operating income | | 81,819 |
| | 8 | % | | — |
| | 81,819 |
| | 20 | % | | (118,555 | ) | | (14 | )% | | — |
| | (118,555 | ) | | (31 | )% | | 200,374 |
| | (169 | )% |
* Rounding may cause variances.
(1) Exclusive of depreciation and amortization.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | 2017 As Adjusted vs |
| | | December 31, 2017 | | December 31, 2016 | | 2016 As Adjusted |
| | | $ | | % | | $ | | $ | | % | | $ | | % | | $ | | $ | | % | | $ | | % |
| | | As Reported | Adjustments | As Adjusted | | As Reported | Adjustments | As Adjusted | | | | |
| Other expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense, net of interest income | | 102,136 |
| | 10 | % | | — |
| | 102,136 |
| | 25 | % | | 99,228 |
| | 12 | % | | — |
| | 99,228 |
| | 26 | % | | 2,908 |
| | 3 | % |
| Loss on extinguishment of debt | | 51,750 |
| | 6 | % | | — |
| | 51,750 |
| | 12 | % | | — |
| | — | % | | — |
| | — |
| | — | % | | 51,750 |
| | — | % |
| Total other expenses | | 153,886 |
| | 16 | % | | — |
| | 153,886 |
| | 37 | % | | 99,228 |
| | 12 | % | | — |
| | 99,228 |
| | 26 | % | | 54,658 |
| | 55 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income tax | | (72,067 | ) | | (7 | )% | | — |
| | (72,067 | ) | | (18 | )% | | (217,783 | ) | | (25 | )% | | — |
| | (217,783 | ) | | (57 | )% | | 145,716 |
| | (67 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax (benefit) provision | | (20,164 | ) | | (2 | )% | | — |
| | (20,164 | ) | | (5 | )% | | 31,696 |
| | 4 | % | | — |
| | 31,696 |
| | 8 | % | | (51,860 | ) | | (164 | )% |
| Net income (loss) | | $ | (51,903 | ) | | (5 | )% | | — |
| | $ | (51,903 | ) | | (13 | )% | | $ | (249,479 | ) | | (29 | )% | | — |
| | $ | (249,479 | ) | | (65 | )% | | $ | 197,576 |
| | (79 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | |
| | December 31, 2020 | | December 31, 2019 | | 2020 vs 2019 |
| | $ | | % | | $ | | % | | $ | | % |
| Other expenses | | | | | | | | | | | | |
| Interest expense, net of interest income | | 74,564 | | | 19 | % | | 77,844 | | | 15 | % | | (3,280) | | | (4) | % |
| Loss on extinguishment of debt | | 7,457 | | | 2 | % | | 179 | | | — | % | | 7,278 | | | 4066 | % |
| Total other expenses | | 82,021 | | | 21 | % | | 78,023 | | | 15 | % | | 3,998 | | | 5 | % |
| Income before income tax | | (87,436) | | | (23) | % | | 15,994 | | | 3 | % | | (103,430) | | | (647) | % |
| Income tax benefit | | (5,756) | | | (2) | % | | (523) | | | — | % | | 5,233 | | | 1001 | % |
| Net (loss) income | | $ | (81,680) | | | (21) | % | | $ | 16,517 | | | 3 | % | | $ | (98,197) | | | (595) | % |
* Rounding may cause variances.
(1) Exclusive of depreciation and amortization.
Total Revenues
Total revenues increaseddecreased by $27.7approximately $149.6 million, or 7%28%, to $410.7approximately $383.7 million for the year ended December 31, 2017,2020, as compared to the prior year period as adjusted foryear. This was primarily due to the net versus gross retrospective impact of ASC 606. This was due to increased FinTechCOVID-19 and Games revenues.
the closure of many casino properties for a portion of the year. Games revenues increaseddecreased by $9.0approximately $82.8 million, or 4%29%, to $222.2approximately $200.3 million for the year ended December 31, 2017,2020, as compared to the prior year period as adjusted foryear. We had: (i) a decline in the net versus gross retrospective impactsale of ASC 606. This was primarily due to an increasegaming machines included in units sold, partially offset by lowerour gaming equipment and systems revenues; and (ii) a decrease in the average daily win per unit as a result of units being deactivated for a prolonged period of time on a higher installed base of leased games.
games largely reflecting greater demand for our premium units included in our gaming operations revenues. FinTech revenues increaseddecreased by $18.7approximately $66.7 million, or 11%27%, to $188.5approximately $183.4 million for the year ended December 31, 2017,2020, as compared to the prior year period as adjusted foryear. We had: (i) a decline in the net versus gross retrospective impact of ASC 606. This was primarily due to higher dollar and transaction volume and fees earned from cashvolumes included in our financial access services new customer openings, the expansion of our ATM services in Canada, as well as overall growthrevenues; and (ii) a decrease in the segment.sale of full service kiosks, partially offset by an increase in our loyalty kiosks included in our hardware revenues.
Costs and Expenses
Games cost of revenues increasedTotal costs and expenses decreased by $3.8approximately $50.1 million, or 8%11%, to $54.1approximately $389.1 million for the year ended December 31, 2017,2020, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606.year. This was primarily due to higher variable costs associated with increased unit sales.
FinTechthe impact of COVID-19 and the closure of many casino properties for a portion of the year. Games cost of revenues decreased by $2.1approximately $30.6 million, or 9%43%, to $20.2approximately $41.3 million for the year ended December 31, 2017,2020, as compared to the prior year periodyear. We had a reduction in the variable costs included in our gaming and equipment systems cost of revenues as adjusteda result of the decline in the sale of machines. FinTech cost of revenues decreased by approximately $16.0 million, or 39%, to approximately $24.5 million for the net versus gross retrospective impactyear ended December 31, 2020, as compared to the prior year. We had a reduction in the variable costs primarily as a result of: (i) a decline in the dollar and transaction volumes included in our financial access services cost of ASC 606.revenues; and (ii) a decrease in the sale of full-service kiosks, partially offset by an increase in our loyalty kiosks included in our hardware revenues.
Operating expenses decreased by approximately $9.6 million, or 6%, to approximately $152.5 million for the year ended December 31, 2020, as compared to the prior year. This was primarily due to higherlower payroll and related expenses and trade show-related costs associatedfrom actions taken in response to COVID-19 for both our Games and FinTech operating segments. In addition, our legal expenses were lower as a result of the litigation costs we incurred in the prior year in connection with higher equipment sales in 2016our FACTA matter related to our FinTech operating segment.
Research and development decreased by approximately $4.6 million, or 14%, to approximately $27.9 million for the year ended December 31, 2020, as compared to 2017.the prior year. This was primarily due to lower payroll and related costs included in our Games segment in light of actions taken in response to COVID-19, partially offset by higher payroll and related costs included in our FinTech segment primarily as a result of the acquisition of certain assets in connection with our loyalty solutions in the prior year as costs for research and development consist primarily of salaries and benefits, consulting fees, certification and testing costs.
Operating expenses remained relatively consistentDepreciation increased by approximately $4.3 million, or 7%, to approximately $67.5 million for the year ended December 31, 2020, as compared to the prior year. This was primarily due to an increase in payroll and benefit-related expenses offset by the decreaseinstalled base of lease gaming machines placed in expenses related to the 2016 Bee Cave Games, Inc. (“Bee Cave”) loan impairment of approximately $4.3 million that did not impact our 2017 results forservice included in our Games segment; and an increase in payroll and benefits-related expenses and professional services expenses offsetsegment.
Amortization increased by the decrease in expenses related to the 2016 separation costs for our former CEO that did not impact our 2017 results for our FinTech segment.
There was no goodwill impairment for the year ended December 31, 2017, as compared to $146.3 million in the prior year period as a result of our October 1, 2016 annual goodwill assessment attributable to our Games reporting unit.
Research and development costs remained relatively consistent with prior year.
Depreciation decreased by $2.7approximately $6.4 million, or 5%9%, to $47.3approximately $75.3 million for the year ended December 31, 2017,2020, as compared to the prior year period. Thisyear. The increase was primarily due to a decreasethe release of new game themes included in depreciation from certain assets being fully depreciated in both our Games segment and FinTech segments.
Amortization decreased by $25.1 million, or 27%, to $69.5 million for the year ended December 31, 2017, as compared tointangible assets acquired in the prior year period. This was primarily due to certain acquired intangible assets being fully amortized in connection with the fourth quarter of 2016 for bothloyalty business included in our Games and FinTech segments.segment.
Primarily as a result of the factors and responsive actions taken, described above, in light of COVID-19 and the closure of many casino properties for a portion of the year, operating income increaseddecreased by $200.4approximately $99.4 million, or 169%106%, toand resulted in an operating incomeloss of $81.8approximately $5.4 million for the year ended December 31, 2017,2020, as compared to the prior year as adjusted for the net versus gross retrospective impact of ASC 606.year. The operating incomeloss margin as adjusted for the net versus gross retrospective impact of ASC 606 increased from negative 31% to a positive 20%was 1% for the year ended December 31, 2017.2020 compared to an operating income margin of 18% for the prior year.
Interest expense, net of interest income, increaseddecreased by $2.9approximately $3.3 million, or 3%4%, to $102.1approximately $74.6 million for the year ended December 31, 2017,2020, as compared to the prior year period.year. This was primarily attributabledue to higherlower debt balances with respect to certain of our instruments and more favorable variable interest recognized as a resultrates in effect for certain of our debt restructuring activitiesinstruments; partially offset by: (i) the amortization of debt issuance costs incurred in connection with the Fourth Amendment to the existing Credit Agreement and entering into the Incremental Term Loan Credit Agreement; (ii) the additional Incremental Term Loan debt incurred with less favorable variable interest rates in effect; (iii) an adjustment to, and the associated accretion of, interest related to the acquisition of certain assets from Atrient and MGT in the fourth quarter of 2017 as well as higher cash usage fees, partially offset by lowerprior year; and (iv) a reduction in interest expense as a result of our debt refinancing in May 2017.income earned.
Loss on extinguishment of debt for the year ended December 31, 2017 was $51.8 million, which consisted of a $26.3 million make-whole premium related to the satisfaction and redemption of the 2014 Unsecured Notes, approximately $10.9 million for the write-off of related unamortized debt issuance costs and fees in the fourth quarter of 2017 and approximately $14.6 million for the unamortized deferred financing fees and discounts related to our extinguished term loan under the Prior Credit Facility and the redeemed Refinanced Secured Notes in the second quarter of 2017. There was no loss on extinguishment of debt in the prior year period.
Income tax benefit was $20.2$7.5 million for the year ended December 31, 2020 was a result of the redemption and repurchase transactions related to the 2017 Unsecured Notes.
Income tax benefit increased by $5.2 million, or 1001%, to approximately $5.8 million for the year ended December 31, 2020, as compared to an income tax provision of $31.7 million in the prior year period.year. The income tax benefit for the year ended December 31, 20172020 reflected an effective income tax rate of 28.0%6.6%, which was less than the statutory federal rate of 35.0% primarily due to a decrease in the carrying value of our deferred tax liabilities as a result of the enactment of the 2017 Tax Act, offset by an increase in the valuation allowance for deferred tax assets. The income tax provision for the year ended December 31, 2016 reflected a negative effective income tax rate of 14.6%, which was less than the statutory federal rate of 35.0%21.0%, primarily due to an increase in our valuation allowance as a result of the book loss incurred during the year, partially offset by certain indefinite lived deferred tax assets that may be offset against our indefinite lived deferred tax liabilities. The income tax benefit reflected an effective income tax rate of negative 3.3% for the prior year, which was less than the statutory federal rate of 21.0%, primarily due to a partial decrease in our valuation allowance for deferred tax assets and the impairment of goodwill for which no tax benefit was provided for book purposes.a research credit.
Primarily as a result of the foregoing,factors and responsive actions taken, described above, in light of COVID-19, our net income decreased by approximately $98.2 million, or 595%, as compared to the prior year,and resulted in a net loss decreased by $197.6 million, or 79%, to $51.9of approximately $81.7 million for the year ended December 31, 2017, as compared to the prior year period.2020.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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 policiesestimates as the onesthose that involve a significant level of estimation uncertainty and have had or are most importantreasonably likely to the portrayal ofhave a material impact on the financial condition andor 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.registrant. Based on this definition, we have identified our critical accounting policies as those addressed below. We also have other key accounting policies that involve the use of estimates, judgments, and assumptions. Refer to “Note“Part II — Item 8 — Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 2 — Basis of Presentation and Summary of Significant Accounting Policies” within our Financial Statements included elsewhere in this Annual Report on Form 10-K for a summary of these policies. We believe that our estimates and assumptions are reasonable, based upon information presently available; however, actual results may differ from these estimates under different assumptions or conditions. Goodwill. We had approximately $640.5 million of goodwill on our Balance Sheets at December 31, 2018 resulting from acquisitions of other businesses. We test for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter, or more often under certain circumstances.Income Taxes
Deferred Tax Assets. Our reporting units are identified as operating segments or one level below and we evaluate our reporting units at least annually.
The annual evaluation of goodwill requires the use of different assumptions, estimates, or judgments in the goodwill impairment testing process, such as: the methodology, the estimated future cash flows of our reporting units, the discount rate used to discount such cash flows, and the market multiples of comparable companies. Management performs its annual forecasting process, which, among other factors, includes reviewing recent historical results, company-specific variables, and industry trends. This process is generally completed in the fourth quarter and considered in conjunction with the annual goodwill impairment evaluation. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations. Our estimates of fair value require significant judgment and are based on assumptions we determined to be reasonable; however, they are unpredictable and inherently uncertain, including: estimates of future growth rates, operating margins, and assumptions about the overall economic climate as well as the competitive environment for our reporting units.
There can be no assurance that our estimates and assumptions made for purposes of our goodwill testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments, or anticipated growth rates are not correct, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing, or earlier, if an indicator of an impairment is present prior to our next annual evaluation.
Property, Equipment, Leased Assets, and Other Intangible Assets. We have approximately $116.3 million in net property, equipment, and leaseddeferred tax assets and approximately $287.4 million in net unamortized other intangible assets on our Balance Sheets at December 31, 2018. Such assetsliabilities are stated at cost, less accumulated depreciation or amortization, computed primarily usingrecognized for the straight-line method over the estimated useful livesexpected future tax consequences of such assets. We apply judgment in the determination of the useful lives, which are generally based on the nature of the assets and the underlying contractual obligations for certain assets.
Property, equipment, leased assets, and other intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or market price of the asset, a significant adverse change in legal factors or business climate that could affect the value of an asset, or a current period operating or cash flow loss combined with a history of operating or cash flow losses. Impairment is indicated when undiscounted future cash flows do not exceed the carrying value of the asset. Any impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Determination of the amount and timing of future cash flows requires significant estimates and assumptions. If actual results differ from such estimates and assumptions, this may have a material impact on our conclusions.
Income Taxes. We are subject to income taxes in the United States as well as various states and foreign jurisdictions in which we operate. Due to the 2017 Tax Act, there is no U.S. federal tax on cash repatriation from foreign subsidiaries; however, we could be subject to foreign withholding tax and U.S. state income taxes. The 2017 Tax Act also subjects our foreign subsidiary earnings to the GILTI tax provisions. Some items of income and expense are not reported in tax returns and our Financial Statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes.
Our income tax returns are subject to examination by various tax authorities and while we believe that the positions taken in our tax returns are in accordance with the applicable laws, they may be challenged by the tax authorities, which may occur several years after such tax returns have been filed. We account for uncertainty in income tax positions by evaluating whether it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognizedincluded in our Financial Statements is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates depending upon changes inor income tax laws, actual resultsreturns. Deferred tax assets and liabilities are determined based upon differences between financial statement carrying amounts of operations,existing assets and their respective tax bases using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on the final audit ofincome tax returns by taxing authorities.
We recognizeprovision or benefit and deferred tax assets which generally representand liabilities for a change in rates is recognized in the Statements of Operations in the period that includes the enactment date.
When measuring deferred tax benefits relatedassets, certain estimates and assumptions are required to tax deductions or credits available in future tax returns, and applyassess whether a valuation allowance to reduce our deferred tax assets toshould be established by evaluating both positive and negative factors in accordance with accounting guidance. This evaluation requires that we exercise judgment in determining the amounts that are more likely than not to be realized.relative significance of each factor. The assessment of the valuation allowance involves significant estimates regarding future taxable income and when it is recognized, the amount and timing of taxable differences, the reversal of temporary differences and the implementation of tax-planning strategies. A valuation allowance is established based on the weight of available evidence, including both positive and negative indicators, if it is more likely than not that a portion, or all, of the deferred tax assets will not be realized. Greater weight is given to evidence that is objectively verifiable, most notably historical results. If we report a cumulative loss from continuing operations before income taxes for a reasonable period of time, this form of negative evidence is difficult to overcome. In that case, we include certain aspects of our historical results in our forecasts of future taxable income, as we do not have the ability to solely rely on forecasted improvements in earnings to recover deferred tax assets. When we report a cumulative loss position, to the extent our results of operations improve, such that we have the ability to overcome the more likely than not accounting standard, we may be able to reverse the valuation allowance in the applicable period of determination. In addition, we rely on deferred tax liabilities in our assessment of the realizability of deferred tax assets if the temporary differences aretiming difference is anticipated to reverse in the same period and jurisdiction and the deferred tax liabilities are of the same character as the temporary differences giving rise to the deferred tax assets.
Revenue Recognition. We recognize revenue upon transferring control of goods or services to our customers in
Based on an amount that reflects the consideration we expect to receive in exchange for those goods or services. We enter into contracts with customers that include various performance obligations consisting of goods, services, or combinations of goods and services. Timingevaluation of the transferthen-available positive and negative evidence, we determined it was appropriate to establish a full valuation allowance on our federal and states deferred tax assets as of control varies basedDecember 31, 2016. At that time, and in subsequent quarters, negative evidence, including three years of cumulative losses, outweighed the positive evidence.However, as of December 31, 2021, our U.S. operations emerged from a three-year cumulative loss position. Our U.S. federal and state operating businesses had deferred tax asset valuation allowances of approximately $68.7 million as of December 31, 2020. Based on our most recent analysis as of December 31, 2021, we decreased our valuation allowance for our deferred tax assets by approximately $67.9 million, of which $63.5 million was released during the naturefourth quarter of 2021, due to the removal of the contract.
There can be no assurance that our estimates and assumptions made for purposes of our measurement of deferred tax assets as of the time of evaluation will prove to determinationbe accurate predictions of performance obligations, the timingfuture. If our assumptions regarding business plans, competitive environments, anticipated growth rates, or expectations of satisfactionresults of operations and financial condition are not correct, we may be required to record a valuation allowance in future periods, whether in connection with our next annual measurement, or earlier, in the event an indicator of strong negative evidence is present at such performance obligations,time during the year.
Uncertain Tax Positions. We also follow GAAP to account for uncertainty in income taxes as recognized in our Financial Statements. The accounting standard creates a single model to address uncertainty in income tax positions and prescribes the minimum recognition threshold a tax position is required to meet before being recognized in our Financial Statements. The standard also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Under this standard, we may recognize tax benefits from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the stand-alone selling pricefinal audit of each identified performance obligation. The critical judgments thattax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed.
We analyzed filing positions in the federal, state, and foreign jurisdictions in which we are required to makefile income tax returns, as well as the open tax years in these jurisdictions. As of December 31, 2021, we recorded approximately $2.2 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 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 assessmentStatements of contractsOperations. Refer to “Part II — Item 8 — Financial Statements and Supplementary Data — Notes to
Goodwill
The annual evaluation of goodwill requires the use of different assumptions, estimates, or judgments in the goodwill impairment testing process, such as: the methodology, the estimated future cash flows of our reporting units, the discount rate used to present value such cash flows, and the market multiples of comparable companies. Management performs its annual forecasting process, which, among other factors, includes reviewing recent historical results, company-specific variables, and industry trends. This process is generally fluid throughout each year and considered in conjunction with customersthe annual goodwill impairment evaluation. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations. Our estimates of fair value require significant judgment and whichare based on assumptions we determined to be reasonable; however, they are unpredictable and inherently uncertain, including: estimates of future growth rates, operating margins, results of operations and financial condition, and assumptions about the overall economic climate as well as the competitive environment for our reporting units.
There can be no assurance that our estimates and assumptions made for purposes of our goodwill testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments, anticipated growth rates, or expectations of results of operations and financial condition are not correct, we may have a material impact on the amount or timing of revenue recognized include:
Determination of stand-alone selling price (“SSP”) - We arebe required to make a significant judgment as torecord goodwill impairment charges in future periods, whether there is a sufficient quantity of items soldin connection with our next annual impairment testing process, or renewed on a stand-alone basis and those prices demonstrate an appropriate level of concentration to conclude that a SSP exists. The SSP of our goods and services are generally determined based on observable prices, an adjusted market assessment approach, or an expected cost plus margin approach. We utilize a residual approach only when the SSP for performance obligations with observable prices have been established and the remaining performance obligationearlier, in the contract with a customer does not haveevent an observable price as itindicator of impairment is uncertain or highly variable and, therefore, is not discernible.present at such time during the year.
Contract combinations with multiple promised goods or services - Our contracts may include various performance obligations for promises to transfer multiple goods and services to a customer, especially since our Games and FinTech businesses may enter into multiple agreements with the same customer that meet the criteria to be combined for accounting purposes under ASC 606. For such arrangements, we use our judgment to analyze the nature of the promises made and determine whether each is distinct or should be combined with other promises in the contract based on the level of integration and interdependency between the individual deliverables.
Recent Accounting Guidance
Liquidity and Capital Resources
Overview
The following table presents selected information about our financial position (in thousands):
| | | | | At December 31, | | | At December 31, |
| | | 2018 | | 2017 | | | 2021 | | 2020 |
| Balance sheet data | | |
| | |
| Balance sheet data | | | | |
| Total assets | | $ | 1,548,261 |
| | $ | 1,537,074 |
| Total assets | | $ | 1,635,650 | | | $ | 1,477,179 | |
| Total borrowings | | 1,163,216 |
| | 1,167,843 |
| Total borrowings | | 981,525 | | | 1,129,253 | |
| Total stockholders’ deficit | | (108,895 | ) | | (140,633 | ) | |
| Total stockholders’ equity (deficit) | | Total stockholders’ equity (deficit) | | 174,500 | | | (7,898) | |
| Cash available | | |
| | |
| Cash available | | | | |
| Cash and cash equivalents | | $ | 297,532 |
| | $ | 128,586 |
| Cash and cash equivalents | | $ | 302,009 | | | $ | 251,706 | |
| Settlement receivables | | 82,359 |
| | 227,403 |
| Settlement receivables | | 89,275 | | | 60,652 | |
| Settlement liabilities | | (334,198 | ) | | (317,744 | ) | Settlement liabilities | | (291,861) | | | (173,211) | |
Net cash position(1) | | 45,693 |
|
| 38,245 |
| Net cash position (1) | | 99,423 | | | 139,147 | |
| Undrawn revolving credit facility | | 35,000 |
| | 35,000 |
| Undrawn revolving credit facility | | 125,000 | | | 35,000 | |
Net cash available(1) | | $ | 80,693 |
|
| $ | 73,245 |
| Net cash available (1) | | $ | 224,423 | | | $ | 174,147 | |
| |
(1) | Non‑GAAP measure. In order to enhance investor understanding of our cash balance, we are providing in this Annual Report on Form 10-K 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 New 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, both on short term and long term basis. |
Issuance of Common Stock
In December 2019, we filed with the SEC an automatic shelf registration statement for an undetermined amount of common stock, preferred stock, debt securities, warrants, and/or units that the Company may offer and sell in one or more offerings on terms to be decided at the time of sale, which will expire on December 4, 2022.
In December 2019, we then issued and sold 11,500,000 shares of our common stock pursuant to a prospectus supplement under the automatic shelf registration statement, for which the aggregate net proceeds of approximately $122.4 million were utilized to pay down and reprice a portion of our existing indebtedness.
Cash Resources
OurAs of December 31, 2021, 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.on both, a short- and long-term basis. Cash and cash equivalents at December 31, 20182021 included cash in non‑U.S.non-U.S. jurisdictions of approximately $21.8$17.5 million. Generally, these funds are available for operating and investment purposes within the jurisdiction in which they reside, and as a result of the 2017 Tax Act, enacted on December 22, 2017, we will not be subjectmay from time to additional taxation if we repatriatetime consider repatriating these foreign funds to the United States, except forsubject to potential withholding tax.tax obligations, based on operating requirements.
We expect that cash provided by operating activities will be sufficient for our operating and debt servicing needs during the foreseeable future. If not,future on both a short- and long-term basis. In addition, we have sufficient borrowings available under our New Credit Facilitiessenior secured revolving credit facility to meet additionalfurther funding requirements. We monitor the financial strength of our lenders on an ongoing basis using publicly-availablepublicly available information. Based upon thatavailable information, we believe there is not a likelihood that any of our lenders might notshould be able to honor their commitments under the New Credit Agreement.Agreement (defined in “Note 12 — Long-Term Debt”). We provide cash settlement services to gaming establishments related to our cash access services, which involve the movement of funds between various parties involved in these types of transactions. We receive reimbursement from the patron’s credit or debit card issuing financial institution for the amount owed to the gaming establishment plus the fee charged to the patron. These activities result in amounts due to us at the end of each business day that we generally recover over the next few business days, which are classified as settlement receivables on our Balance Sheets. As of December 31, 2018, we had $82.4 million in settlement receivables. In addition, cash settlement services result in amounts due to gaming establishments for the cash disbursed to patrons through the issuance of a negotiable instrument or through electronic settlement for the face amount provided to patrons that we generally remit over the next few business days, which are classified as settlement liabilities on our Balance Sheets. As of December 31, 2018, we had $334.2 million in settlement liabilities. As the timing of cash received from cash settlement services may differ, the total amount of cash held by us will fluctuate throughout the year.
Our cash and cash equivalents were $297.5 million and $128.6 million as of December 31, 2018 and December 31, 2017, respectively. Our net cash position after considering the impact of settlement receivables and settlement liabilities was $45.7 million and $38.2 million as of December 31, 2018 and December 31, 2017, respectively. Our net cash available after considering the net cash position and undrawn amounts available under our New Revolving Credit Facility was approximately $80.7 million and $73.2 million as of December 31, 2018 and December 31, 2017, respectively.
Cash Flows
The following table summarizespresents a summary of our cash flowsflow activity for the years ended December 31, 2018, 20172021, 2020 and 20162019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | $ Change |
| | | 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| Cash flow activities | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 391,630 | | | $ | 36,179 | | | $ | 84,890 | | | $ | 355,451 | | | $ | (48,711) | |
| Net cash used in investing activities | | (151,912) | | | (94,118) | | | (166,337) | | | (57,794) | | | 72,219 | |
| Net cash (used in) provided by financing activities | | (188,359) | | | 15,066 | | | 77,613 | | | (203,425) | | | (62,547) | |
| Effect of exchange rates on cash and cash equivalents | | 18 | | | (1,388) | | | 1,263 | | | 1,406 | | | (2,651) | |
| Cash and cash equivalents and restricted cash | | | | | | | | | | |
| Net increase (decrease) for the period | | 51,377 | | | (44,261) | | | (2,571) | | | 95,638 | | | (41,690) | |
| Balance, beginning of the period | | 252,349 | | | 296,610 | | | 299,181 | | | (44,261) | | | (2,571) | |
| Balance, end of the period | | $ | 303,726 | | | $ | 252,349 | | | $ | 296,610 | | | $ | 51,377 | | | $ | (44,261) | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase/(Decrease) |
| | | 2018 | | 2017 | | 2016 | | 2018 vs 2017 | | 2017 vs 2016 |
| Cash flow activities | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 294,286 |
| | $ | 96,259 |
| | $ | 131,899 |
| | $ | 198,027 |
| | $ | (35,640 | ) |
| Net cash used in investing activities | | (123,350 | ) | | (109,780 | ) | | (88,148 | ) | | (13,570 | ) | | (21,632 | ) |
| Net cash provided by (used in) financing activities | | 11 |
| | 22,394 |
| | (24,922 | ) | | (22,383 | ) | | 47,316 |
|
| Effect of exchange rates on cash | | (1,370 | ) | | 1,292 |
| | (1,714 | ) | | (2,662 | ) | | 3,006 |
|
| Cash and cash equivalents | | | | | | | | | | |
| Net increase for the period | | 169,577 |
| | 10,165 |
| | 17,115 |
| | 159,412 |
| | (6,950 | ) |
| Balance, beginning of the period | | 129,604 |
| | 119,439 |
| | 102,324 |
| | 10,165 |
| | 17,115 |
|
| Balance, end of the period | | $ | 299,181 |
|
| $ | 129,604 |
|
| $ | 119,439 |
|
| $ | 169,577 |
|
| $ | 10,165 |
|
Cash flows provided by operating activities were $294.3 million, $96.3 million, and $131.9 million for the years ended December 31, 2018, 2017, and 2016, respectively. Cash flows provided by operating activities increased by $198.0approximately $355.5 million for the year ended December 31, 2018,2021, as compared to the prior year period,year. This was primarily attributable to thenet income earned and changes in working capital, most notably associated with cash settlement servicesactivities from our FinTech segment, andpartially offset by loss on extinguishment of debt incurred during the reduction in cash paid for interest.year ended December 30, 2021. Cash flows provided by operating activities decreased by $35.6approximately $48.7 million for the year ended December 31, 2017,2020, as compared to the prior year, period. This was primarily attributable to the impact of COVID-19 on our Games and FinTech segments, as well as changes in working capital associated with settlement receivables and settlement liabilitiesnon-cash adjustments from our Games and FinTech segment.segments.
Cash flows used in investing activities were $123.4 million, $109.8 million, and $88.1 million for the years ended December 31, 2018, 2017, and 2016, respectively. Cash flows used in investing activities increased by $13.6 million for the year ended December
31, 2018, as compared to the prior year period, primarily attributable to an increase in capital expenditures, and higher placement fee arrangements in our Games segment. Cash flows used in investing activities increased by $21.6approximately $57.8 million for the year ended December 31, 2017,2021, as compared to the prior year period.year. This was primarily attributable to an increase in capital expenditures higher placement fee arrangements in our Games segment, and decreased sales of fixed assets.
FinTech segments. In addition, this increase was due to placement fees from our Games segment. Cash flows providedused in investing activities decreased by financing activities were $11,000 and $22.4approximately $72.2 million for the year ended December 31, 2018 and 2017, respectively,2020, as compared to $24.9 millionthe prior year, primarily attributable to our response to the impact of cashCOVID-19, for which we reduced our capital expenditures in both our Games and FinTech segments, and the impact of the acquisition of certain loyalty related assets in our FinTech segment in the prior year.
Cash flows used in financing activities forincreased by approximately $203.4 million in the year ended December 31, 2016.2021, as compared to the prior year. This was primarily attributable to the refinancing of our 2017 Unsecured Notes in July 2021 and entering into our New Term Loan in August 2021 and incurring fees associated with these transactions. In addition, we made a final earnout payment during the current period with respect to the Atrient transaction. Cash flows provided by financing activities decreased by $22.4approximately $62.5 million in the year ended December 31, 2018,2020, as compared to the prior year period,year. This was primarily attributable to less debt restructuring activities completedthe repayments of borrowings under our 2017 Unsecured Notes and Senior Secured Credit Facilities during the period and the secondary equity offering in 2018. Cash flows providedthe prior year, partially offset by financing activities increased by $47.3 million inthe proceeds from the Incremental Term Loan.
Capital Expenditures
For the year ended December 31, 2017, as compared to the prior period. This2021, cash spent for capital expenditures, excluding placement fees, totaled $104.7 million, of which $81.7 million and $23.0 million was primarily attributablerelated to our debt restructuring activities completedGames and FinTech segments, respectively. For the year ended December 31, 2020, cash spent for capital expenditures totaled $76.4 million, of which $62.6 million and $13.8 million, was related to our Games and FinTech segments, respectively. We paid approximately $31.5 million, $3.1 million, and $17.7 million in 2017 and an increase in proceeds from the exercise of stock options.
We have not declared or paid any cash dividends on our capital stock as we intend to retain our earnings and utilize themplacement fees for the repaymentyears ended December 31, 2021, 2020, and 2019, respectively. In September 2021, we entered into a placement fee agreement with a customer for certain of its locations for approximately $28.9 million, which we settled in October 2021. There were no material imputed interest amounts recorded in connection with these payments for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2019, the payments made included approximately $0.6 million of imputed interest.
Long-Term Debt
At December 31, 2021, we had approximately $599 million of borrowings outstanding debt and to finance the growth and development of our business. Any future change in our dividend policy will be made at the discretion of our Board of Directors, and will depend on our contractual restrictions, results of operations, earnings, capital requirements, and other factors considered relevant by our Board of Directors. In addition,under the New Credit FacilitiesTerm Loan and there were no borrowings outstanding under the indenture governingNew Revolver. We had $125 million of additional borrowing availability under the 2017
New Revolver as of December 31, 2021. At December 31, 2021, we had approximately $400 million outstanding under our 2021 Unsecured Notes limit our ability to declare and pay cash dividends.Notes.
Long‑Term Debt
Contractual Obligations
The following summarizes our contractual cash obligations (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter |
| Contractual obligations | | | | | | | | | | | | | | |
Debt obligations(1) | | $ | 1,182,700 |
| | $ | 8,200 |
| | $ | 8,200 |
| | $ | 8,200 |
| | $ | 8,200 |
| | $ | 8,200 |
| | $ | 1,141,700 |
|
Estimated interest obligations(2) | | 435,709 |
| | 73,566 |
| | 73,186 |
| | 72,769 |
| | 72,189 |
| | 71,730 |
| | 72,269 |
|
Operating lease obligations(3) | | 19,721 |
| | 5,570 |
| | 5,680 |
| | 4,598 |
| | 2,799 |
| | 1,074 |
| | — |
|
Purchase obligations(4) | | 66,463 |
| | 56,233 |
| | 7,887 |
| | 1,835 |
| | 508 |
| | — |
| | — |
|
| Total contractual obligations | | $ | 1,704,593 |
|
| $ | 143,569 |
|
| $ | 94,953 |
| | $ | 87,402 |
| | $ | 83,696 |
| | $ | 81,004 |
| | $ | 1,213,969 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | Total | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
| Contractual obligations | | | | | | | | | | | | | | |
Debt obligations (1) | | $ | 998,500 | | | $ | 6,000 | | | $ | 6,000 | | | $ | 6,000 | | | $ | 6,000 | | | $ | 6,000 | | | $ | 968,500 | |
Estimated interest obligations (2) | | 276,275 | | | 38,086 | | | 38,015 | | | 37,805 | | | 37,588 | | | 37,406 | | | 87,375 | |
Lease obligations (3) | | 19,389 | | | 6,635 | | | 5,001 | | | 3,739 | | | 2,971 | | | 889 | | | 154 | |
Purchase obligations (4) | | 124,385 | | | 86,924 | | | 14,997 | | | 8,227 | | | 4,198 | | | 4,477 | | | 5,562 | |
| | | | | | | | | | | | | | |
| Total contractual obligations | | $ | 1,418,549 | | | $ | 137,645 | | | $ | 64,013 | | | $ | 55,771 | | | $ | 50,757 | | | $ | 48,772 | | | $ | 1,061,591 | |
(2)Estimated interest payments were computed using the interest rate in effect at December 31, 2021 multiplied by the principal balance outstanding. For our debt obligations, the weighted average rate assumed was approximately 3.80% until August 3, 2028, when the weighted average rate would increase to 5.00% until the remaining debt is fully satisfied in 2029.
| |
(1) | We are required to make principal payments of 0.25% per quarter of the initial aggregate principal, with the final principal repayment installment on the maturity date and may also be required to make an excess cash flow payment that is based on full year end earnings and our consolidated secured leverage ratio in effect at that time. The above table does not reflect any future payments related to excess cash flow payments. |
| |
(2) | Estimated interest payments were computed using the interest rate in effect at December 31, 2018 multiplied by the principal balance outstanding after scheduled principal amortization payments. For our debt obligations, the weighted average rate assumed was approximately 6.16% until 2024, when the weighted average rate would increase to approximately 7.50% until the remaining debt is fully satisfied in 2025. |
| |
(3) | Our operating lease obligations primarily consist of real estate arrangements we enter into with third parties. See Note 13 for additional information regarding our operating leases. |
| |
(4) | Our purchase obligations primarily consist of open purchase orders and placement fee agreements related to our Games business as well as minimum transaction processing services from various third‑party processors used by our FinTech business. |
(4)The Company is a party to certain purchase obligations, which primarily include purchases of raw materials, capital expenditures, and other indirect purchases in connection with conducting our business. The purchase obligations represent open purchase orders with our suppliers that have not yet been received as these agreements generally allow us the option to cancel, reschedule and adjust terms based on our business needs prior to the delivery of goods or performance of services.
Other Liquidity Needs and Resources
We need cash to support our foreign operations. As a result of the 2017 Tax Act, enacted December 22, 2017, we will not be subject to additional taxation if we repatriate foreign funds to the United States, except for potential withholding tax. Depending on the
jurisdiction and the treaty between different foreign jurisdictions, our applicable withholding tax rates cancould vary significantly. If we expand our business into new foreign jurisdictions, we will rely on treaty‑favored cross‑bordertreaty-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
WeIn the normal course of business, we have commercial arrangements with third partythird-party vendors to provide cash for certain of our ATMs. For the use of these funds, we pay a cash usage fee on either the average daily balance of funds utilized multiplied by a contractually defined cash usage rate or the amounts supplied multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Statements of Income (Loss),Operations, were $7.0approximately $4.0 million, $4.9$3.1 million, and $3.1$7.2 million for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively. The cash usage fees were significantly higher in the current year as compared to the prior year as a result of increased funds dispensing volumes at our customer locations as the operational impacts from the pandemic began to lessen. We are exposed to interest rate risk to the extent that the applicable federal funds rate increases.
Under these agreements, the currency supplied by third partythird-party vendors remain their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected on our Balance Sheets. The outstanding balances of ATM cash utilizedfunds provided by us from the third partythird-party vendors were $224.7approximately $401.8 million and $289.8$340.3 million as of December 31, 20182021 and 2017,2020, respectively.
TheOur primary commercial arrangement, the Contract Cash Solutions Agreement, as amended, with Wells Fargo Bank, N.A. (“Wells Fargo”) provides us with cash in the maximum amount of $300.0$300 million with the ability to increase the amount as defined within the agreement or otherwise permitted by $75 million over a 5-day period for special occasions, such as the period around New Year’s Day.vault cash provider. The agreement currently expires on June 30, 20212023 and will autoautomatically renew for additional one-year periods unless either party provides a 90-dayninety-day written notice of its intent not to renew. For additional information see “Part II — Item 8 — Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 5 — Funding Agreements.”We are responsible for any losses of cash in the ATMsfund dispensing devices under this agreement and we self-insure for this risk. We incurred no material losses related to this self-insurance for the years ended December 31, 20182021, 2020, and 2017.2019.
Effects of Inflation
Our monetary assets that primarily consist of cash, receivables, inventory, as well as our non-monetary assets that are mostly comprised of 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 FinTech products and services to gaming establishments.
Item 7A. 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 condition. At present, we do not hedge this risk;exposure; however, we continue to evaluate such foreign currency translation exposure.exchange risk.
In the normal course of business, we have commercial arrangements with third partythird-party vendors to provide cash for certain of our ATMs.fund dispensing devices. Under the terms of these agreements, we pay a monthly cashfund usage fee that is generally based upon the target federal funds rate. We are, therefore, exposed to interest rate risk to the extent that the applicabletarget federal funds rate increases. The outstanding balance of ATM cash utilizedfunds provided by us from third partythe third-party vendors was $224.7approximately $401.8 million as of December 31, 2018;2021; therefore, each 1%100 basis points increase in the applicabletarget federal funds rate would have approximately a $2.2$4.0 million impact on income before tax over a 12‑month12-month period.
The New Credit Facilities bear interest at rates that can vary over time. We have the option of havingpaying interest on the outstanding amounts under the New Credit Facilities paid using on a base rate or LIBOR. We have historically elected to pay interest based on LIBOR, and we expect to continue to do so for various maturities.
The weighted average interest rateon the New Credit FacilitiesTerm Loan, which includes a 50 basis point floor, was approximately 5.17%3.00% for the year ended December 31, 2018.2021. Based upon the outstanding balance onof the New Credit FacilitiesTerm Loan of $807.7$598.5 million as of December 31, 2018,2021, each 1%100 basis points increase in the applicable Eurodollar RateLIBOR would have an $8.1a combined impact of approximately $6.0 million impact on interest expense over a 12‑month12-month period.
The interest rate is fixed at 5.00% for the 2021 Unsecured Notes is fixed;due 2029; therefore, an increase in LIBOR rates does not impact the related interest expense. At present, we do not hedge the risk related to the changes in the interest rate; however, we continue to evaluate such interest rate exposure.
We continue to evaluate the potential impact of the eventual replacement of the LIBOR benchmark. We expect to utilize the replacement rate commonly referred to as the secured overnight financing rate (“SOFR”), which is the anticipated benchmark in place of LIBOR, and we do not expect the transition to SOFR to have a material impact on our business, financial condition and results of operations.
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Everi Holdings Inc. and subsidiariesSubsidiaries
Las Vegas, NV
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Everi Holdings Inc. and subsidiaries (the “Company”) and subsidiaries as of December 31, 20182021 and 2017,2020, the related consolidated statements of income (loss)operations and comprehensive income (loss), stockholders’ deficit,equity (deficit), and cash flows for each of the three years in the period ended December 31, 2018,2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 20182021 and 2017,2020, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2018,2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’sCompany's internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 12, 20191, 2022 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” and the related amendments.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes – Release of Valuation Allowance related to Deferred Tax Assets
As described in Notes 2 and 17 to the consolidated financial statements, the Company had approximately $68.7 million of valuation allowances recorded on deferred tax assets related to federal and state loss and credit carryforwards as of December 31, 2020. Deferred income taxes reflect the net future tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their basis for income tax purposes and the tax effects of net operating losses and tax credit carryforwards. Net deferred tax assets have been recognized based on management’s estimates of future taxable income for the Company. Valuation allowances have been established for the amounts that, more likely than not, will not be realized. In assessing the realizability of deferred tax assets, management determined there was sufficient positive evidence that it was more likely than not that the net operating loss and credit carryforwards related to federal and certain state jurisdictions would be realized and therefore, released $63.5 million of the valuation allowance against the deferred tax assets during the fourth quarter of 2021.
Management considers a number of factors in assessing the realization of a deferred tax asset associated with net operating losses and tax credit carryforwards, including the reversal of temporary differences, future taxable income and ongoing prudent
and feasible tax-planning strategies. Management also considers the uncertainty posed by the current economic environment and the effect of this uncertainty on the various factors that management takes into account in evaluating the need for valuation allowances.
We identified management’s judgments related to the determination of the realizability of deferred tax assets recorded as a critical audit matter due to significant judgments related to: (i) evaluating the positive and negative evidence available in the determination of the amount of deferred tax assets that were more-likely-than-not to be realized in the future and (ii) evaluating whether sufficient projected future taxable income will be generated to support the valuation allowance release. Auditing these judgments involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skills or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Assessing the reasonableness and the appropriateness of management’s judgments and assumptions used to support projected taxable income against historical performance of the Company and management’s plans.
•Reviewing and independently evaluating the rolling twelve quarter cumulative income analysis, scheduled reversal of deferred tax liabilities and industry trends used to determine the realizability of the deferred tax assets.
•Utilizing personnel with specialized knowledge and skills in accounting for income taxes to assist in the evaluation of the positive and negative evidence available, the analysis of the realizability of the deferred tax assets and the conclusions reached.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2015.
Las Vegas, Nevada
March 12, 20191, 2022
EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except earnings (loss) per share amounts)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Revenues | | | | | | |
|
| Games revenues | | | | | | |
| Gaming operations | | $ | 168,146 |
| | $ | 148,654 |
| | $ | 152,514 |
|
| Gaming equipment and systems | | 87,038 |
| | 70,118 |
| | 56,277 |
|
| Gaming other | | 3,794 |
| | 4,005 |
| | 4,462 |
|
| Games total revenues | | 258,978 |
| | 222,777 |
| | 213,253 |
|
| | | | | | | |
| FinTech revenues | | | | | | |
| Cash access services | | 156,806 |
| | 707,222 |
| | 601,874 |
|
| Equipment | | 20,977 |
| | 13,258 |
| | 14,995 |
|
| Information services and other | | 32,754 |
| | 31,691 |
| | 29,334 |
|
| FinTech total revenues | | 210,537 |
| | 752,171 |
| | 646,203 |
|
| | | | | | | |
| Total revenues | | 469,515 |
| | 974,948 |
| | 859,456 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
Games cost of revenues(1) | | | | | | |
| Gaming operations | | 17,603 |
| | 15,741 |
| | 15,265 |
|
| Gaming equipment and systems | | 47,121 |
| | 35,707 |
| | 31,602 |
|
| Gaming other | | 3,285 |
| | 3,247 |
| | 3,441 |
|
| Games total cost of revenues | | 68,009 |
| | 54,695 |
| | 50,308 |
|
| | | | | | | |
FinTech cost of revenues(1) | | | | | | |
| Cash access services | | 9,717 |
| | 572,880 |
| | 485,061 |
|
| Equipment | | 12,601 |
| | 7,717 |
| | 9,889 |
|
| Information services and other | | 4,110 |
| | 3,253 |
| | 3,756 |
|
| FinTech total cost of revenues | | 26,428 |
| | 583,850 |
| | 498,706 |
|
| | | | | | | |
| Operating expenses | | 142,298 |
| | 118,935 |
| | 118,709 |
|
| Research and development | | 20,497 |
| | 18,862 |
| | 19,356 |
|
| Goodwill impairment | | — |
| | — |
| | 146,299 |
|
| Depreciation | | 61,225 |
| | 47,282 |
| | 49,995 |
|
| Amortization | | 65,245 |
| | 69,505 |
| | 94,638 |
|
| Total costs and expenses | | 383,702 |
| | 893,129 |
| | 978,011 |
|
| | | | | | | |
| Operating income (expense) | | 85,813 |
| | 81,819 |
| | (118,555 | ) |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Other expenses | | | | | | |
| Interest expense, net of interest income | | 83,001 | | 102,136 |
| | 99,228 |
|
| Loss on extinguishment of debt | | 166 |
| | 51,750 |
| | — |
|
| Total other expenses | | 83,167 |
| | 153,886 |
| | 99,228 |
|
| | | | | | | |
| Income (loss) before income tax | | 2,646 |
| | (72,067 | ) | | (217,783 | ) |
| | | | | | | |
| Income tax (benefit) provision | | (9,710 | ) | | (20,164 | ) | | 31,696 |
|
| Net income (loss) | | 12,356 |
| | (51,903 | ) | | (249,479 | ) |
| Foreign currency translation | | (1,745 | ) | | 1,856 |
| | (2,427 | ) |
| Comprehensive income (loss) | | $ | 10,611 |
| | $ | (50,047 | ) | | $ | (251,906 | ) |
| Earnings (loss) per share | | | | | | |
| Basic | | $ | 0.18 |
| | $ | (0.78 | ) | | $ | (3.78 | ) |
| Diluted | | $ | 0.17 |
| | $ | (0.78 | ) | | $ | (3.78 | ) |
| Weighted average common shares outstanding | | | | | | |
| Basic | | 69,464 |
| | 66,816 |
| | 66,050 |
|
| Diluted | | 73,796 |
| | 66,816 |
| | 66,050 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Revenues | | | | | | |
| Games revenues | | | | | | |
| Gaming operations | | $ | 272,767 | | | $ | 156,199 | | | $ | 188,874 | |
| Gaming equipment and systems | | 103,844 | | | 44,006 | | | 90,919 | |
| Gaming other | | 118 | | | 96 | | | 3,326 | |
| Games total revenues | | 376,729 | | | 200,301 | | | 283,119 | |
| FinTech revenues | | | | | | |
| Financial access services | | 178,019 | | | 112,035 | | | 164,741 | |
| Software and other | | 67,797 | | | 47,041 | | | 47,502 | |
| Hardware | | 37,840 | | | 24,297 | | | 37,865 | |
| FinTech total revenues | | 283,656 | | | 183,373 | | | 250,108 | |
| Total revenues | | 660,385 | | | 383,674 | | | 533,227 | |
| Costs and expenses | | | | | | |
Games cost of revenues (1) | | | | | | |
| Gaming operations | | 21,663 | | | 15,192 | | | 18,043 | |
| Gaming equipment and systems | | 60,093 | | | 25,680 | | | 50,826 | |
| Gaming other | | — | | | 456 | | | 3,025 | |
| Games total cost of revenues | | 81,756 | | | 41,328 | | | 71,894 | |
FinTech cost of revenues (1) | | | | | | |
| Financial access services | | 6,779 | | | 6,755 | | | 14,236 | |
| Software and other | | 4,129 | | | 3,029 | | | 3,964 | |
| Hardware | | 22,785 | | | 14,724 | | | 22,292 | |
| FinTech total cost of revenues | | 33,693 | | | 24,508 | | | 40,492 | |
| Operating expenses | | 188,900 | | | 152,546 | | | 162,184 | |
| Research and development | | 39,051 | | | 27,943 | | | 32,505 | |
| Depreciation | | 61,487 | | | 67,459 | | | 63,198 | |
| Amortization | | 57,987 | | | 75,305 | | | 68,937 | |
| Total costs and expenses | | 462,874 | | | 389,089 | | | 439,210 | |
| Operating income (loss) | | 197,511 | | | (5,415) | | | 94,017 | |
| Other expenses | | | | | | |
| Interest expense, net of interest income | | 62,097 | | | 74,564 | | | 77,844 | |
| Loss on extinguishment of debt | | 34,389 | | | 7,457 | | | 179 | |
| Total other expenses | | 96,486 | | | 82,021 | | | 78,023 | |
| Income (loss) before income tax | | 101,025 | | | (87,436) | | | 15,994 | |
| Income tax benefit | | (51,900) | | | (5,756) | | | (523) | |
| Net income (loss) | | 152,925 | | | (81,680) | | | 16,517 | |
| Foreign currency translation (loss) gain | | (264) | | | (372) | | | 1,179 | |
| Comprehensive income (loss) | | $ | 152,661 | | | $ | (82,052) | | | $ | 17,696 | |
(1) Exclusive of depreciation and amortization.
The 2018 results include the impact of adopting the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 606Revenues from Contracts with Customers(“ASC 606”). Refer to “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies” and “Note 3 — Adoption of ASC 606, Revenue from Contracts with Customers” to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for more information.EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except earnings (loss) per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Earnings (loss) per share | | | | | | |
| Basic | | $ | 1.71 | | | $ | (0.96) | | | $ | 0.23 | |
| Diluted | | $ | 1.53 | | | $ | (0.96) | | | $ | 0.21 | |
| Weighted average common shares outstanding | | | | | | |
| Basic | | 89,284 | | | 85,379 | | | 72,376 | |
| Diluted | | 99,967 | | | 85,379 | | | 79,235 | |
See notes to consolidated financial statements.
EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
|
| | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 |
| ASSETS | | |
| | |
|
| Current assets | | |
| | |
|
| Cash and cash equivalents | | $ | 297,532 |
| | $ | 128,586 |
|
| Settlement receivables | | 82,359 |
| | 227,403 |
|
Trade and other receivables, net of allowances for doubtful accounts of $6,425 and $4,706 at December 31, 2018 and December 31, 2017, respectively | | 64,387 |
| | 47,782 |
|
| Inventory | | 24,403 |
| | 23,967 |
|
| Prepaid expenses and other assets | | 20,259 |
| | 20,670 |
|
| Total current assets | | 488,940 |
|
| 448,408 |
|
| Non-current assets | | |
| | |
|
| Property, equipment and leased assets, net | | 116,288 |
| | 113,519 |
|
| Goodwill | | 640,537 |
| | 640,589 |
|
| Other intangible assets, net | | 287,397 |
| | 324,311 |
|
| Other receivables | | 8,847 |
| | 2,638 |
|
| Other assets | | 6,252 |
| | 7,609 |
|
| Total non-current assets | | 1,059,321 |
|
| 1,088,666 |
|
| Total assets | | $ | 1,548,261 |
|
| $ | 1,537,074 |
|
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | |
| | |
|
| Current liabilities | | |
| | |
|
| Settlement liabilities | | $ | 334,198 |
| | $ | 317,744 |
|
| Accounts payable and accrued expenses | | 129,238 |
| | 134,504 |
|
| Current portion of long-term debt | | 8,200 |
| | 8,200 |
|
| Total current liabilities | | 471,636 |
|
| 460,448 |
|
| Non-current liabilities | | |
| | |
|
| Deferred tax liability | | 27,867 |
| | 38,207 |
|
| Long-term debt, less current portion | | 1,155,016 |
| | 1,159,643 |
|
| Other accrued expenses and liabilities | | 2,637 |
| | 19,409 |
|
| Total non-current liabilities | | 1,185,520 |
|
| 1,217,259 |
|
| Total liabilities | | 1,657,156 |
|
| 1,677,707 |
|
| Commitments and contingencies (Note 13) | |
|
| |
|
|
| Stockholders’ deficit | | |
| | |
|
| Common stock, $0.001 par value, 500,000 shares authorized and 95,100 and 93,120 shares issued at December 31, 2018 and December 31, 2017, respectively | | 95 |
| | 93 |
|
| Convertible preferred stock, $0.001 par value, 50,000 shares authorized and no shares outstanding at December 31, 2018 and December 31, 2017, respectively | | — |
| | — |
|
| Additional paid-in capital | | 298,929 |
| | 282,070 |
|
| Accumulated deficit | | (229,457 | ) | | (246,202 | ) |
| Accumulated other comprehensive loss | | (1,998 | ) | | (253 | ) |
| Treasury stock, at cost, 24,900 and 24,883 shares at December 31, 2018 and December 31, 2017, respectively | | (176,464 | ) | | (176,341 | ) |
| Total stockholders’ deficit | | (108,895 | ) |
| (140,633 | ) |
| Total liabilities and stockholders’ deficit | | $ | 1,548,261 |
|
| $ | 1,537,074 |
|
| | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2021 | | 2020 |
| ASSETS | | | | |
| Current assets | | | | |
| Cash and cash equivalents | | $ | 302,009 | | | $ | 251,706 | |
| Settlement receivables | | 89,275 | | | 60,652 | |
| Trade and other receivables, net of allowances for credit losses of $5,161 and $3,689 at December 31, 2021 and December 31, 2020, respectively | | 104,822 | | | 74,191 | |
| Inventory | | 29,233 | | | 27,742 | |
| Prepaid expenses and other current assets | | 27,299 | | | 17,348 | |
| Total current assets | | 552,638 | | | 431,639 | |
| Non-current assets | | | | |
| Property and equipment, net | | 119,993 | | | 112,323 | |
| Goodwill | | 682,663 | | | 681,974 | |
| Other intangible assets, net | | 214,594 | | | 214,627 | |
| Other receivables | | 13,982 | | | 14,620 | |
| Deferred tax assets, net | | 32,121 | | | — | |
| Other assets | | 19,659 | | | 21,996 | |
| Total non-current assets | | 1,083,012 | | | 1,045,540 | |
| Total assets | | $ | 1,635,650 | | | $ | 1,477,179 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | | |
| Current liabilities | | | | |
| Settlement liabilities | | $ | 291,861 | | | $ | 173,211 | |
| Accounts payable and accrued expenses | | 173,933 | | | 145,029 | |
| Current portion of long-term debt | | 6,000 | | | 1,250 | |
| Total current liabilities | | 471,794 | | | 319,490 | |
| Non-current liabilities | | | | |
| Deferred tax liabilities, net | | — | | | 19,956 | |
| Long-term debt, less current portion | | 975,525 | | | 1,128,003 | |
| Other accrued expenses and liabilities | | 13,831 | | | 17,628 | |
| Total non-current liabilities | | 989,356 | | | 1,165,587 | |
| Total liabilities | | 1,461,150 | | | 1,485,077 | |
| Commitments and contingencies (Note 13) | | 0 | | 0 |
| Stockholders’ equity (deficit) | | | | |
| Common stock, $0.001 par value, 500,000 shares authorized and 116,996 and 91,313 shares issued and outstanding at December 31, 2021, respectively, and 111,872 and 86,683 shares issued and outstanding at December 31, 2020, respectively | | 117 | | | 112 | |
| Convertible preferred stock, $0.001 par value, 50,000 shares authorized and no shares outstanding at December 31, 2021 and December 31, 2020, respectively | | — | | | — | |
| Additional paid-in capital | | 505,757 | | | 466,614 | |
| Accumulated deficit | | (141,755) | | | (294,620) | |
| Accumulated other comprehensive loss | | (1,455) | | | (1,191) | |
| Treasury stock, at cost, 25,683 and 25,190 shares at December 31, 2021 and December 31, 2020, respectively | | (188,164) | | | (178,813) | |
| Total stockholders’ equity (deficit) | | 174,500 | | | (7,898) | |
| Total liabilities and stockholders’ equity (deficit) | | $ | 1,635,650 | | | $ | 1,477,179 | |
See notes to consolidated financial statements.
EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities | | | | | | |
| Net income (loss) | | $ | 152,925 | | | $ | (81,680) | | | $ | 16,517 | |
| Adjustments to reconcile net income (loss) to cash provided by operating activities: | | | | | | |
| Depreciation | | 61,487 | | | 67,459 | | | 63,198 | |
| Amortization | | 57,987 | | | 75,305 | | | 68,937 | |
| Non-cash lease expense | | 4,401 | | | 4,880 | | | 4,276 | |
| Amortization of financing costs and discounts | | 3,937 | | | 4,283 | | | 4,285 | |
| Loss on sale or disposal of assets | | 1,658 | | | 450 | | | 1,678 | |
| Accretion of contract rights | | 9,318 | | | 7,675 | | | 8,710 | |
| Provision for credit losses | | 7,540 | | | 8,010 | | | 14,647 | |
| Deferred income taxes | | (52,077) | | | (6,579) | | | (1,594) | |
| Reserve for inventory obsolescence | | 2,275 | | | 2,166 | | | 1,463 | |
| Write-down of assets | | — | | | 13,068 | | | 1,268 | |
| Loss on extinguishment of debt | | 34,389 | | | 7,457 | | | 179 | |
| Stock-based compensation | | 20,900 | | | 13,036 | | | 9,857 | |
| Other non-cash items | | 53 | | | 456 | | | — | |
| Changes in operating assets and liabilities: | | | | | | |
| Settlement receivables | | (28,624) | | | 9,881 | | | 12,961 | |
| Trade and other receivables | | (37,617) | | | 8,621 | | | (41,754) | |
| Inventory | | (3,755) | | | (5,650) | | | (3,067) | |
| Prepaid expenses and other assets | | (10,219) | | | (4,301) | | | (18,724) | |
| Settlement liabilities | | 118,651 | | | (61,133) | | | (100,783) | |
| Accounts payable and accrued expenses | | 48,401 | | | (27,225) | | | 42,836 | |
| Net cash provided by operating activities | | 391,630 | | | 36,179 | | | 84,890 | |
| Cash flows from investing activities | | | | | | |
| Capital expenditures | | (104,708) | | | (76,429) | | | (114,291) | |
| Acquisitions, net of cash acquired | | (16,000) | | | (15,000) | | | (35,000) | |
| Proceeds from sale of property and equipment | | 261 | | | 396 | | | 56 | |
| Placement fee agreements | | (31,465) | | | (3,085) | | | (17,102) | |
| Net cash used in investing activities | | (151,912) | | | (94,118) | | | (166,337) | |
| EVERI HOLDINGS INC. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Cash flows from financing activities | | | | | | |
| Proceeds from new term loan | | 600,000 | | | — | | | — | |
| Repayments of new term loan | | (1,500) | | | — | | | — | |
| Repayments of prior term loan | | (735,500) | | | (13,500) | | | (58,700) | |
| Proceeds from prior incremental term loan | | — | | | 125,000 | | | — | |
| Repayment of prior incremental term loan | | (124,375) | | | (625) | | | — | |
| Proceeds from prior revolver | | — | | | 35,000 | | | — | |
| Repayments of prior revolver | | — | | | (35,000) | | | — | |
| Proceeds from 2021 unsecured notes | | 400,000 | | | — | | | — | |
| Repayments of 2017 unsecured notes | | (285,381) | | | (89,619) | | | — | |
| Fees associated with debt transactions — new debt | | (19,797) | | | — | | | — | |
| Fees associated with debt transactions — prior debt | | (20,828) | | | (11,128) | | | (707) | |
| Proceeds from issuance of common stock, net | | — | | | — | | | 122,376 | |
| Proceeds from exercise of stock options | | 18,251 | | | 6,226 | | | 15,704 | |
| Treasury stock | | (9,354) | | | (1,288) | | | (1,060) | |
| Payment of acquisition contingent consideration | | (9,875) | | | — | | | — | |
| Net cash (used in) provided by financing activities | | (188,359) | | | 15,066 | | | 77,613 | |
| Effect of exchange rates on cash and cash equivalents | | 18 | | | (1,388) | | | 1,263 | |
| Cash, cash equivalents and restricted cash | | | | | | |
| Net increase (decrease) for the period | | 51,377 | | | (44,261) | | | (2,571) | |
| Balance, beginning of the period | | 252,349 | | | 296,610 | | | 299,181 | |
| Balance, end of the period | | $ | 303,726 | | | $ | 252,349 | | | $ | 296,610 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities | | | | | | |
| Net income (loss) | | $ | 12,356 |
| | $ | (51,903 | ) | | $ | (249,479 | ) |
| Adjustments to reconcile net income (loss) to cash provided by operating activities: | | | | | | |
| Depreciation | | 61,225 |
| | 47,282 |
| | 49,995 |
|
| Amortization | | 65,245 |
| | 69,505 |
| | 94,638 |
|
| Amortization of financing costs and discounts | | 4,877 |
| | 8,706 |
| | 6,695 |
|
| Loss on sale or disposal of assets | | 869 |
| | 2,513 |
| | 2,563 |
|
| Accretion of contract rights | | 8,421 |
| | 7,819 |
| | 8,692 |
|
| Provision for bad debts | | 11,459 |
| | 9,737 |
| | 9,908 |
|
| Deferred income taxes | | (10,343 | ) | | (20,015 | ) | | 29,940 |
|
| Write-down of assets | | 2,575 |
| | — |
| | 4,289 |
|
| Reserve for obsolescence | | 1,919 |
| | 397 |
| | 3,581 |
|
| Goodwill impairment | | — |
| | — |
| | 146,299 |
|
| Loss on extinguishment of debt | | 166 |
| | 51,750 |
| | — |
|
| Stock-based compensation | | 7,251 |
| | 6,411 |
| | 6,735 |
|
| Changes in operating assets and liabilities: | | | | | | |
| Settlement receivables | | 143,705 |
| | (98,390 | ) | | (83,998 | ) |
| Trade and other receivables | | (29,320 | ) | | (884 | ) | | (8,207 | ) |
| Inventory | | (3,848 | ) | | (5,753 | ) | | 5,600 |
|
| Prepaid and other assets | | 1,672 |
| | (1,105 | ) | | 4,668 |
|
| Settlement liabilities | | 17,159 |
| | 78,465 |
| | 99,245 |
|
| Accounts payable and accrued expenses | | (1,102 | ) | | (8,276 | ) | | 735 |
|
| Net cash provided by operating activities | | 294,286 |
|
| 96,259 |
|
| 131,899 |
|
| Cash flows from investing activities | | | | | | |
| Capital expenditures | | (103,031 | ) | | (96,490 | ) | | (80,741 | ) |
| Acquisitions, net of cash acquired | | — |
| | — |
| | (694 | ) |
| Proceeds from sale of fixed assets | | 237 |
| | 10 |
| | 4,599 |
|
| Placement fee agreements | | (20,556 | ) | | (13,300 | ) | | (11,312 | ) |
| Net cash used in investing activities | | (123,350 | ) |
| (109,780 | ) |
| (88,148 | ) |
| Cash flows from financing activities | | | | | | |
| Proceeds from new credit facility | | — |
| | 820,000 |
| | — |
|
| Proceeds from unsecured notes | | — |
| | 375,000 |
| | — |
|
| Repayments of prior credit facility | | — |
| | (465,600 | ) | | (24,400 | ) |
| Repayments of secured notes | | — |
| | (335,000 | ) | | — |
|
| Repayments of unsecured notes | | — |
| | (350,000 | ) | | — |
|
| Repayments of new credit facility | | (8,200 | ) | | (4,100 | ) | | — |
|
| Debt issuance costs and discounts | | (1,276 | ) | | (28,702 | ) | | (480 | ) |
| Proceeds from exercise of stock options | | 9,610 |
| | 10,906 |
| | — |
|
| Purchase of treasury stock | | (123 | ) | | (110 | ) | | (42 | ) |
| Net cash provided by (used in) financing activities | | 11 |
| | 22,394 |
| | (24,922 | ) |
| Effect of exchange rates on cash | | (1,370 | ) | | 1,292 |
| | (1,714 | ) |
| Cash, cash equivalents and restricted cash | | | | | | |
| Net increase for the period | | 169,577 |
| | 10,165 |
| | 17,115 |
|
| Balance, beginning of the period | | 129,604 |
| | 119,439 |
| | 102,324 |
|
| Balance, end of the period | | $ | 299,181 |
|
| $ | 129,604 |
|
| $ | 119,439 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Supplemental cash disclosures | | | | | | |
| Cash paid for interest | | $ | 51,224 | | | $ | 67,562 | | | $ | 77,351 | |
| Cash paid for income tax, net of refunds | | 1,062 | | | 576 | | | 694 | |
| Supplemental non-cash disclosures | | | | | | |
| Accrued and unpaid capital expenditures | | $ | 3,690 | | | $ | 2,801 | | | $ | 4,500 | |
| Accrued and unpaid placement fees added during the year | | — | | | — | | | 585 | |
| Accrued and unpaid liabilities for acquisitions added during the year | | — | | | — | | | 36,940 | |
| Transfer of leased gaming equipment to inventory | | 8,782 | | | 5,775 | | | 10,980 | |
See notes to consolidated financial statements.
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Supplemental cash disclosures | | | | | | |
| Cash paid for interest | | $ | 81,609 |
| | $ | 89,008 |
| | $ | 93,420 |
|
| Cash paid for income tax | | 406 |
| | 1,009 |
| | 1,703 |
|
| Cash refunded for income tax | | 4 |
| | 829 |
| | 171 |
|
| Supplemental non-cash disclosures | | |
| | |
| | |
|
| Accrued and unpaid capital expenditures | | $ | 3,657 |
| | $ | 1,386 |
| | $ | 2,104 |
|
| Accrued and unpaid placement fees added during the year | | — |
| | 39,074 |
| | — |
|
| Accrued and unpaid contingent liability for acquisitions | | (550 | ) | | — |
| | (3,169 | ) |
| Transfer of leased gaming equipment to inventory | | 10,028 |
| | 7,820 |
| | 9,042 |
|
EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock— Series A | | Additional | | Retained Earnings | | Accumulated Other | | | | Total |
| | | Number of Shares | | Amount | | Paid-in Capital | | (Accumulated Deficit) | | Comprehensive Income (Loss) | | Treasury Stock | | Equity (Deficit)
|
| Balance, January 1, 2016 | | 90,877 |
| | $ | 91 |
| | $ | 258,020 |
| | $ | 55,180 |
| | $ | 318 |
| | $ | (176,189 | ) | | $ | 137,420 |
|
| Net loss | | — |
| | — |
| | — |
| | (249,479 | ) | | — |
| | — |
| | (249,479 | ) |
| Foreign currency translation | | — |
| | — |
| | — |
| | — |
| | (2,427 | ) | | — |
| | (2,427 | ) |
| Stock-based compensation expense | | — |
| | — |
| | 6,735 |
| | — |
| | — |
| | — |
| | 6,735 |
|
| Restricted share vesting withholdings | | — |
| | — |
| | — |
| | — |
| | — |
| | (42 | ) | | (42 | ) |
| Restricted shares | | 75 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance, December 31, 2016 | | 90,952 |
|
| $ | 91 |
|
| $ | 264,755 |
|
| $ | (194,299 | ) |
| $ | (2,109 | ) |
| $ | (176,231 | ) | | $ | (107,793 | ) |
| Net loss | | — |
| | — |
| | — |
| | (51,903 | ) | | — |
| | — |
| | (51,903 | ) |
| Foreign currency translation | | — |
| | — |
| | — |
| | — |
| | 1,856 |
| | — |
| | 1,856 |
|
| Stock-based compensation expense | | — |
| | — |
| | 6,411 |
| | — |
| | — |
| | — |
| | 6,411 |
|
| Exercise of options | | 2,037 |
| | 2 |
| | 10,904 |
| | — |
| | — |
| | — |
| | 10,906 |
|
| Restricted share vesting withholdings | | — |
| | — |
| | — |
| | — |
| | — |
| | (110 | ) | | (110 | ) |
| Restricted shares | | 131 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance, December 31, 2017 | | 93,120 |
|
| $ | 93 |
|
| $ | 282,070 |
|
| $ | (246,202 | ) |
| $ | (253 | ) |
| $ | (176,341 | ) | | $ | (140,633 | ) |
| Net income | | — |
| | — |
| | — |
| | 12,356 |
| | — |
| | — |
| | 12,356 |
|
| Cumulative adjustment related to adoption of ASC 606 | | — |
| | — |
| | — |
| | 4,389 |
| | — |
| | — |
| | 4,389 |
|
| Foreign currency translation | | — |
| | — |
| | — |
| | — |
| | (1,745 | ) | | — |
| | (1,745 | ) |
| Stock-based compensation expense | | — |
| | — |
| | 7,251 |
| | — |
| | — |
| | — |
| | 7,251 |
|
| Exercise of options | | 1,980 |
| | 2 |
| | 9,608 |
| | — |
| | — |
| | — |
| | 9,610 |
|
| Restricted share vesting withholdings | | — |
| | — |
| | — |
| | — |
| | — |
| | (123 | ) | | (123 | ) |
| Balance, December 31, 2018 | | 95,100 |
|
| $ | 95 |
|
| $ | 298,929 |
|
| $ | (229,457 | ) |
| $ | (1,998 | ) |
| $ | (176,464 | ) | | $ | (108,895 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock— Series A | | Additional | | | | Accumulated Other | | | | Total |
| | Number of Shares | | Amount | | Paid-in Capital | | Accumulated
Deficit | | Comprehensive Loss | | Treasury Stock | | Equity (Deficit)
|
| Balance, January 1, 2019 | | 95,100 | | $ | 95 | | | $ | 298,929 | | | $ | (229,457) | | | $ | (1,998) | | | $ | (176,464) | | | $ | (108,895) | |
| Net income | | — | | | — | | | — | | | 16,517 | | | — | | | — | | | 16,517 | |
| Foreign currency translation | | — | | | — | | | — | | | — | | | 1,179 | | | — | | | 1,179 | |
| Issuance of common stock in public offering, net | | 11,500 | | | 11 | | | 122,365 | | | — | | | — | | | — | | | 122,376 | |
| Stock-based compensation expense | | — | | | — | | | 8,167 | | | — | | | — | | | — | | | 8,167 | |
| Exercise of options | | 2,595 | | | 3 | | | 15,701 | | | — | | | — | | | — | | | 15,704 | |
| Restricted share vesting and withholding | | 298 | | | — | | | — | | | — | | | — | | | (1,060) | | | (1,060) | |
| Balance, December 31, 2019 | | 109,493 | | | $ | 109 | | | $ | 445,162 | | | $ | (212,940) | | | $ | (819) | | | $ | (177,524) | | | $ | 53,988 | |
| Net loss | | — | | | — | | | — | | | (81,680) | | | — | | | — | | | (81,680) | |
| Foreign currency translation | | — | | | — | | | — | | | — | | | (372) | | | — | | | (372) | |
| Stock-based compensation expense | | — | | | — | | | 14,726 | | | — | | | — | | | — | | | 14,726 | |
| Issuance of warrants | | — | | | — | | | 502 | | | — | | | | | | | 502 | |
| Exercise of options | | 1,474 | | | 2 | | | 6,224 | | | — | | | — | | | — | | | 6,226 | |
| Restricted share vesting and withholding | | 905 | | | 1 | | | — | | | — | | | — | | | (1,289) | | | (1,288) | |
| Balance, December 31, 2020 | | 111,872 | | | $ | 112 | | | $ | 466,614 | | | $ | (294,620) | | | $ | (1,191) | | | $ | (178,813) | | | $ | (7,898) | |
| Net income | | — | | | — | | | — | | | 152,925 | | | — | | | — | | | 152,925 | |
| Dissolution adjustment | | — | | | — | | | — | | | (60) | | | — | | | — | | | (60) | |
| Foreign currency translation | | — | | | — | | | — | | | — | | | (264) | | | — | | | (264) | |
| Stock-based compensation expense | | — | | | — | | | 20,900 | | | — | | | — | | | — | | | 20,900 | |
| Exercise of warrants | | 378 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Exercise of options | | 3,180 | | | 3 | | | 18,248 | | | — | | | — | | | — | | | 18,251 | |
| Restricted share vesting and withholding | | 1,566 | | | 2 | | | (5) | | | — | | | — | | | (9,351) | | | (9,354) | |
| Balance, December 31, 2021 | | 116,996 | | | $ | 117 | | | $ | 505,757 | | | $ | (141,755) | | | $ | (1,455) | | | $ | (188,164) | | | $ | 174,500 | |
See notes to consolidated financial statements.
EVERI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In this filing, we refer to: (i) our audited consolidated financial statements and notes thereto as our “Financial Statements;”Statements”; (ii) our audited Consolidated Statements of Income (Loss)Operations and Comprehensive Income (Loss) as our “Statements of Income (Loss)Operations”;” and (iii) our audited Consolidated Balance Sheets as our “Balance Sheets.”
1. BUSINESS
Everi 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 Payments Inc. (“Everi FinTech” or “FinTech”) and Everi Games Holding Inc. (“Everi Games Holding”), which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (“Everi Games” or “Games”), and Everi Payments Inc. (“Everi Payments”). Unless otherwise indicated, the terms the “Company,” “we,” “us,” and “our” refer to Everi Holdings together with its consolidated subsidiaries.
Everi is a leading supplier of entertainment and technology solutions for the casino and digital gaming industry. We provide casino operators withThe Company develops game content and gaming machines, gaming systems and services for land-based and iGaming operators. The Company is also a diverse portfolioprovider of products including innovative gaming machinesfinancial technology solutions that power the casino floor, including products and casino operationalservices that facilitate cash and management systems that include comprehensive end-to-end payments solutions, criticalcashless financial transactions, self-service player loyalty tools and applications, and regulatory and intelligence offerings, and gaming operations efficiency technologies.software.
Everi Holdings reports its results offinancial performance, and organizes and manages its operations, based on two operatingacross the following 2 business segments: Games(i) Games; and FinTech. Effective April 1, 2018, we changed the name of the operating segment previously referred to as “Payments” to “Financial(ii) Financial Technology Solutions”Solutions (“Everi FinTech” or “FinTech”). We believe this reference more accurately reflects the focus of the business segment on delivering innovative and integrated solutions to enhance the efficiency of the casino operator, support the comprehensive regulatory and tax requirements of their gaming customers, and improve players’ gaming experience by providing easy access to their funds and payment of winnings.
Everi Games primarily provides gaming operators with gaming technology products and services, including: (a)(i) gaming machines, primarily comprised ofcomprising Class II and Class III slot machines placed under participation or fixed feefixed-fee lease arrangements or sold to casino customers, including TournEvent® that allows operators to switch from in-revenue gaming to out-of-revenue tournaments; (b) system software, licenses, ancillary equipment,customers; (ii) providing and maintenance; and (c) business-to-consumer and business-to-business interactive activities. In addition, Everi Games develops and managesmaintaining the central determinant systemsystems for the video lottery terminals (“VLTs”) installed in the State of New York and it also provides similar technology in certain tribal jurisdictions.jurisdictions; and (iii) business-to-business (“B2B”) digital online gaming activities.
Everi FinTech provides gaming operators cash accesswith financial technology and relatedentertainment products and services, including: (a)(i) financial access and related services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels; (ii) loyalty and marketing software and tools, regulatory and compliance (“RegTech”) software solutions, other information-related products and services, and hardware maintenance services; and (iii) associated casino patron self-service hardware that utilizes our financial access, software and other services. Our services operate as part of an end-to-end security suite to protect against cyber-related attacks and maintain the necessary secured environments to maintain compliance with applicable regulatory requirements. These solutions include: access to cash and cashless funding at gaming facilities via Automated Teller Machine (“ATM”) cashdebit withdrawals, credit card cashfinancial access transactions, and point of sale (“POS”) debit card cash access transactions,purchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check verificationwarranty services, self-service ATMs and warrantyfully integrated kiosk and maintenance services; (b) equipment that provides cash accessself-service loyalty tools and efficiency-related services; (c) products and services that improve credit decision making, automate cashier operations, and enhance patron marketing activities for gaming establishments; (d)promotion management software; compliance, audit, and data solutions;software; casino credit data and (e) online payment processing solutionsreporting services; marketing and promotional offering subscription-based services; and other ancillary offerings.
With respect to our FinTech business, we have made the following updates to certain of our financial statement descriptions, where applicable: (i) “Cash access services” has become “Financial access services”; (ii) “ATM” has been renamed “Funds dispensed”; (iii) “Equipment” has been changed to “Hardware”; and (iv) “Information services and other” has been revised to “Software and other.” These naming convention changes better represent how our business has evolved.
Impact of the Coronavirus Disease 2019 (“COVID-19”) Pandemic
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, temporarily lowered equity market valuations, created significant volatility in the financial markets, increased unemployment levels, and caused temporary, and in certain cases, permanent closures of many businesses. The initial impacts from the COVID-19 pandemic have begun to subside with certain aspects of the global economy, equity market valuations, and increased unemployment levels showing signs of recovery. The gaming industry was not immune to these factors as our casino customers closed their gaming establishments in the first quarter of 2020, with many beginning to reopen their operations over the remainder of 2020 and throughout 2021. As a result, our operations experienced significant disruptions in the first three quarters of 2020. At the immediate onset of the COVID-19 pandemic, we were affected by various measures, including, but not limited to: the institution of social distancing and sheltering-in-place requirements in many states and communities where we operate, which significantly impacted demand for our products and services, and resulted in office closures, the furlough of a majority of our employees, the implementation of temporary base salary reductions for our employees and the implementation of a work-from-home policy.
Since the onset of COVID-19, we have implemented measures to mitigate our exposure throughout the global pandemic. While there may be further uncertainty facing our customers as a result of COVID-19, we continue to evaluate our business strategies and the impacts of the global pandemic on our results of operations and financial condition and make business decisions to mitigate further risk. While gaming industry conditions improved significantly in 2021 compared to 2020, it is unclear if the customer volumes experienced will continue to exceed pre-COVID levels. Resurgences of COVID-19 and its variants could result in reduced patron demand for gaming and could also result in new closures of casinos by the various governmental and regulatory agencies overseeing our customers or even by the casino operators themselves in statesan effort to contain the COVID-19 global pandemic or mitigate its impact and the effect of vaccines on these matters.
As of December 31, 2021, excluding the few casinos that offer intrastate, Internet-basedhave permanently closed, there are only a minimal number of customer sites, located primarily in Canada and other international markets, whose operations still remain closed. At the onset of the pandemic, our customers implemented protocols intended to protect their patrons and guests from potential COVID-19 exposure and re-establish customer confidence in the gaming and lottery activities.hospitality industry. These measures included enhanced sanitization, limitations on public gathering and casino capacity, patron social distancing requirements, and limitations on casino operations and amenities, which have limited the number of patrons that are able or who desire to attend these venues. This has also impacted the pace at which demand for our products and services rebounds.
With various limitations still in effect, we expect that demand and supply for our products and services may be tempered in the short-term, to the extent gaming activity decreases at our customers’ locations, or fails to increase at expected rates, and to the extent our customers decide to continue to restrict their capital spending as a result of uncertainty in the industry, or that supply chain disruptions might impact customer deliveries or otherwise. As a result, we continue to monitor and manage liquidity levels and we may, from time to time, evaluate available capital resource alternatives on acceptable terms to provide additional financial flexibility. The impact of the COVID-19 pandemic also exacerbates the risks disclosed in this Annual Report including, but not limited to: our ability to comply with the terms of our indebtedness; our ability to generate revenues, earn profits and maintain adequate liquidity; our ability to service existing and attract new customers and maintain our overall competitiveness in the market; the potential for significant fluctuations in demand for our products and services; overall trends in the gaming industry impacting our business; and potential volatility in our stock price, among other concerns such as cybersecurity exposure.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements are prepared under U.S. Generally Accepted Accounting Principles (GAAP) and include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Business Combinations
We apply the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations,” in the accounting for acquisitions. It requires us toWhen we acquire a business, we recognize separately from goodwill the assets acquired and the liabilities assumed, at their acquisition date fair values. Goodwill as of the acquisition date is measured and recognized as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Significant estimates and assumptions are required to value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable. These estimates are preliminary and typically include the calculation of an appropriate discount rate and projection of the cash flows associated with each acquired asset over its estimated useful life. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.goodwill (referred to as the measurement period). In addition, deferred tax assets, deferred tax liabilities, uncertain tax positions, and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date and any adjustments to its preliminary estimates are recorded to goodwill, in the period of
identification, if identified within the measurement period. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Statements of Income (Loss).Operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and balances on deposit in banks and financial institutions. We consider highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Such balances generally exceed the federal insurance limits,limits; however, we periodically evaluate the creditworthiness of these institutions to minimize risk.
ATM Funding Agreements
We obtain all of the cash required to operate our ATMs through various ATM Funding Agreements. Some gaming establishments provide the cash utilized within the ATM (“Site‑Funded”Site-Funded”). The Site‑FundedSite-Funded receivables generated for the amount of cash dispensed from transactions performed at our ATMs are owned by us and we are liable to the gaming establishment for the face amount of the cash dispensed. In our Balance Sheets, the amount of the receivable for transactions processed on these ATMfunds dispensed transactions is included within settlement receivables and the amount due to the gaming establishment for the face amount of dispensing transactions is included within settlement liabilities.
For the non‑Site‑Fundednon-Site-Funded locations, we enter into commercial arrangements with third party vendors to provide us the currency needed for normal operating requirements for our ATMs. For the use of these funds, we pay a cash usage fee based upon the target federal funds rate. Under these agreements, the currency supplied by the third partythird-party vendors remains the sole property of these suppliers until cash isfunds are dispensed, at which time the third partythird-party vendors obtain an interest in the corresponding settlement receivable. As the cash is an asset of these suppliers, it is therefore not reflected on our Balance Sheets. The usage fee for the cash supplied in these ATMs is included as interest expense in the Statements of Income (Loss).Operations. Our rationale to record cash usage fees as interest expense is primarily due to the similar operational characteristics to a revolving line of credit, the fact that the fees are calculated on a financial index, and the fees are paid for access to a capital resource.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts related to our trade and other receivables and notes receivable that have been deemed to have a high risk of uncollectibility or for which uncertainty exists as to whether the account balance has become uncollectible. Management reviews its accounts and notes receivable on a quarterly basis to determine if any receivables will potentially be uncollectible. Management analyzes historical collection trends and changes in our customer payment patterns, concentration, and creditworthiness when evaluating the adequacy of our allowance for doubtful accounts. Based on the information available, management believes the allowance for doubtful accounts is adequate; however, actual write-offs may exceed the recorded allowance.
Settlement Receivables and Settlement Liabilities
We provide cash settlement services to gaming establishments related to our cashfinancial access services, which involve the movement of funds between various parties involved in these types of transactions. We receive reimbursement from the patron’s credit or debit card issuing financial institution for the amount owed to the gaming establishment plus the fee charged to the patron. These activities result in amounts due to us at the end of each business day that we generally recover over the next few business days, which are classified as settlement receivables on our Balance Sheets. In addition, cash settlement services result in amounts due to gaming establishments for the cash disbursed to patrons through the issuance of a negotiable instrument or through electronic settlement for the face amount provided to patrons that we generally remit over the next few business days, which are classified as settlement liabilities on our Balance Sheets.
Warranty Receivables
If a gaming establishment chooses to have a check warranted, it sends a request to our third-party check warranty service provider, asking whether it would be willing to accept the risk of cashing the check. If the check warranty provider accepts the risk and warrants the check, the gaming establishment negotiates the patron’s check by providing cash for the face amount of the check. If the check is dishonored by the patron’s bank upon presentment, the gaming establishment invokes the warranty, and the check warranty service provider purchases the check from the gaming establishment for the full check amount and then pursues collection activities on its own. In our Central Credit Check Warranty product under our agreement with the third-party service provider, we receive all of the check warranty revenue. We are exposed to risk for the losses associated with any warranted items that cannot be collected from patrons issuing the items. Warranty receivables are defined as any amounts paid by the third-party check warranty service provider to gaming establishments to purchase dishonored checks. Additionally, we pay a fee to the third-party check warranty service provider for its services.
The warranty receivables amount is recorded in trade and other receivables, net on our Balance Sheets. On a monthly basis, the Company evaluates the collectability of the outstanding balances and establishes a reserve for the face amount of the expected losses on these receivables. The warranty expense associated with this reserve is included within cost of revenues (exclusive of depreciation and amortization) on our Statements of Income (Loss).Operations.
Allowance for Credit Losses
We continually evaluate the collectability of outstanding balances and maintain an allowance for credit losses related to our trade and other receivables and notes receivable that have been determined to have a high risk of uncollectability, which represents our best estimates of the current expected credit losses to be incurred in the future. To derive our estimates, we analyze historical collection trends and changes in our customer payment patterns, current and expected conditions and market trends along with our operating forecasts, concentration, and creditworthiness when evaluating the adequacy of our allowance for credit losses. In addition, with respect to our check warranty receivables, we are exposed to risk for the losses associated with warranted items that cannot be collected from patrons issuing these items. We evaluate the collectability of the outstanding balances and establish a reserve for the face amount of the current expected credit losses related to these receivables. Account balances are charged against the provision when the Company believes it is probable the receivable will not be recovered. The provision for doubtful accounts receivable is included within operating expenses and the check warranty loss reserves are included within financial access services cost of revenues in the Statements of Operations.
Inventory
Our inventory primarily consists of component parts as well as finished goods and work-in-progress. 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 first in, first out method (“FIFO”).
Restricted Cash
Our restricted cash primarily consists of: (i) funds held in connection with certain customer agreements; (ii) deposits held in connection with a sponsorship agreement; (ii) WAP-related(iii) wide-area progressive (“WAP”)-related restricted funds; and (iii) Internet-related(iv) financial access activities related to cashless balances held on behalf of patrons. The following table provides a reconciliation of cash, access activities. The current portion ofcash equivalents, and restricted cash which is includedreported within the Balance Sheets that sum to the total of the same such amounts shown in prepaid expenses and other assets, was approximately $1.5 million, $0.9 million, and $0.3 million asthe statements of cash flows for the years ended December 31, 2018, 2017,2021, 2020, and 2016, respectively. The non-current portion of restricted cash, which is included in other assets, was approximately $0.1 million as of December 31, 2018, 2017, and 2016.2019, respectively (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | Classification on our Balance Sheets | | 2021 | | 2020 | | 2019 |
| Cash and cash equivalents | | Cash and cash equivalents | | $ | 302,009 | | | $ | 251,706 | | | $ | 289,870 | |
| Restricted cash — current | | Prepaid expenses and other current assets | | 1,616 | | | 542 | | | 6,639 | |
| Restricted cash — non-current | | Other assets | | 101 | | | 101 | | | 101 | |
| Total | | | | $ | 303,726 | | | $ | 252,349 | | | $ | 296,610 | |
Property Equipment and Leased AssetsEquipment
Property and equipment, andwhich includes assets leased assetsto customers, are stated at cost, less accumulated depreciation, and are computed using the straight-line method over the lesser of the lease term or estimated life of the related assets, generally twoone to five years, or the related lease term.years. Player terminals and related components and equipment are included in our rental pool. The rental pool can be further delineated as “rental pool – deployed,” which consists of assets deployed at customer sites under participation or fixed fee arrangements, and “rental pool – undeployed,” which consists of assets held by us that are available for customer use. Rental pool – undeployed also consists of both new units awaiting deployment to a customer site and previously deployed units currently back with us to be refurbished awaiting re-deployment. Routine maintenance of property, equipment and leased gaming equipment is expensed in the period incurred, while major component upgrades are capitalized and depreciated over the estimated remaining useful life of the component. Sales and retirements of depreciable property are recorded by removing the related cost and accumulated depreciation from the accounts. Gains or losses on sales and retirements of property are reflected in our Statements of Income (Loss).Operations. Property, equipment and leased assets are reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Impairment is indicated when future cash flows, on an undiscounted basis, do not exceed the carrying value of the asset.
Placement Fee and Development Agreements
We enter into placement fee and, to a certain extent, development agreements to provide financing for the expansion of existing facilities, or for new gaming facilities. Funds provided under placement fee agreements are not reimbursed, while funds provided under development agreements are reimbursed to us, in whole, or in part. In return, the facility dedicates a percentage of its floor space to placement of our player terminals, and we receive a fixed percentage of those player terminals’ hold amounts per day over the term of the agreement, which is generally from 12 to 83 months. Certain of the agreements contain player terminal performance standards that could allow the facility to reduce a portion of our guaranteed floor space. In addition, certain development agreements allow the facilities to buy out floor space after advances that are subject to repayment have been repaid. The agreements typically provide for a portion of the amounts retained by the gaming facility for their share of the operating profits of the facility to be used to repay some or all of the advances recorded as notes receivable.
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. We test for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter orand between annual tests if events and circumstances indicate it is more often under certain circumstances.likely than not that the fair value of a reporting unit is less than its carrying amount. 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 both 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. IfTo the fair valueextent the carrying amount of a reporting unit is less than its carrying amount,estimated fair value, an impairment charge is recorded.
The evaluation of impairment of goodwill requires the use of estimates about future operating results. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations and financial condition. The estimates of expected future cash flows require significant judgment and are based on assumptions we determined to be reasonable; however, they are unpredictable and inherently uncertain, including, estimates of future growth rates, operating margins, and assumptions about the overall economic climate as well as the competitive environment within which we operate. There can be no assurance that our estimates and assumptions made for purposes of our impairment assessments as of the time of evaluation will useprove to be accurate predictions of the “Step 1” assessmentfuture. If our assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, we may be required to determine therecord non-cash impairment charges in accordancefuture periods, whether in connection with ASC 350, Intangibles - Goodwill and Other.our normal review procedures periodically, or earlier, if an indicator of an impairment is present prior to such evaluation.
Our reporting units are identified as operating segments or one level below. Reporting units must: (a)(i) engage in business activities from which they earn revenues and incur expenses; (b)(ii) have operating results that are regularly reviewed by our segment management to ascertain the resources to be allocated to the segment and assess its performance; and (c)(iii) have discrete financial
information available. As of December 31, 2018,2021, our reporting units included: Games, Cash(i) Games; (ii) Financial Access Services,Services; (iii) Kiosk Sales and Service,Services; (iv) Central Credit Services, andServices; (v) Compliance Sales and Services; and (vi) Loyalty Sales and Services.
Other Intangible Assets
Other intangible assets are stated at cost, less accumulated amortization, and are computed primarily using the straight-line method. Other intangible assets consist primarily of: (i) customer contracts (rights to provide Games and FinTech services to gaming establishment customers), developed technology, trade names and trademarks, and contract rights acquired through business combinations; and (ii) capitalized software development costs. Customer contracts require us to make renewal assumptions, which impact the estimated useful lives of such assets. Capitalized software development costs require us to make certain judgments as to the stages of development and costs eligible for capitalization. Capitalized software costs placed in service are amortized over their useful lives, generally not to exceed fivesix years. We review intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or market price of the asset, a significant adverse change in legal factors or business climate that could affect the value of an asset, or a current period operating or cash flow loss combined with a history of operating or cash flow losses. We group intangible assets for impairment analysis at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of definite lived intangible assets is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset, on an undiscounted basis and without interest or taxes. Any impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Debt Issuance Costs
Debt issuance costs incurred in connection with long-term borrowings are capitalized and amortized to interest expense based upon the related debt agreements using the straight-line method, which approximates the effective interest method. Debt issuance costs related to line-of-credit arrangements are included in other assets, non-current, on our Balance Sheets. All other debt issuance costs are included as contra-liabilities in long-term debt.
Original issue discounts incurred in connection with long-term borrowings are capitalized and amortized to interest expense based upon the related debt agreements using the straight-line method, which approximates the effective interest method. These amounts are recorded as contra-liabilities and included in long-term debt on our Balance Sheets.
Revenue Recognition
Overview
We evaluate the recognition of revenue based on the criteria set forth in ASCAccounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers and ASC 840,842 — Leases, as appropriate. We recognize revenue upon transferring control of goods or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We enter into contracts with customers that include various performance obligations consisting of goods, services, or combinations of goods and services. Timing of the transfer of control varies based on the nature of the contract. We recognize revenue net of any sales and other taxes collected from customers, which are subsequently remitted to governmental authorities and are not included in revenues or operating expenses. We measure revenue based on the consideration specified in a contract with a customer and adjusted, as necessary.
We evaluate the composition of our revenues to ensure compliance with SEC Regulation S-X Section 210.5-3, which requires us to separately present certain categories of revenues that exceed the quantitative threshold on our Statements of Income (Loss).
Significant Judgments
We apply judgments or estimates to determine the performance obligations and the Stand-Alone Selling Price (“SSP”) of each identified performance obligation. The establishment of SSP requires judgment as to whether there is a sufficient quantity of items sold or renewed on a stand-alone basis and those prices demonstrate an appropriate level of concentration to conclude that a SSP exists. The SSP of our goods and services are generally determined based on observable prices, an adjusted market assessment approach or an expected cost plus margin approach. We utilize a residual approach only when the SSP for performance obligations with observable prices have been established and the remaining performance obligation in the contract with a customer does not have an observable price as it is uncertain or highly variable and, therefore, is not discernible.
Collectability
To assess collectability, we determine whether it is probable that we will collect substantially all of the consideration to which we are entitled in exchange for the goods and services transferred to the customer in accordance with the terms and conditions of the contract. In connection with these procedures, we evaluate the customer using internal and external information available, including, but not limited to, research and analysis of theour credit history with the customer. Based on the nature of our transactions and historical trends, we determine whether our customers have the ability and intention to pay the amounts of consideration when they become due to identify potentially significant credit risk exposure.
Contract Combinations - Multiple Promised Goods and Services
Our contracts may include various performance obligations for promises to transfer multiple goods and services to a customer, especially since our Games and FinTech businesses may enter into multiple agreements with the same customer that meet the criteria to be combined for accounting purposes under ASC 606. When this occurs, a SSPStand-Alone Selling Price (“SSP”) will be determined for each performance obligation in the combined arrangement, and the consideration will be allocated between the respective performance obligations. The SSP of our goods and services is generally determined based on observable prices, an adjusted market assessment approach, or an expected cost plus margin approach. We utilize a residual approach only when the SSP for performance obligations with observable prices has been established and the remaining performance obligation in the contract with a customer does not have an observable price as it is uncertain or highly variable and, therefore, is not discernible. We use our judgment to analyze the nature of the promises made and determine whether each is distinct or should be combined with other promises in the contract based on the level of integration and interdependency between the individual deliverables.
Disaggregation of Revenues
We disaggregate revenues based on the nature and timing of the cash flows generated by such revenues as presented in “Note“Note 18 -— Segment Information.” Outbound Freight Costs, Installation and Training
Upon transferring control of a goodgoods to a customer, the shipping and handling costs in connection with sale transactions are generally accounted for as fulfillment costs and included in cost of revenues.
Our performance of installation and training services relating to the sales of gaming equipment and systems and FinTech equipment does not modify the software or hardware in those equipment and systems. Such installation and training services are generally immaterial in the context of the contract; and therefore, such items do not represent a separate performance obligation.
Costs to Acquire a Contract with a Customer
We typically incur incremental costs to acquire customer contracts in the form of sales commission expenses. We evaluate those acquisition costs for groups ofcommissions; however, because the expected benefit from these contracts with similar characteristics, based on the nature of the transactions. The incremental costs to acquire customer contracts identified would be amortized withinis one year and, as a result,or less, we elected to utilize the practical expedient set forth in ASC 340-40, Contract Costs - Incremental Costs of Obtaining a Contract to expense these amounts as incurred.
Contract Balances
Since our contracts may include multiple performance obligations, there is often a timing difference between the cash collections and the satisfaction of such performance obligations and revenue recognition. Such arrangements are evaluated to determine whether contract assets and liabilities exist. We generally record contract assets when the timing of cash collectionsbilling differs from when revenue is recognized due to contracts containing specific performance obligations that are required to be met prior to a customer being billed.invoiced. We generally record contract liabilities when cash is collected in advance of us satisfying performance obligations, including those that are satisfied over a period of time. Balances of our contract assets and contract liabilities may fluctuate due to timing of cash collections.
The following table summarizes our contract assets and contract liabilities arising from contracts with customers: |
| | | | |
| | | For the Year Ended |
| | | December 31, 2018 |
| | | |
Contract assets(1) | | |
| Balance at January 1 | | $ | 8,433 |
|
| Balance at December 31 | | 11,310 |
|
| Increase (decrease) | | 2,877 |
|
| | | |
Contract liabilities(2) | | |
| Balance at January 1 | | 12,397 |
|
| Balance at December 31 | | 15,470 |
|
| Increase (decrease) | | $ | 3,073 |
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
Contract assets (1) | | | | |
| Balance at January 1 — current | | $ | 9,240 | | | $ | 8,634 | |
| Balance at January 1 — non-current | | 8,321 | | | 6,774 | |
| Total | | 17,561 | | | 15,408 | |
| Balance at December 31 — current | | 9,927 | | | 9,240 | |
| Balance at December 31 — non-current | | 5,294 | | | 8,321 | |
| Total | | 15,221 | | | 17,561 | |
| (Decrease)/Increase | | $ | (2,340) | | | $ | 2,153 | |
Contract liabilities (2) | | | | |
| Balance at January 1 — current | | $ | 26,980 | | | $ | 28,510 | |
| Balance at January 1 — non-current | | 289 | | | 354 | |
| Total | | 27,269 | | | 28,864 | |
| Balance at December 31 — current | | 36,238 | | | 26,980 | |
| Balance at December 31 — non-current | | 377 | | | 289 | |
| Total | | 36,615 | | | 27,269 | |
| Increase/(Decrease) | | $ | 9,346 | | | $ | (1,595) | |
(1) CurrentThe current portion of contract assets is included within Tradetrade and other receivables, net and the non-current portion is included within Otherother receivables in our Balance Sheets.
(2) CurrentThe current portion of contract liabilities is included within Accountsaccounts payable and accrued expenses, and the non-current portion is included within Otherother accrued expenses and liabilities in our Balance Sheets.
We recognized approximately $11.4$21.3 million and $23.5 million in revenue that was included in the beginning contract liability balance during 2018.2021 and 2020, respectively.
Games Revenues
Our Games products and services include commercial products,electronic gaming devices, such as Native American Class II productsofferings and other electronic bingo products, Class III products, video lottery terminals,slot machine offerings, VLTs, B2B digital online gaming activities, accounting and central determinant systems, and other back office systems. We conduct our Games segment business based on results generated from the following major revenue streams: (i) Gaming Operations; (ii) Gaming Equipment and Systems; and (iii) Gaming Other.
Gaming Operations
Games revenues areWe primarily generated by ourprovide: (i) leased gaming operations under placement,equipment, both Class II and Class III offerings, on a participation or a daily fixed-fee basis, including standard games and development arrangements, in which we provide our customers with player terminals, including TournEvent® that allows operators to switch from in-revenue gaming to out-of-revenue tournaments, player terminal-content licenses,hardware and premium games and hardware, inclusive of local-area progressive, machines, and back-office equipment, collectively referred to herein as leasedWAP; (ii) accounting and central determinant systems; and (iii) digital online gaming equipment.activities. We evaluate the recognition of lease revenues based on criteria set forth in ASC 840. Generally, under842. Under these arrangements, we retain ownership of the machines installed at customer facilities. We receiverecognize recurring revenuerental income over time based on a percentage of the net win per day generated by the leased gaming equipment or a daily fixed-fee based on the timing services are provided. Such revenues are generated daily and are limited to the lesser of the net win per day generated by the leased gaming equipment or the fixed daily fee. Revenuesfee and the lease payments that have been collected from lease participation or daily fee arrangements are considered both realizable and earned at the end of each gaming day.lessee. Gaming operations revenues generated by leased gaming equipment deployed at sites under development or placement fee agreements give rise to contract rights, which are amounts recorded to intangible assets for dedicated floor space resulting from such agreements. The gaming operations revenues generated by these arrangements are reduced by the accretion of contract rights, which represents the related amortization of the contract rights recorded in connection with thosesuch agreements. Gaming operations lease revenues accounted for under ASC 840842 are generally short-term in nature with payment terms ranging from 30 to 90 days. We recognized $136.6$189.8 million, $126.1$116.1 million, and $134.0$143.2 million in lease revenues for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
Gaming operations revenues include amounts generated by Wide Area Progressive (“WAP”)WAP systems, which are recognized under ASC 606. WAP consists of linked slot machines located in multiple casino properties that are connected to a central system. WAP-based gaming machines have a progressive jackpot we administeradministered by us that increases with every wager until a player wins the top award combination. Casino operators pay us a percentage of the coin-in (the total amount wagered), a percentage of net win, or a combination of both for services related to the design, assembly, installation, operation, maintenance, administration, and marketing of the WAP systems.offering. The gaming operations revenues with respect to WAP machines compriserepresent a separate performance obligation and are recognizedwe transfer control and recognize revenue over time based on a percentage of the amount expected to be received with any variability being resolved incoin-in, a percentage of net win, or a combination of both, based on the reporting period.timing services are provided. These arrangements are generally short-term in nature with a majority of invoices payable within 30 to 4590 days. Such revenues are presented in the Statements of Income (Loss)Operations, net of the jackpot expense, which is comprisedare composed of incremental amounts funded by a portion of the coin-in from the players. At the time a jackpot is won by a player, an additional jackpot expense is recorded
in connection with respect to the base seed amount required to fund the minimum level required byas set forth in the respective WAP arrangementarrangements with the casino operator.operators.
Gaming operations revenues also include amounts received in connection withrevenues generated under our relationship witharrangement to provide the New York State Gaming Commission to provide an accounting and(the “NYSGC”) with a central determinant monitoring and accounting system for the VLTs in operation at licensed State of New York gaming facilities. Pursuant to our agreement with the New York State Gaming Commission,NYSGC, we receive a portion of the network-wide net win (generally, cash-in less prizes paid) per day in exchange for provision and maintenance of the central determinant system and records it in accordance with ASC 606.recognize revenue over time, based on the timing services are provided. We also provide the central determinant system technology to Native American tribes in other licensed jurisdictions, for which we receive a portion of the revenue generated from the VLTs connected to the system. These arrangements are generally short-term in nature with payments due monthly.
Gaming operations revenues also include amounts generated by our Interactivedigital offering comprised of business-to-consumer (“B2C”)B2B activities. Our B2B operations provide games to our business customers, including both regulated real money and business-to-business (“B2B”) activities. B2C relates to games offered directly to consumers to play with virtual currency which can be purchased through our social, mobile application. Control transfers and we recognize revenues in accordance with ASC 606 from player purchases of virtual currency as it is consumed for game play, which is based on a historical data analysis. B2B relates to games offered to the online business partners, or social casinos, who thenwhich offer the games to consumers.consumers on their apps. Our B2B arrangements primarily provide access to our game content, and revenue is recognized in accordance with ASC 606over time as the control transfers upon the onlineour business partners’ daily access to such content based on either a flat fee or revenue share arrangements with the social casinos.and regulated real money casinos, based on the timing services are provided.
Gaming Equipment and Systems
Gaming equipment and systems revenues are accounted for under ASC 606 and are derived from the sale of some combination of: (a)(i) gaming equipment and player terminals, including TournEvent® that allows operators to switch from in-revenue gaming to out-of-revenue tournaments; (b)terminals; (ii) game content; (c)(iii) license fees; (d)and (iv) ancillary equipment;equipment, such as signage and (e) maintenance.lighting packages. Such arrangements are predominately short-term in nature with payment terms ranging from 30 to 180 days, and with certain agreements providing for extended payment terms ranging fromup to 39 months. Each contract containing extended payment terms over a period of 12 to 24 months. Ourmonths is evaluated for the presence of a financing component; however, our contracts with customersgenerally do not contain anya financing componentscomponent that havehas been determined to be significant to the contract. PerformanceDistinct and thus, separately identifiable performance obligations for gaming equipment and systems arrangements include gaming equipment, player terminals, content, system software, license fees, ancillary equipment, maintenance, or various combinations thereof. Gaming equipment and systems revenues are recognized at a point in time when control of the promised goods and services transfers to the customer, which is generally upon shipment or delivery pursuant to the terms of the contract. The performance obligations are generally satisfied at the same time or within a short period of time.
Gaming Other
Gaming other revenues consist of amountsare generated from fees paid by casino customers that participate in our TournEvent of Champions® national tournament that allowsslot tournament. Casinos, in partnership with Everi, host slot tournaments, in which winners of the local and regional tournaments throughout the year tothen participate in a national tournament that results in the determination of a final champion. Such revenues are accounted for under ASC 606.As the customer simultaneously receives and consumes the benefits of our performance as it occurs, revenuesRevenues are recognized as earned over a period of time, using an output method depictingbased on the transfer of control to the customer.timing services are provided. These arrangements are generally short-term in nature with payment terms ranging from 30 to 90 days.
FinTech Revenues
CashFinancial Access Services
Cash access servicesFinancial Access Services revenues are accounted for under ASC 606 and are generally comprised of the following distinct performance obligations: cash advance, ATM,funds advanced, funds dispensed, and check services. We do not control the cash advancefunds advanced and ATMfunds dispensed services provided to a customer and, therefore, we are acting as an agent whose performance obligation is to arrange for the provision of these services. Our cashfinancial access services involve the movement of funds between the various parties associated with cashfinancial access transactions and give rise to settlement receivables and settlement liabilities, both of which are settled in days following the transaction.
CashFunds advance revenues are primarily comprised of transaction fees assessed to gaming patrons in connection with credit card cashfinancial access and POS debit card cashfinancial access transactions. Such fees are primarily based on a combination of a fixed amount plus a percentage of the face amount of the credit card cashfinancial access or POS debit card cashfinancial access transaction amount. In connection with these types of transactions, we report certain direct costs incurred as reductions to revenues on a net basis, which generally include: (i) commission expenses payable to casino operators; (ii) interchange fees payable to the network associations; and (iii) processing and related costs payable to other third partythird-party partners.
ATMFunds dispensed revenues are primarily comprised of transaction fees in the form of cardholder surcharges assessed to gaming patrons in connection with ATMfunds dispensed cash withdrawals at the time the transactions are authorized and reverse interchange reimbursement fees paid to us by the
patrons’ issuing banks. The cardholder surcharges assessed to gaming patrons in connection with ATMfunds dispensed cash withdrawals are currently a fixed dollar amount and not a percentage of the transaction amount. In connection with these types of transactions, we report certain direct costs incurred as reductions to revenues on a net basis, which generally include: (i) commission expenses payable to casino operators; (ii) interchange fees payable to the network associations; and (iii) processing and related costs payable to other third partythird-party partners.
Check services revenues are principally comprised of check warranty revenues and are generally based upon a percentage of the face amount of checks warranted. These fees are paid to us by gaming establishments. We report certain direct costs incurred as reductions to revenues on a net basis, which include: (i) warranty expenses, defined as amounts paid by the third-party check warranty service provider to gaming establishments to purchase dishonored checks; and (ii) service fees, defined as amounts paid to the third-party check warranty service provider for its assistance.
For cashfinancial access services arrangements, since the customer simultaneously receives and consumes the benefits as the performance obligations occur, we recognize revenues as earned over a period of time using an output method depicting the transfer of control to the customer based on variable consideration, such as volume of transactions processed with variability generally resolved in the reporting period.
Equipment
Equipment revenues are derived from the sale of equipment and are accounted for under ASC 606. Revenues are recognized at a point in time when control of the promised goods and services transfers to the customer generally upon shipment or delivery pursuant to the terms of the contract. These sales contracts are generally short-term in nature with payment terms ranging from 30 to 90 days.
Information ServicesSoftware and Other
Information servicesSoftware and other revenues are accounted for under ASC 606 and include amounts derived from our financial access, loyalty kiosk, compliance, and loyalty related revenue streams from the sale of: (i) software licenses, software subscriptions, professional services, and certain other ancillary fees; (ii) service relatedservice-related fees associated with the sale, installation, training, and maintenance of equipment directly to our customers under contracts, which are generally short-term in nature with payment terms ranging from 30 to 90 days, secured by the related equipment; (iii) credit worthiness-related software subscription services that are based upon either a flat monthly unlimited usage fee or a variable fee structure driven by the volume of patron credit histories generated; and (iv) ancillary marketing and database and Internet-based gaming related activities.
Our software represents a functional right-to-useservices. Software license and the revenues are recognized as earned at a point in time. Subscriptiontime; software subscriptions are recognized over the term of the contract.
Hardware
Hardware revenues are derived from the sale of our financial access and loyalty kiosks and related equipment and are accounted for under ASC 606, unless such transactions meet definition of a sales type or direct financing lease which are accounted for under ASC 842. Revenues are recognized at a point in time when control of the promised goods and services transfers to the customer generally upon shipment or delivery pursuant to the terms of the contract. The sales contracts are recognizedgenerally short-term
in nature with payment terms ranging from 30 to 90 days, while certain agreements provide for extended payment terms of up to 60 months. Each contract containing extended payment terms over a period of time using an input method based on time elapsed as we transfer12 months is evaluated for the control ratably by providingpresence of a stand-ready service. Professional and other services revenues are recognized overfinancing component; however, our contracts generally do not contain a period of time using an input method based on time elapsed as services are provided, thereby reflecting the transfer of controlfinancing component that has been determined to be significant to the customer.contract.
Cost of Revenues (Exclusive of Depreciation and Amortization)
The cost of revenues (exclusive of depreciation and amortization) represents the direct costs required to perform revenue generating transactions. The costs included within cost of revenues (exclusive of depreciation and amortization) are inventory and related costs associated with the sale of our fully integrated kiosks, electronic gaming machines and system sale, check cashing warranties, field service, and network operations personnel.
Advertising, Marketing, and Promotional Costs
We expense advertising, marketing, and promotional costs as incurred. Total advertising, marketing, and promotional costs, included in operating expenses in the Statements of Income (Loss),Operations, were $3.4$2.6 million, $1.1$1.3 million, and $1.2$5.0 million for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
Research and Development Costs
We conduct research and development activities for both our Games and FinTech segments. Our Gaming research and development activities are primarily to develop gaming systems, game engines, casino data management systems, casino central monitoringdetermination and other electronic bingo-outcome determination systems, video lottery outcome determination systems, gaming platforms and gaming content, and to enhance our existing product lines. We believe our ability to deliver differentiated, appealing products and services to the marketplace is based on ourOur FinTech research and development investments,activities are primarily to develop: (i) payments products, systems, and we expect to continue to makerelated capabilities such investmentsas security, encryption, and business rule engines that deliver differentiated patron experiences and integrate with our other products; (ii) compliance products that increase efficiencies, profitability, enhance employee/patron relationships, and meet regulatory reporting requirements; and (iii) loyalty products, systems, and features that attract, engage, and retain patrons in the future. more intuitive and contextual ways than our competition.
Research and development costs consist primarily of salaries and benefits, consulting fees, certification and game lab testing fees. Once the technological feasibility of a project has been established, itthe project is capitalized until it becomes available for general release.
Research and development costs were $20.5$39.1 million, $18.9$27.9 million, and $19.4$32.5 million for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
Income Taxes
We are subject to income taxes in the United States as well as various states and foreign jurisdictions in which we operate. In accordance with accounting guidance, our income taxes include amounts from domestic and international jurisdictions. Due to the 2017 Tax Act, there is no U.S. federal tax on cash repatriation from foreign subsidiaries; however, we could be subject to foreign withholding tax and U.S. state income taxes. The 2017 Tax Act also subjects our foreign subsidiary earnings to the Global Intangible Low-Taxed Income (“GILTI”) tax provisions. Some items of income and expense are not reported in tax returns and our Financial Statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes.
Our deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in our Financial Statements or income tax returns. Deferred tax assets and liabilities are determined based upon differences between financial statement carrying amounts of existing assets and their respective tax bases using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on the income tax provision or benefit and deferred tax assets and liabilities for a change in rates is recognized in the Statements of Income (Loss)Operations in the period that includes the enactment date.
When measuring deferred tax assets, certain estimates and assumptions are required to assess whether a valuation allowance should be established by evaluating both positive and negative factors in accordance with accounting guidance. This evaluation requires that we exercise judgment in determining the relative significance of each factor. The assessment of the valuation allowance involves significant estimates regarding future taxable income and when it is recognized, the amount and timing of taxable differences, the reversal of temporary differences and the implementation of tax-planning strategies. A valuation allowance is established based on the weight of available evidence, including both positive and negative indicators, if it is more likely than not that a portion, or all, of the deferred tax assets will not be realized. Greater weight is given to evidence that is objectively verifiable, most notably historical results. If we report a cumulative loss from continuing operations before income taxes for a reasonable period of time, this form of negative evidence is difficult to overcome. Therefore,In that case, we include certain aspects of our historical results in our forecasts of future taxable income, as we do not have the ability to solely rely on forecasted improvements in earnings to recover deferred tax assets. When we report a cumulative loss position, to the extent our results of operations improve, such that we have the ability to overcome the more likely than not accounting standard, we may be able to reverse the valuation allowance in the applicable period of determination. In addition, we rely on deferred tax liabilities in our assessment of the realizability of deferred tax assets if the temporary timing difference is anticipated to reverse in the same period and jurisdiction and the deferred tax liabilities are of the same character as the temporary differences giving rise to the deferred tax assets.
We also follow accounting guidanceGAAP to account for uncertainty in income taxes as recognized in our Financial Statements. The accounting standard creates a single model to address uncertainty in income tax positions and prescribes the minimum recognition threshold a tax position is required to meet before being recognized in our Financial Statements. The standard also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Under this standard, we may recognize tax benefits from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed.
Employee Benefits Plan
The Company provides a 401(k) Plan that allows employees to defer up to the lesser of the Internal Revenue Code prescribed maximum amount or 100%75% of their income on a pre-tax basis through contributions to the plan. As a benefit to employees, the Company matches a percentage of these employee contributions (as defined in the plan document). As a direct result of the circumstances surrounding the global pandemic, we were unable to offer a Company match of employee contributions for a majority of 2020. Expenses related to the matching portion of the contributions to the 401(k) Plan were $2.2$2.6 million, $2.3$0.6 million, and $1.9$2.6 million for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
Fair Values of Financial Instruments
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant market information about the financial instrument.
The carrying amount of cash and cash equivalents, restricted cash, settlement receivables, short-term trade and other receivables, settlement liabilities, accounts payable, and accrued expenses approximate fair value due to the short-term maturities of these instruments. The fair value of the long-term trade and loans receivable is estimated by discounting expected future cash flows using current
interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. The fair value of long-term accounts payable is estimated by discounting the total obligation using the appropriate interest rates. As of December 31, 20182021 and December 31, 2017,2020, the fair value of notestrade and loan receivable net, approximated the carrying value due to contractual terms of trade and loans receivable generally being under 24slightly over 12 months. The fair value of our borrowings is estimated based on various inputs to determine a market price, such as: market demand and supply, size of tranche, maturity, and similar instruments trading in more active markets.
The estimated fair value and outstanding balances of our borrowings are as follows (in(dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | Level of Hierarchy | | Fair Value | | Outstanding Balance |
| December 31, 2021 | | | | | |
| $600 million New Term Loan | 2 | | $ | 598,171 | | | $ | 598,500 | |
| $400 million 2021 Unsecured Notes | 2 | | $ | 404,000 | | | $ | 400,000 | |
| December 31, 2020 | | | | | |
| Term loan | 2 | | $ | 729,138 | | | $ | 735,500 | |
| Incremental term loan | 2 | | $ | 129,972 | | | $ | 124,375 | |
| Senior unsecured notes | 2 | | $ | 296,083 | | | $ | 285,381 | |
|
| | | | | | | | | |
| | Level of Hierarchy | | Fair Value | | Outstanding Balance |
| December 31, 2018 | | | |
| | |
|
| Term loan | 2 | | $ | 784,479 |
| | $ | 807,700 |
|
| Senior unsecured notes | 1 | | $ | 354,863 |
| | $ | 375,000 |
|
| December 31, 2017 | | | |
| | |
|
| Term loan | 2 | | $ | 826,099 |
| | $ | 815,900 |
|
| Senior unsecured notes | 1 | | $ | 372,656 |
| | $ | 375,000 |
|
The term loan facility was reported atOur borrowings’ fair valuevalues were determined using a Level 2 input as there wereinputs based on quoted market prices in markets that were not considered active as of December 31, 2018 and December 31, 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 December 31, 2018 and December 31, 2017.for these securities.
Foreign Currency Translation
Foreign currency denominated assets and liabilities for those foreign entities for which the local currency is the functional currency are translated into U.S. dollars based on exchange rates prevailing at the end of each year. Revenues and expenses are translated at average exchange rates during the year. The effects of foreign exchange gains and losses arising from these translations are included as a component of other comprehensive income (loss) on the Statements of Income (Loss).Operations. Translation adjustments on intercompany balances of a long-term investment nature are recorded as a component of accumulated other comprehensive loss on our Balance Sheets.
Use of Estimates
We have made estimates and judgments affecting the amounts reported in these financial statements and the accompanying notes in conformity with accounting principles generally accepted in the United States.GAAP. The actual results may materially differ from these estimates.
Earnings Applicable to Common Stock
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the effect of potential common stock resulting from assumed stock option exercises and vesting of restricted stock unless it is anti-dilutive. To the extent we report a net loss from continuing operations in a particular period, no potential dilution from the application of the treasury stock method would be applicable in accordance with ASC 260, Earnings per Share.applicable.
Share‑BasedStock-Based Compensation
Share-basedStock-based compensation is considered an equity award and results in a cost that is measured at fair value on the grant date of an award. Generally, we issue grants that are classified as equity awards. However, if we issue grants that are considered liability awards, they are remeasured at fair value at the end of each reporting period until settlement with changes being recognized as stock-based compensation cost and a corresponding adjustment recorded to the liability, either immediately or during the remaining service period depending on the vested status of the award. Generally, with respect to stock option awards granted under our plans, they expire 10 years from the date of grant with the exercise price based on the closing market price of our common stock on the date of the grant.
Our restricted stock awards, restricted stock units, and performance-based stock units are measured at fair value based on the closing stock price on the grant date. Our time-based stock options wereoption awards are measured at fair value on the grant date using the Black Scholes model. Our restricted stock awards and restricted stock units, including the restricted stock units bound by certain performance-based metrics issued in 2018, were measured at fair value based on the stock price on the grant date. The stock-based compensation expensecost is recognized on a straight-line basis over the vesting period of the awards.
Our market-based options granted in 2017 and 2016 under our 2014 Equity Incentive Plan (the “2014 Plan”) and 2012 Equity Incentive Plan (as amended, the “2012 Plan”) vest at a rate of 25% per year on each of the first four anniversaries of the grant date, provided that as of the vesting date for each vesting tranche, the closing price of the Company’s shares on the New York Stock Exchange is at least a specified price hurdle, defined as a 25% and 50% premium for 2017 and 2016, respectively, 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.
The market-based options were measured at fair value on the grant date using a lattice-based valuation model based on the median time horizon from the date of grant for these options to the vesting date for those paths that achieved the target threshold(s). The compensation expense is recognized on a straight-line basis over the median vesting periods calculated under such valuation model.
ForfeituresForfeiture amounts are estimated at the grant date for our time-based, market-basedstock awards and performance-based awards, with such estimatesare updated periodically; and withperiodically based on actual forfeitures recognized currentlyresults, to the extent they differ from the estimates.
Unless otherwise provided by the administrator of our equity incentive plans, stock options granted under our plans generally expire ten years from the date of grant. The exercise price of stock options is generally the closing market price of our common stock on the date of the stock option grant.
Acquisition-Related Costs
We recognize a liability for acquisition-related costs when the expense is incurred. Acquisition-related costs include, but are not limited to: financial advisory, legal and debt fees; accounting, consulting, and professional fees associated with due diligence, valuation, and integration; severance; and other related costs and adjustments.
Reclassification of Prior Year Balances
Reclassifications were madeCertain amounts in the accompanying consolidated financial statements and accompanying notes have been reclassified to the prior-period Financial Statements to conform tobe consistent with the current period presentation, exceptyear presentation. These reclassifications had no effect on net income for the adoption impact of the application of ASC 606 utilizing the modified retrospective transition method.prior periods.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
In March 2018, the FASB issued ASU No. 2018-05, which provides guidance on accounting for the tax effects of the 2017 Tax Act (pursuant to SEC Staff Accounting Bulletin No. 118). The new standard is effective March 13, 2018. We have adopted this guidance in the quarter ended March 31, 2018. In accordance with this guidance, some of the income tax effects recorded in 2017 were provisional and insignificant adjustments were made during 2018. As of December 22, 2018, we completed our analysis and our updated assessment is that the 2017 Tax Act has no further impact on our previously reported income tax provisions or our deferred tax assets or liabilities; therefore, these amounts are no longer considered provisional in nature.
In May 2014, the FASB issued ASU No. 2014-09, which creates ASC 606 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 2014-9 was further updated by ASU 2016-08 in March 2016, which provided 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 2014-9. In May 2016, the FASB issued ASU 2016-11, which amended 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 ASC 606. In December 2016, the FASB issued ASU 2016-20, which clarified additional topics in ASC 606. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. We adopted this guidance effective January 1, 2018 and have provided additional information with respect to the new revenue recognition topic elsewhere in this Note 2 disclosure and also in “Note 3 — Adoption of ASC 606, Revenue from Contracts with Customers.”
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. We adopted this guidance in the quarter ended March 31, 2018. The adoption of this ASU did not have a material impact 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 is to be applied using a prospective approach as of the beginning of the first period of adoption. We adopted this guidance in the quarter ended March 31, 2018. The adoption of this ASU did not have a material impact 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. We adopted this guidance in the quarter ended March 31, 2018 using a retrospective approach to each period presented. The adoption of this ASU did not have a material impact 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. 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. We adopted this guidance in the quarter ended March 31, 2018. The adoption of this ASU did not have a material impact 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. This guidance is to be applied using a 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. We adopted this guidance in the quarter ended March 31, 2018. The adoption of this ASU did not have a material impact on our Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, which, among other things, requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. We adopted this guidance in the quarter ended March 31, 2018. The adoption of this ASU did not have a material impact on our Financial Statements. | | | | | | | | | | | |
| Standard | Description | Date of Adoption | Effect on Financial Statements |
Accounting Standard Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | This ASU simplifies the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations, and interim calculations, and adds guidance to reduce the complexity of applying Topic 740. | January 1, 2021 | The adoption of this ASU did not have a material effect on our Financial Statements or on our disclosures. |
Recent Accounting Guidance Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The new standard is effective for fiscal years beginning after | | | | | | | | | | | |
| Standard | Description | Date of Planned Adoption | Effect on Financial Statements |
ASU 2021-05, 'Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments | This ASU amends the lease classification requirements for lessors to align them with practice under ASC Topic 840. | January 1, 2022 | We are currently evaluating the impact of adopting this ASU on our Financial Statements and our disclosures; however, we do not expect the impact to be material. |
As of December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact of adopting this guidance on our Financial Statements; however,31, 2021, other than what has been described above, we do not expect the impact to be material.
In June 2018, the FASBanticipate recently issued ASU No. 2018-07, which expands the scope of Topic 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this ASUguidance to have a materialsignificant impact on our Financial Statements.consolidated financial statements.
In February 2018,
3. LEASES
We determine if a contract is, or contains, a lease at the FASB issued ASU No. 2018-02, which provides financial statement preparers withinception, or modification, of a contract based on whether the contract conveys the right to control the use of an optionidentified asset for a period of time in exchange for consideration. Control over the use of an asset is predicated upon the notion that a lessee has both the right to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect(i) obtain substantially all of the change ineconomic benefit from the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We do not expect the adoption of this ASU to have a material impact on our Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, which provides updated guidance on how an entity should measure credit losses on financial instruments. The new guidance replaces the current incurred loss measurement methodology with a lifetime expected loss measurement methodology, and 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 asuse of the beginningasset; and (ii) direct the use 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. In November 2018, the FASB issued ASU No. 2018-19 to mitigate transition complexity by requiring entities other than public business entities to implement ASU No. 2016-13 for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. This aligns the implementation date for their annual financial statements with the implementation date for their interim financial statements. The guidance also clarified that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. We are currently evaluating the impact of adopting this guidance on our Financial Statements; however, we do not expect the impact to be material.asset.
In February 2016, the FASB issued ASU No. 2016-02, to increase transparency and comparability among organizations by recognizingOperating lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. The guidance establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU assetassets and a lease liabilityliabilities are recognized based on the balance sheet for all leases with terms longer than 12 months. We made an accounting policy election whereby leases that are 12 months or less that do not include an option to purchasepresent value of minimum lease payments over the underlying assets will be accounted for similarly to our current operating leases; therefore, theseexpected lease term at commencement date. Lease expense is recognized on a straight-line basis over the expected lease term. Our lease arrangements will not be recorded on the balance sheet. For lessees, leases will be classified as either financing or operating with classification affecting the pattern of expense recognition in the income statement. For lessors, leases will be classified as operating, sales-type or direct financing with classification affecting the pattern of revenue and profit recognition in the income statement. In July 2018, the FASB issued ASU No. 2018-10 - Codification Improvements to Topic 842, Leases and ASU No. 2018-11 - Leases (Topic 842): Targeted Improvements. ASU No. 2018-10 affects narrow aspects of the guidance previously issued and ASU No. 2018-11 provides a practical expedient for lessors on separating components of a contract and also includes an additional optional transition relief methodology for adopting the new standard. In December 2018, the FASB issued ASU No. 2018-20 - Leases (Topic 842): Narrow-Scope Improvements for Lessors, which addresses the following issues facing lessors when applying the standard: sales taxes and other similar taxes collected from lessees, certain lessor costs paid directly by lessees, and recognition of variable payments for contracts withhave both lease and non-lease components. The guidance requires an entitycomponents, and we have elected the practical expedient to adoptaccount for the new standard,lease and non-lease elements as amended, under a modified retrospective application. Withsingle lease.
Certain of our lease arrangements contain options to renew with terms that generally have the optional transition relief methodology available, entities have an opportunityability to adoptextend the new lease standard prospectively at the beginning of the period of adoption throughterm to a cumulative-effect adjustment, with certain practical expedients available.
On January 1, 2019, the Company adopted the new leasing standard promulgated by the FASB using the adoption date method. While we are finalizing the adoption procedures, we expect that the standard will have a material impact on our Balance Sheets, however, we do not expect that the standard will have a material impact on our Statements of Income (Loss). Upon adoption, we will record a ROU asset and lease liability, representing our obligation to make lease payments for operating leases, measured on a discounted basis. We expect the ROU assets and lease liabilities of operating leases recorded to be within the range of approximately 1%-2%one to ten years. The exercise of total assets. We elected the practical expedients offered in the aforementioned guidance, including the transition practical expedient that states that the Company need not reassess: (a) whether expiredlease renewal options is generally at our sole discretion. The expected lease terms include options to extend or existing contracts contain leases; (b)terminate the lease classificationwhen it is reasonably certain that we will exercise such option. The depreciable life of expiredleased assets and leasehold improvements are limited by the expected term of such assets, unless there is a transfer of title or existing leases;purchase option reasonably certain to be exercised.
Lessee
We enter into operating lease agreements for real estate purposes that generally consist of buildings for office space and warehouses for manufacturing purposes. Certain of our lease agreements consist of rental payments that are periodically adjusted for inflation. Our lease agreements do not contain material residual value guarantees or (c) initial direct costs for any existing leases. Other expedients adopted include practical expedientmaterial restrictive covenants. Our lease agreements do not generally provide explicit rates of interest; therefore, we use our incremental collateralized borrowing rate, which is based on a fully collateralized and fully amortizing loan with a maturity date the same as the length of the lease that allows a Company, as an accounting policy election by classis based on the information available at the commencement date to determine the present value of underlying assets, choose not to separate non-lease components from lease components; and a short-term lease recognition exemption to not record short-term leasespayments.
Leases with an initial expected term of 12 months or less (short-term) are not accounted for on our Balance Sheets. As of December 31, 2021 and December 31, 2020, our finance leases were not material.
Supplemental balance sheet information related to our operating leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Classification on our Balance Sheets | | At December 31, 2021 | | At December 31, 2020 |
| Assets | | | | | | |
| Operating lease ROU assets | | Other assets, non-current | | $ | 12,692 | | | $ | 16,104 | |
| Liabilities | | | | | | |
| Current operating lease liabilities | | Accounts payable and accrued expenses | | $ | 5,663 | | | $ | 5,649 | |
| Non-current operating lease liabilities | | Other accrued expenses and liabilities | | $ | 11,869 | | | $ | 16,077 | |
Supplemental cash flow information related to leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2021 | | 2020 | | 2019 |
| Cash paid for: | | | | | | | |
| Long-term operating leases | | $ | 6,675 | | | $ | 6,411 | | | $ | 5,893 | | |
| Short-term operating leases | | $ | 1,622 | | | $ | 1,908 | | | $ | 1,799 | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
Operating leases(1) | | $ | 1,362 | | | $ | 10,356 | | | $ | 16,533 | | (2) |
(1) The amounts are presented net of current year terminations and exclude amortization for the balance sheet.period.
As we are finalizing(2) The amount includes approximately $13.6 million of operating lease ROU assets obtained in exchange for existing lease obligations due to the adoption procedures, we expect the following impact to our financial statements as summarized within the table below:
|
| |
Lessor Perspective | Expected Impact Upon Adoption |
Games and FinTech Segments | The adoption of ASC 842 will not have a material impact on the Company from the lessor perspective as our lessor accounting for leases will be consistent with current practices. |
| |
Lessee Perspective | Expected Impact Upon Adoption |
Games and FinTech Segments | We will recognize operating lease ROU assets and liabilities primarily associated with real estate leases on our Balance Sheets for lease contracts with terms that are longer than 12 months with no material impact to the Statements of Income (Loss). The operating lease ROU assets and liabilities are expected to be recognized at the commencement date based on the present value of lease payments over the lease terms. |
We do not anticipate that any other recently issued accounting guidance will have a significant effect on our consolidated financial statements.
3. ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS”
Change842 (net of operating lease terminations occurring in accounting policies
On January 1, 2018, we adopted ASC 606 using the modified retrospective method, which required us to evaluate whether any cumulative adjustment was required to be recorded to retained earnings (accumulated deficit) as a result of applying the provisions set forth under ASC 606 for any existing arrangements not yet completed as of the adoption date of January 1, 2018. We determined that there was an immaterial cumulative adjustment2019 in the amount of approximately $4.4$0.5 million), and approximately $2.5 million which we recorded to accumulated deficit as of the adoption date as a result of applying the modified retrospective transition method. Revenues and costs related to certain contracts are recognized at a pointoperating lease ROU assets obtained in time under ASC 606 as the performanceexchange for new lease obligations related to certain types of sales are satisfied; whereas, previously these revenues and costs were recognized over a period of time under ASC 605. In addition, under the modified retrospective method, our prior period results were not recast to reflect the new revenue recognition standard. Except for the changes discussed with respect to revenue recognition, the impact of which is summarized in the tables below, we have consistently applied our accounting policies to the periods presented in our Financial Statements.
Balance Sheets and Statements of Cash Flows
The adoption of ASC 606 utilizing the modified retrospective transition method did not have a material impact to our Balance Sheets and Statements of Cash Flows as of and forentered into during the year ended December 31, 2018.2019.
GamesOther information related to lease terms and discount rates is as follows: | | | | | | | | | | | | | | |
| | At December 31, 2021 | | At December 31, 2020 |
| Weighted Average Remaining Lease Term (in years): | | | | |
| Operating leases | | 3.52 | | 4.16 |
| Weighted Average Discount Rate: | | | | |
| Operating leases | | 5.04 | % | | 5.16 | % |
Components of lease expense are as follows (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Operating Lease Cost: | | | | | | |
Operating lease cost (1) | | $ | 5,474 | | | $ | 5,770 | | | $ | 4,907 | |
| Variable lease cost | | $ | 1,267 | | | $ | 1,682 | | | $ | 1,619 | |
(1) The amount includes approximately $4.4 million, $4.9 million and $4.3 million in non-cash lease expense attributable to amortization of ROU assets for the years ended December 31, 2021, 2020 and 2019, respectively.
Maturities of lease liabilities are summarized as follows as of December 31, 2021 (in thousands):
| | | | | | | | |
| Year ending December 31, | | Amount |
| 2022 | | $ | 6,386 | |
| 2023 | | 5,001 | |
| 2024 | | 3,739 | |
| 2025 | | 2,971 | |
| 2026 | | 889 | |
| Thereafter | | 154 | |
| Total future minimum lease payments | | $ | 19,140 | |
| Amount representing interest | | (1,608) | |
| Present value of future minimum lease payments | | $ | 17,532 | |
| Current operating lease obligations | | (5,663) | |
| Long-term lease obligations | | $ | 11,869 | |
Lessor
We generate lease revenues
We previously reported certain costs incurred in connection with primarily from our
WAP platform, consisting primarilygaming operations activities, and the majority of our leases are month-to-month leases. Under these arrangements, we retain ownership of the
jackpot expenses, aselectronic gaming machines (“EGMs”) installed at customer facilities. We receive recurring revenues based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee. Such revenues are generated daily and are limited to the lesser of the net win per day generated by the leased gaming equipment or the fixed daily fee and the lease payments that have been collected from the lessee. Certain of our leases have terms and conditions with options for a lessee to purchase the underlying assets. Refer to “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies” for further discussion of lease revenues. The cost of revenues. Under ASC 606, such costs are reflectedEGMs the Company is leasing to third-parties as reductions to gaming operations revenues on a net basis of presentation.December 31, 2021 is approximately $249.0 million.FinTech revenuesWe did not have material sales transactions that qualified for sales-type lease accounting treatment during the years ending December 31, 2021 and December 31, 2020.
We previously reported costs and expensesSupplemental balance sheet information related to our cash access services, which include commission expenses payable to casino operators, interchange fees payable to the network associations and processing, and related costs payable to other third party partners,sales-type leases is as costs of revenues. As the result of our evaluation of the factors contained in ASC 605, we previously determined that the indicators requiring the gross reporting outweighed those for net reporting primarily due to the risk of loss. Under ASC 606, such costs are reflected as reductions to revenues on a net basis of presentation, since we determined that we do not control certain cash access services provided to a customer and, therefore, we are acting as an agent whose performance obligation is to arrange for the provision of these types of services. In addition, commission expenses payable to the gaming operators are determined to be consideration paid to customers under ASC 606.
The following table presents the impact of the application of ASC 606 utilizing the modified retrospective transition method to certain line items on our Statements of Income (Loss) for the year ended December 31, 2018follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Classification on our Balance Sheets | | At December 31, 2021 | | At December 31, 2020 |
| Assets | | | | | | |
| Net investment in sales-type leases — current | | Trade and other receivables, net | | $ | 1,331 | | | $ | 1,397 | |
| Net investment in sales-type leases — non-current | | Other receivables | | $ | — | | | $ | 803 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | As Reported | | Adjustments | | Without Adoption of ASC 606 |
| Revenues | | | | | |
| Games revenues | | | | | |
| Gaming operations | $ | 168,146 |
| | $ | 2,364 |
| | $ | 170,510 |
|
| Games total revenues | 258,978 |
| | 2,364 |
| | 261,342 |
|
| | | | | | |
| FinTech revenues | |
| | |
| | |
|
| Cash access services | 156,806 |
| | 629,641 |
| | 786,447 |
|
| Equipment | 20,977 |
| | (1,622 | ) | | 19,355 |
|
| FinTech total revenues | 210,537 |
| | 628,019 |
| | 838,556 |
|
| | | | | | |
| Total revenues | 469,515 |
| | 630,383 |
| | 1,099,898 |
|
| | | | | | |
| Costs and expenses | |
| | |
| | |
|
Games cost of revenues(1) | |
| | |
| | |
|
| Gaming operations | 17,603 |
| | 2,364 |
| | 19,967 |
|
| Games total cost of revenues | 68,009 |
| | 2,364 |
| | 70,373 |
|
| | | | | | |
FinTech cost of revenues(1) | |
| | |
| | |
|
| Cash access services | 9,717 |
| | 629,092 |
| | 638,809 |
|
| Equipment | 12,601 |
| | (825 | ) | | 11,776 |
|
| FinTech total cost of revenues | 26,428 |
| | 628,267 |
| | 654,695 |
|
| | | | | | |
| Total costs and expenses | 383,702 |
| | 630,631 |
| | 1,014,333 |
|
| | | | | | |
| Operating income | 85,813 |
| | (248 | ) | | 85,565 |
|
| | | | | | |
| Income before income tax | 2,646 |
| | (248 | ) | | 2,398 |
|
| | | | | | |
| Income tax benefit | (9,710 | ) | | — |
| | (9,710 | ) |
| Net income | 12,356 |
| | (248 | ) | | 12,108 |
|
| | | | | | |
| Comprehensive income | 10,611 |
| | (248 | ) | | 10,363 |
|
75
(1) Exclusive of depreciation and amortization.
4. 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 yearsyear ended December 31, 2018, 2017,2021, and 2016.2020, respectively.
The following is a summary of business combinations completed during the year ended December 31, 2019.
Atrient, Inc.
In August 2015,On March 8, 2019, we acquired certain assets of Resort Advantage, LLCAtrient, Inc. (“Resort Advantage”Atrient,” the “Seller”), a supplier of comprehensiveprivately held company that developed and integrateddistributed hardware and software applications to gaming operators to enhance gaming patron loyalty, pursuant to an asset purchase agreement. This acquisition included existing contracts with gaming operators, technology, and intellectual property that allow us to provide gaming operators with self-service enrollment, loyalty and marketing equipment, a mobile application to offer a gaming operator’s patrons additional flexibility in accessing casino promotions, and a marketing platform that manages and delivers a gaming operator’s marketing programs through these patron interfaces. This acquisition expanded our financial technology solutions for complete Financial Crimes Enforcement Network (“FinCEN”) and Internal Revenue Service regulatory compliance toofferings within our FinTech segment. Under the gaming industry, for an aggregate purchase price of approximately $13.3 million, of which we estimated that approximately $4.7 million (the “earn out liability”) would be paid under the provisionsterms of the asset purchase agreement, over a period of 40 months (the “payout period”) based upon an evaluation over a period of 36 months (the “earn out period”) followingwe paid the Seller $20.0 million at the closing of the transaction. Upon expirationtransaction, $10.0 million one year following the closing and another $10.0 million during the year ended December 31, 2021. The related liabilities were recorded at fair value on the acquisition date as part of the earn out periodconsideration transferred and were included in August 2018, we analyzed the remaining earn out liabilityaccounts payable and accrued expenses as of December 31, 2020.
Furthermore, an additional amount of approximately $0.8$9.9 million in contingent consideration was earned by the Seller based upon the achievement of certain revenue targets over the first two years post-closing, which we paid in June 2021. The related liabilities were recorded at fair value on the acquisition date as part of the consideration transferred and were remeasured each reporting period. The inputs used to measure the fair value of our liabilities were categorized as Level 3 in the fair value hierarchy. Contingent consideration liabilities as of December 31, 2020 were approximately $9.9 million, and determinedwere included in accounts payable and accrued expenses in our Balance Sheets as of December 31, 2020.
Micro Gaming Technologies, Inc.
On December 24, 2019, we acquired certain assets of Micro Gaming Technologies, Inc. (“MGT”), a privately held company that approximately $0.6 million would not be realized; therefore, we reverseddeveloped and distributed kiosks and software applications to gaming patrons to enhance patron loyalty, in an asset purchase agreement. The acquired assets consisted of existing contracts with gaming operators, technology, and intellectual property intended to allow us to provide gaming operators with self-service patron loyalty functionality delivered through stand-alone kiosk equipment and a marketing platform that amount into income. We continued to record approximately $0.2 million in remaining earn out liability to potentially be paid undermanages and delivers gaming operators marketing programs through these patron interfaces. This acquisition further expanded our financial technology loyalty offerings within our FinTech segment. Under the provisionsterms of the asset purchase agreement, duringwe paid MGT $15.0 million at the firstclosing of the transaction, with an additional $5.0 million due by April 1, 2020 and a final payment of $5.0 million due two years following the date of closing.
In the second quarter of 2019.2020, we entered into an amendment to the asset purchase agreement allowing us to remit the additional $5.0 million by July 1, 2020, which we paid in June 2020. The Resort Advantagefinal payment of $5.0 million due by July 1, 2021 was paid in June 2021. The related liabilities were recorded at fair value on the acquisition date as part of the consideration transferred and were included in accounts payable and accrued expenses as of December 31, 2020. The total consideration for this acquisition was $25.0 million. The acquisition did not have a materialsignificant impact on our results of operations or financial condition.
5. FUNDING AGREEMENTS
Commercial Cash Arrangements
We have commercial arrangements with third partythird-party vendors to provide cash for certain of our ATMs.fund dispensing devices. For the use of these funds, we pay a cash usage fee on either the average daily balance of funds utilized multiplied by a contractually defined cash usage rate or the amounts supplied multiplied by a contractually defined cash usage rate. These cashfund usage fees, reflected as interest expense within the Statements of Income (Loss),Operations, were $7.0approximately $4.0 million, $4.9$3.1 million, and $3.1$7.2 million for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively. We are exposed to interest rate risk to the extent that the applicable rates increase.
Under these agreements, the currency supplied by third party vendors remain their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected in our Balance Sheets. The outstanding balancesbalance of ATM cash utilized by usfunds provided from the third parties were approximately $224.7$401.8 million and $289.8$340.3 million as of December 31, 20182021 and 2017,2020, respectively.
Our primary commercial arrangement, the Contract Cash Solutions Agreement, as amended, is with Wells Fargo, N.A. (“Wells Fargo”). Wells Fargo provides us with cash in the maximum amount ofup to $300 million with the ability to increase the amount as defined within the agreement or otherwise permitted by $75 million over a 5-day period for holidays, such as the period around New Year’s Day.vault cash provider. The term of the agreement expires on June 30, 20212023 and will autoautomatically renew for additional one-year periods unless either party provides a 90-dayninety-day written notice of its intent not to renew.
We are responsible for any losses of cash in the ATMsfund dispensing devices under this agreement, and we self-insure for this type of risk. We incurredThere were no material losses related to this self-insurance for the years ended December 31, 2018, 2017,2021, 2020, and 2016.2019.
Site‑FundedSite-Funded ATMs
We operate ATMs at certain customercustomers’ gaming establishments where the gaming establishment provides the cash required for the ATMATMs’ 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 is included within settlement liabilities in the accompanying Balance Sheets and was $249.6approximately $194.3 million and $210.8$125.3 million as of December 31, 20182021 and 2017,2020, respectively.
Everi-Funded ATMs
We enter into agreements with international customers for certain of our Canadian ATMs whereby we provide the cash required to operate the ATMs. WeThe amount of cash supplied approximately $4.8 million and $6.9 million of our cash for these ATMs at December 31, 2018 and 2017, respectively, whichby Everi represents an outstanding balance under such agreements at the end of the period. Such amounts are reported within settlement receivables line ofon our Balance Sheets. The outstanding balances in connection with these arrangements were immaterial at December 31, 2021 and 2020.
Prefunded CashPre-Funded Financial Access Agreements
Due to certain regulatory requirements in certain jurisdictions, some international gaming establishments require prefundingpre-funding of cash to cover allthe outstanding settlement amounts in order for us to provide cashfinancial access services to their properties. We enter into agreements with these gaming operators for which we supply our cashfinancial access services forto their properties. Under these agreements, we maintain sole discretion to either continue or cease operations as well as discretion over the amounts prefundedpre-funded to the properties and may request amounts to be refunded to us, with appropriate notice to the operator, at any time. The initial prefundedpre-funded amounts and subsequent amounts from the settlement of transactions are deposited into a bank account that is to be used exclusively for cashfinancial access services, and we maintain the right to monitor allthe transaction activity in that account. The total amount of prefundedpre-funded cash outstanding was approximately $6.1$3.0 million and $8.4$2.6 million at December 31, 20182021 and 2017,2020, respectively, and is included in prepaid expenses and other current assets inline on our Balance Sheets.
6. TRADE AND OTHER RECEIVABLES
Trade and other receivables represent short-term credit granted to customers as well asand long-term loans receivable onin connection with our games,Games and FinTech equipment 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. Other receivables include income tax receivables and other miscellaneous receivables.
The balance of trade and other receivables consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2021 | | 2020 |
| Trade and other receivables, net | | | | |
| Games trade and loans receivables | | $ | 77,053 | | | $ | 44,794 | |
| FinTech trade and loans receivables | | 21,504 | | | 14,683 | |
Contract assets (1) | | 15,221 | | | 17,561 | |
Insurance settlement receivable (2) | | — | | | 7,650 | |
| Other receivables | | 3,695 | | | 1,923 | |
| Net investment in sales-type leases | | 1,331 | | | 2,200 | |
| Total trade and other receivables, net | | 118,804 | | | 88,811 | |
| Non-current portion of receivables | | | | |
| Games trade and loans receivables | | (1,348) | | | (1,333) | |
| FinTech trade and loans receivables | | (7,340) | | | (4,163) | |
Contract assets (1) | | (5,294) | | | (8,321) | |
| Net investment in sales-type leases | | — | | | (803) | |
| Total non-current portion of receivables | | (13,982) | | | (14,620) | |
| Total trade and other receivables, current portion | | $ | 104,822 | | | $ | 74,191 | |
|
| | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 |
| Trade and other receivables, net | | |
| | |
|
| Games trade and loans receivables | | $ | 53,011 |
| | $ | 38,070 |
|
| FinTech trade and loans receivables | | 18,890 |
| | 10,780 |
|
| Other receivables | | 1,333 |
| | 1,570 |
|
| Total trade and other receivables, net | | $ | 73,234 |
|
| $ | 50,420 |
|
| Non-current portion of receivables | | | | |
| Games trade and loans receivables | | (2,922 | ) | | (1,267 | ) |
FinTech trade and loans receivables(1) | | (5,925 | ) | | (1,371 | ) |
| Total non-current portion of receivables | | $ | (8,847 | ) | | $ | (2,638 | ) |
| Total trade and other receivables, current portion | | $ | 64,387 |
|
| $ | 47,782 |
|
(1) In connection withAllowance for Credit Losses
The activity in our allowance for credit losses for the adoption of ASC 606 utilizing the modified retrospective transition method, we recorded an immaterial cumulative adjustment with respect to certain amounts that had been previously deferred under the then existing revenue recognition guidance as ofyears ended December 31, 2017 that required recognition under ASC 606 as of the effective date of adoption in accumulated deficit.
At least quarterly, we evaluate the collectability of the outstanding balances2021 and establish a reserve for the amount of the expected losses on our receivables. The allowance for doubtful accounts for trade receivables was approximately $6.4 million and $4.7 million as of December 31, 2018 and 2017, respectively, and included approximately $3.2 million and $2.7 million of check warranty reserves, respectively. The provision for doubtful customer accounts receivable is generally included within operating expenses in the Statements of Income (Loss).
A summary activity of the reserve for check warranty losses2020 is as follows (in thousands):
| | | | | | | | | | | |
| At December 31, |
| | 2021 | | 2020 |
| Beginning allowance for credit losses | $ | (3,689) | | | $ | (5,786) | |
| Provision | (7,540) | | | (8,010) | |
| Charge-offs and recoveries | 6,068 | | | 10,107 | |
| Ending allowance for credit losses | $ | (5,161) | | | $ | (3,689) | |
|
| | | |
| | Amount |
| Balance, December 31, 2015 | $ | 2,973 |
|
| Warranty expense provision | 8,694 |
|
| Charge-offs against reserve | (8,972 | ) |
| Balance, December 31, 2016 | 2,695 |
|
| Warranty expense provision | 9,418 |
|
| Charge-offs against reserve | (9,404 | ) |
| Balance, December 31, 2017 | 2,709 |
|
| Warranty expense provision | 9,819 |
|
| Charge-offs against reserve | (9,366 | ) |
| Balance, December 31, 2018 | $ | 3,162 |
|
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.freight, and is accounted for using the first in, first out method. The inventory is stated at the lower of cost or net realizable value and accounted for using the FIFO method.
There was no material impairment of our inventory for the years ended December 31, 2018 and 2017.
We recorded an immaterial impairment charge of approximately $1.8 million in our Games segment for the year ended December 31, 2018 to reduce the carrying value of certain component parts to their fair values. The adjustment was included in operating expenses in our Statements of Income (Loss).value.
Inventory consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2021 | | 2020 |
| Inventory | | | | |
| Component parts, net of reserves of $2,422 and $1,262 at December 31, 2021 and December 31, 2020, respectively | | $ | 22,490 | | | $ | 21,560 | |
| Work-in-progress | | 554 | | | 182 | |
| Finished goods | | 6,189 | | | 6,000 | |
| Total inventory | | $ | 29,233 | | | $ | 27,742 | |
|
| | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 |
| Inventory | | |
| | |
|
| Component parts, net of reserves of $1,468 and $1,327 at December 31, 2018 and December 31, 2017, respectively | | $ | 23,197 |
| | $ | 18,782 |
|
| Work-in-progress | | 280 |
| | 985 |
|
| Finished goods | | 926 |
| | 4,200 |
|
| Total inventory | | $ | 24,403 |
|
| $ | 23,967 |
|
8. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our New Revolving Credit Facility (defined herein),Revolver, restricted cash, operating lease ROU assets, and other assets. The current portion of these assets is included in prepaid expenses and other current assets and the non-current portion is included in other assets, both of which are contained within our Balance Sheets.
The balance of the current portion of prepaid expenses and other assets consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2021 | | 2020 |
| Prepaid expenses and other current assets | | | | |
| Prepaid expenses | | $ | 14,389 | | | $ | 11,282 | |
| Deposits | | 7,709 | | | 4,133 | |
Restricted cash(1) | | 1,616 | | | 542 | |
| Other | | 3,585 | | | 1,391 | |
| Total prepaid expenses and other current assets | | $ | 27,299 | | | $ | 17,348 | |
|
| | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 |
| Prepaid expenses and other assets | | |
| | |
|
| Deposits | | $ | 8,241 |
| | $ | 9,003 |
|
| Prepaid expenses | | 8,351 |
| | 6,426 |
|
| Other | | 3,667 |
| | 5,241 |
|
| Total prepaid expenses and other assets | | $ | 20,259 |
|
| $ | 20,670 |
|
The balance of the non-current portion of other assets consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2021 | | 2020 |
| Other assets | | | | |
| Operating lease ROU assets | | $ | 12,692 | | | $ | 16,104 | |
| Prepaid expenses and deposits | | 4,789 | | | 4,952 | |
| Debt issuance costs of revolving credit facility | | 1,760 | | | 267 | |
| Other | | 418 | | | 673 | |
| Total other assets | | $ | 19,659 | | | $ | 21,996 | |
|
| | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 |
| Other assets | | |
| | |
|
| Prepaid expenses and deposits | | $ | 5,289 |
| | $ | 4,103 |
|
| Debt issuance costs of revolving credit facility | | 654 |
| | 849 |
|
| Other | | 309 |
| | 2,657 |
|
| Total other assets | | $ | 6,252 |
|
| $ | 7,609 |
|
9. PROPERTY EQUIPMENT AND LEASED ASSETSEQUIPMENT
Property equipment and leased assetsequipment consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | At December 31, 2021 | | At December 31, 2020 |
| | | | | At December 31, 2018 | | At December 31, 2017 | | Useful Life (Years) | | Cost | | Accumulated Depreciation | | Net Book Value | | Cost | | Accumulated Depreciation | | Net Book Value |
| | | Useful Life
(Years) | | Cost | | Accumulated Depreciation | | Net Book Value | | Cost | | Accumulated Depreciation | | Net Book Value | |
Property, equipment and
leased assets | | | | | | | | | | | | | | | |
| Property and equipment | | Property and equipment | | | | | | | | | | | | | | |
| Rental pool - deployed | | 2-4 | | $ | 183,309 |
| | $ | 105,038 |
| | $ | 78,271 |
| | $ | 162,319 |
| | $ | 80,895 |
| | $ | 81,424 |
| Rental pool - deployed | | 2-4 | | $ | 248,958 | | | $ | 166,075 | | | $ | 82,883 | | | $ | 216,775 | | | $ | 136,975 | | | $ | 79,800 | |
| Rental pool - undeployed | | 2-4 | | 23,825 |
| | 14,680 |
| | 9,145 |
| | 17,366 |
| | 9,374 |
| | 7,992 |
| Rental pool - undeployed | | 2-4 | | 23,284 | | | 18,285 | | | 4,999 | | | 21,974 | | | 16,680 | | | 5,294 | |
| FinTech equipment | | 3-5 | | 27,285 |
| | 21,000 |
| | 6,285 |
| | 25,907 |
| | 18,654 |
| | 7,253 |
| FinTech equipment | | 1-5 | | 32,802 | | | 21,257 | | | 11,545 | | | 33,349 | | | 21,947 | | | 11,402 | |
Leasehold and building
improvements | | Lease
Term | | 11,857 |
| | 6,938 |
| | 4,919 |
| | 10,981 |
| | 5,211 |
| | 5,770 |
| Leasehold and building improvements | | Lease Term | | 12,598 | | | 9,234 | | | 3,364 | | | 11,352 | | | 8,557 | | | 2,795 | |
Machinery, office and other
equipment | | 2-5 | | 46,322 |
| | 28,654 |
| | 17,668 |
| | 35,167 |
| | 24,087 |
| | 11,080 |
| |
| Machinery, office, and other equipment | | Machinery, office, and other equipment | | 1-5 | | 45,277 | | | 28,075 | | | 17,202 | | | 45,085 | | | 32,053 | | | 13,032 | |
| Total | | | | $ | 292,598 |
|
| $ | 176,310 |
|
| $ | 116,288 |
|
| $ | 251,740 |
|
| $ | 138,221 |
|
| $ | 113,519 |
| Total | | | | $ | 362,919 | | | $ | 242,926 | | | $ | 119,993 | | | $ | 328,535 | | | $ | 216,212 | | | $ | 112,323 | |
Depreciation expense related to property equipment and leased assetsequipment totaled approximately $61.2$61.5 million, $47.3$67.5 million, and $50.0$63.2 million for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
There was no material impairment of our property, equipment and leased assets for the years ended December 31, 2018 and 2017.
We recorded an immaterial impairment charge of approximately $0.8 million in our Games segment for the year ended December 31, 2018 to reduce the carrying value of certain leased assets to their fair values. The adjustment was included in operating expenses in our Statements of Income (Loss).
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. The balance of goodwill was approximately $682.7 million and $682.0 million at December 31, 2021 and 2020, respectively. We have the following reporting units: (i) Games; (ii) Financial Access Services; (iii) Kiosk Sales and Services; (iv) Central Credit Services; (v) Compliance Sales and Services; and (vi) Loyalty Sales and Services.
In accordance with ASC 350 (“Intangibles—Goodwill and Other”), we test goodwill at the reporting unit level, which areis identified as an operating segmentssegment 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 our goodwill for impairment annually on October 1 each year, or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit basis, at the beginning of our fourth fiscal quarter, or more often under certain circumstances.is less than its carrying amount. The annual impairment test is completed using either: a qualitative “Step 0” assessment based on reviewing relevant events and circumstances;circumstances or a quantitative “Step 1” assessment, which determines the fair value of the reporting unit, using both 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.
Goodwill Testing
In performing our annual goodwill impairment tests, we utilize To the approach prescribed under ASC 350. The “Step 1” required a comparison ofextent the carrying amount of each reporting unit to its estimated fair value. To estimate the fair value of our reporting units for “Step 1”, we used a combination of an income valuation approach and a market valuation approach. The income approach is based on a discounted cash flow (“DCF”) analysis. This method involves estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value, using a risk-adjusted discount rate. Assumptions used in the DCF require the exercise of significant judgment, including, but not limited to: appropriate discount rates and terminal values, growth rates and the amount and timing of expected future cash flows. The projected cash flows are based on our most recent annual budget and projected years beyond. Our budgets and projected cash flows are based on estimated future growth rates. We believe our assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent in future cash flow projections, used in the DCF are based on estimates of the WACC of market participants relative to each respective reporting unit. The market approach considers comparable market data based on multiples of revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”). If the fair value of a reporting unit is less than its carrying amount,estimated fair value, an impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the fair value of that goodwill is recorded in accordance with ASC 350.recorded.
We had approximately $640.5 million and $640.6 million of goodwill on our Balance Sheets as of December 31, 2018 and 2017, respectively, resulting from acquisitions of other businesses.
In connection with our annual goodwill impairment testing process for 20182021 and 2017,2020, we determined that no impairment adjustments were necessary. The fair value exceeded the carrying amountnecessary for each of the Games, Cash Access Services, Kiosk Sales and Services, Central Credit Services and Compliance Sales and Services reporting units for 2018 and 2017.
In connection with our annual goodwill impairment testing process 2016, we determined that impairment adjustments were necessary. The fair value exceeded the carrying amount for each of the Cash Access Services, Kiosk Sales and Services, Central Credit Services and Compliance Sales and Services reporting units, while Games reporting unit had a goodwill impairment of $146.3 million for 2016. The impairment recorded in 2016 was primarily based upon limited growth and capital expenditure constraints in the gaming industry, consolidation and increased competition in the gaming manufacturing space, stock market volatility, global and domestic economic uncertainty, and lower than forecasted operating profits and cash flows. Based on these indicators, we revised our estimates and assumptions for the Games reporting unit.
Management performs its annual forecasting process, which, among other factors, includes reviewing recent historical results, company-specific variables and industry trends. This process is generally completed in the fourth quarter and considered in conjunction with the annual goodwill impairment evaluation.
The annual evaluation of goodwill requires the use of estimates about future operating results of each reporting unit to determine its estimated fair value. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations. The estimates of fair value require significant judgment and are based on assumptions we determined to be reasonable; however, that are unpredictable and inherently uncertain, including, estimates of future growth rates, operating margins, and assumptions about the overall economic climate as well as the competitive environment for our reporting units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing, or earlier, if an indicator of an impairment is present prior to our next annual evaluation.
Our reporting units are identified as operating segments or one level below. Reporting units must: (a) engage in business activities from which they earn revenues and incur expenses; (b) have operating results that are regularly reviewed by our segment management to ascertain the resources to be allocated to the segment and assess its performance; and (c) have discrete financial information available. Our reporting units included: Games, Cash Access Services, Kiosk Sales and Services, Central Credit Services, and Compliance Sales and Services.
The changes in the carrying amount of goodwill are as follows (in thousands):
| | | | | Games | | Cash Access Services | | Kiosk Sales and Services | | Central Credit Services | | Compliance Sales and Services | | Total | | | Games | | Financial Access Services | | Kiosk Sales and Services | | Central Credit Services | | Compliance Sales and Services | | Loyalty Sales and Services | | Total |
| Goodwill | | |
| | |
| | |
| | |
| | |
| | |
| Goodwill | | | | | | | | | | | | | | |
| Balance, December 31, 2016 | | $ | 449,041 |
| | $ | 157,055 |
| | $ | 5,745 |
| | $ | 17,127 |
| | $ | 11,578 |
| | $ | 640,546 |
| |
| Balance, December 31, 2019 | | Balance, December 31, 2019 | | $ | 449,041 | | | $ | 157,074 | | | $ | 5,745 | | | $ | 17,127 | | | $ | 11,578 | | | $ | 41,070 | | | $ | 681,635 | |
| Foreign translation adjustment | | — |
| | 43 |
| | — |
| | — |
| | — |
| | 43 |
| Foreign translation adjustment | | — | | | 14 | | | — | | | — | | | — | | | — | | | 14 | |
| Balance, December 31, 2017 | | $ | 449,041 |
|
| $ | 157,098 |
|
| $ | 5,745 |
|
| $ | 17,127 |
|
| $ | 11,578 |
|
| $ | 640,589 |
| |
| Acquisitions | | Acquisitions | | — | | | — | | | — | | | — | | | — | | | 325 | | | 325 | |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | | $ | 449,041 | | | $ | 157,088 | | | $ | 5,745 | | | $ | 17,127 | | | $ | 11,578 | | | $ | 41,395 | | | $ | 681,974 | |
| Foreign translation adjustment | | — |
| | (52 | ) | | — |
| | — |
| | — |
| | (52 | ) | Foreign translation adjustment | | — | | | 2 | | | — | | | — | | | — | | | — | | | 2 | |
| Balance, December 31, 2018 | | $ | 449,041 |
|
| $ | 157,046 |
|
| $ | 5,745 |
|
| $ | 17,127 |
|
| $ | 11,578 |
|
| $ | 640,537 |
| |
| Acquisitions | | Acquisitions | | — | | | — | | | — | | | — | | | 687 | | | — | | | 687 | |
| Balance, December 31, 2021 | | Balance, December 31, 2021 | | $ | 449,041 | | | $ | 157,090 | | | $ | 5,745 | | | $ | 17,127 | | | $ | 12,265 | | | $ | 41,395 | | | $ | 682,663 | |
Other Intangible Assets
Other intangible assets consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | At December 31, 2021 | | At December 31, 2020 |
| | Useful Life (Years) | | Cost | | Accumulated Amortization | | Net Book Value | | Cost | | Accumulated Amortization | | Net Book Value |
| Other intangible assets | | | | | | | | | | | | | | |
| Contract rights under placement fee agreements | | 3-7 | | $ | 58,837 | | | $ | 4,237 | | | $ | 54,600 | | | $ | 60,561 | | | $ | 28,108 | | | $ | 32,453 | |
| Customer contracts | | 3-14 | | 72,138 | | | 58,758 | | | 13,380 | | | 71,975 | | | 54,407 | | | 17,568 | |
| Customer relationships | | 8-12 | | 231,100 | | | 147,515 | | | 83,585 | | | 231,100 | | | 126,549 | | | 104,551 | |
| Developed technology and software | | 1-6 | | 342,309 | | | 280,412 | | | 61,897 | | | 313,957 | | | 255,771 | | | 58,186 | |
| Patents, trademarks, and other | | 2-18 | | 20,547 | | | 19,415 | | | 1,132 | | | 19,682 | | | 17,813 | | | 1,869 | |
| Total | | | | $ | 724,931 | | | $ | 510,337 | | | $ | 214,594 | | | $ | 697,275 | | | $ | 482,648 | | | $ | 214,627 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | At December 31, 2018 | | At December 31, 2017 |
| | | Weighted Average Remaining Life (Years) | | Cost | | Accumulated Amortization | | Net Book Value | | Cost | | Accumulated Amortization | | Net Book Value |
| Other intangible assets | | | | | | | | | | | | | | |
Contract rights under placement fee agreements | | 4 | | $ | 57,440 |
| | $ | 12,178 |
| | $ | 45,262 |
| | $ | 57,231 |
| | $ | 3,910 |
| | $ | 53,321 |
|
| Customer contracts | | 6 | | 51,175 |
| | 46,162 |
| | 5,013 |
| | 51,175 |
| | 43,638 |
| | 7,537 |
|
| Customer relationships | | 8 | | 231,100 |
| | 84,619 |
| | 146,481 |
| | 231,100 |
| | 63,653 |
| | 167,447 |
|
Developed technology and software | | 2 | | 277,243 |
| | 190,886 |
| | 86,357 |
| | 249,064 |
| | 158,919 |
| | 90,145 |
|
| Patents, trademarks and other | | 4 | | 29,168 |
| | 24,884 |
| | 4,284 |
| | 29,046 |
| | 23,185 |
| | 5,861 |
|
| Total | | | | $ | 646,126 |
|
| $ | 358,729 |
|
| $ | 287,397 |
|
| $ | 617,616 |
|
| $ | 293,305 |
|
| $ | 324,311 |
|
Amortization expense related to other intangible assets totaled approximately $65.2$58.0 million, $69.5$75.3 million, and $94.6$68.9 million for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively. We capitalized $33.3$30.2 million, $29.4$21.2 million, and $24.2$43.7 million of internalinternally-developed software development costs for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
On a quarterly basis, we evaluate our other intangible assets for potential impairment as part of our quarterly review process. There was no material impairment identified for any of our other intangible assets for the years ended December 31, 2018, 2017,2021 and 2016.2019. During 2020, we recorded a full write-down of intangible assets of approximately $6.3 million, of which $6.0 million and $0.3 million, related to our Games and FinTech businesses, respectively, for certain of our internally developed and third-party software projects that were not expected to be pursued. This charge was reflected in Operating Expenses of our Statement of Operations.
The anticipated amortization expense related to other intangible assets, assuming no subsequent impairment of the underlying assets, is as follows (in thousands):
| | | Anticipated amortization expense | Amount | Anticipated amortization expense | Amount |
| 2019 | $ | 64,380 |
| |
| 2020 | 52,168 |
| |
| 2021 | 41,440 |
| |
| 2022 | 33,473 |
| 2022 | $ | 57,122 | |
| 2023 | 20,241 |
| 2023 | 38,104 | |
| 2024 | | 2024 | 28,402 | |
| 2025 | | 2025 | 26,342 | |
| 2026 | | 2026 | 25,712 | |
| Thereafter | 50,316 |
| Thereafter | 11,327 | |
Total(1) | $ | 262,018 |
| Total (1) | $ | 187,009 | |
| |
(1) | For the year ended December 31, 2018, the Company had $25.4 million in other intangible assets which(1) For the year ended December 31, 2021, the Company had $27.6 million in other intangible assets that had not yet been placed into service. |
We enter into placement fee agreements to secure a long-term revenue share percentage and a fixed number of player terminal placements in a gaming facility. 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 from 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 thesethe agreements to reduce our floor space at thethese 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 theits remaining estimated useful life.
We paid approximately $31.5 million, $3.1 million, and $17.7 million in placement fees for the years ended December 31, 2021, 2020, and 2019, respectively. In July 2017,September 2021, we entered into a placement fee agreement with a customer for certain of its locations for approximately $49.1$28.9 million, net of $10.1 million of unamortized fees related to superseded contracts. We paid approximately $22.7 million and $13.3 millionwhich we settled in placement fees to this customerOctober 2021. There were no material imputed interest amounts recorded in connection with these payments for thethe years ended December 31, 20182021 and 2017,2020, respectively. TheFor the year ended December 31, 2019, the payments made in 2018 included approximately $2.1$0.6 million of imputed interest.interest.
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table presents our accounts payable and accrued expenses (amounts in thousands):
| | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2021 | | 2020 |
| Accounts payable and accrued expenses | | | | |
| Customer commissions payable | | 57,515 | | | 39,028 | |
| Contract liabilities | | 36,238 | | | 26,980 | |
| Payroll and related expenses | | 29,125 | | | 13,357 | |
| Accounts payable - trade | | 25,453 | | | 15,503 | |
| Accrued interest | | 9,273 | | | 1,068 | |
| Operating lease liabilities | | 5,663 | | | 5,649 | |
Financial access processing and related expenses (1) | | 3,619 | | | 1,109 | |
| Accrued income taxes | | 2,756 | | | 1,329 | |
Contingent consideration and acquisition-related liabilities (2) | | — | | | 24,674 | |
Litigation accrual (3) | | — | | | 12,727 | |
| Other | | 4,291 | | | 3,605 | |
| Total accounts payable and accrued expenses | | $ | 173,933 | | | $ | 145,029 | |
|
| | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 |
| Accounts payable and accrued expenses | | | | |
| Trade accounts payable | | $ | 70,796 |
| | $ | 59,435 |
|
Placement fees(1) | | 16,746 |
| | 22,328 |
|
| Payroll and related expenses | | 15,055 |
| | 14,178 |
|
| Deferred and unearned revenues | | 12,887 |
| | 10,450 |
|
| Other | | 6,303 |
| | 11,303 |
|
| Cash access processing and related expenses | | 4,160 |
| | 8,932 |
|
| Accrued taxes | | 1,917 |
| | 2,112 |
|
| Accrued interest | | 1,374 |
| | 5,766 |
|
| Total accounts payable and accrued expenses | | $ | 129,238 |
|
| $ | 134,504 |
|
| |
(1) | The total outstanding balance of the placement fee liability was approximately $16.7 million and $39.1 million as of December 31, 2018 and 2017, respectively. The placement fee liability was considered current portion due to the remaining obligation being due within twelve months of December 31, 2018. The remaining non-current placement fees of approximately $16.8 million as of December 31, 2017 were included in other accrued expenses and liabilities in our Balance Sheets. |
12. LONG-TERM DEBT
The following table summarizes our indebtedness (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity | | Interest | | At December 31, |
| | Date | | Rate | | 2021 | | 2020 |
| Long-term debt | | | | | | | | |
| $600 million New Term Loan | | 2028 | | LIBOR+2.50% | | $ | 598,500 | | | $ | — | |
| $125 million New Revolver | | 2026 | | LIBOR+2.50% | | — | | | — | |
| $820 million Prior Term Loan | | 2024 | | LIBOR+2.75% | | — | | | 735,500 | |
| $125 million Prior Incremental Term Loan | | 2024 | | LIBOR+10.50% | | — | | | 124,375 | |
| Senior Secured Credit Facilities | | | | | | 598,500 | | | 859,875 | |
| $400 million 2021 Unsecured Notes | | 2029 | | 5.00% | | 400,000 | | | — | |
| $375 million 2017 Unsecured Notes | | 2025 | | 7.50% | | — | | | 285,381 | |
| Total debt | | | | | | 998,500 | | | 1,145,256 | |
| Debt issuance costs and discount | | | | | | (16,975) | | | (16,003) | |
| Total debt after debt issuance costs and discount | | | | 981,525 | | | 1,129,253 | |
| Current portion of long-term debt | | | | | | (6,000) | | | (1,250) | |
| Total long-term debt, net of current portion | | | | $ | 975,525 | | | $ | 1,128,003 | |
|
| | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 |
| Long-term debt | | | | |
| Senior secured term loan | | $ | 807,700 |
| | $ | 815,900 |
|
| Senior unsecured notes | | 375,000 |
| | 375,000 |
|
| Total debt | | 1,182,700 |
|
| 1,190,900 |
|
| Debt issuance costs and discount | | (19,484 | ) | | (23,057 | ) |
| Total debt after debt issuance costs and discount | | 1,163,216 |
|
| 1,167,843 |
|
| Current portion of long-term debt | | (8,200 | ) | | (8,200 | ) |
| Long-term debt, less current portion | | $ | 1,155,016 |
|
| $ | 1,159,643 |
|
Refinancings
On May 9, 2017 (the “Closing Date”), Everi Payments,The Company, as borrower, and Holdings entered into a credit agreement withdated August 3, 2021 (the “Closing Date”), among the Company, the lenders party thereto and Jefferies Finance LLC, as administrative agent, collateral agent, swing line lender and a letter of credit issuer sole lead arranger and sole book manager (amended as described below, the(the “New Credit Agreement”). The New Credit Agreement provides for: (i) a $35.0seven-year $600 million five-yearsenior secured term loan due 2028 issued at 99.75% of par (the “New Term Loan”); and (ii) a $125 million senior secured revolving credit facility due 2026, which was undrawn at closing (the “New Revolving Credit Facility”); and (ii) an $820.0 million, seven-year senior secured term loan facility (the “New Term Loan Facility,”“New Revolver” and together with the New Revolving Credit Facility,Term Loan, the “New Credit Facilities”).
The fees associated with the New Credit Facilities were approximately $13.9 million, which included discounts of approximately $4.1 million$1.5 million.
The interest rate per annum applicable to the New Credit Facilities will be, at the Company’s option, either the Eurodollar rate with a 0.50% LIBOR floor plus a margin of 2.50% or the base rate plus a margin of 1.50%.
The New Revolver is available for general corporate purposes, including permitted acquisitions, working capital and debtthe issuance costs of approximately $15.5 million. All borrowingsletters of credit. Borrowings under the New Revolving Credit FacilityRevolver are subject to the satisfaction of customary conditions, including the absence of defaults and the accuracy of representations and warranties.
The proceeds fromCompany is required to make periodic payments on the New Term Loan Facility incurred on the Closing Date were used to: (i) refinance: (a) 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) 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.
On November 13, 2017 (the “Repricing Closing Date”), we entered into an amendment to the New Credit Agreement (the “First Amendment”) which, among other things, reduced the interest rate on the approximately $818.0 million then-outstanding balance of the New Term Loan Facility; however, it did not change the maturity dates for the New Term Loan Facility or the New Revolving Credit Facility or the financial covenants or other debt repayments terms set forth in the New Credit Agreement. We incurred approximately $3.0 million of debt issuance costs and fees associated with the repricing of the New Term Loan Facility.
On May 17, 2018, we entered into a Second Amendment (the “Second Amendment”) to the New Credit Agreement, which reduced the interest rate on the $813.9 million outstanding balance of the senior secured term loan under the Credit Agreement by 50 basis points to LIBOR + 3.00% from LIBOR + 3.50% with the LIBOR floor unchanged at 1.00%. The senior secured term loan under the Credit Agreement will be subject to a prepayment premium of 1.00% of the principal amount repaid for any voluntary prepayment or mandatory prepayment with proceeds of debt that has a lower effective yield than the repriced term loan or any amendment to the repriced term loan that reduces the interest rate thereon, in each case, to the extent occurring within six months of the effective date of the Second Amendment. The maturity date for the Credit Agreement remains May 9, 2024, and no changes were made to the financial covenants or other debt repayment terms. We incurred approximately $1.3 million of debt issuance costs and fees associated with the repricing of the New Term Loan Facility.
New Credit Facilities
The New Term Loan Facility matures seven years after the Closing Date and the New Revolving Credit Facility matures five years after the Closing 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 is, 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 also is, at Everi Payments’ option, the base rate or the Eurodollar Rate plus, in each case, an applicable margin. The Eurodollar Rate is 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 zero, then such rate will be equal to zero 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%. Prior to the effectiveness of the First Amendment on the Repricing Closing Date, the applicable margins for both the New Revolving Credit Facility and the New Term Loan Facility were: (i) 4.50% in respect of Eurodollar Rate loans and (ii) 3.50% in respect of base rate loans. The applicable margins for the New Term Loan Facility from and after the effectiveness of the First Amendment on the Repricing Closing Date through the effectiveness of the Second Amendment were: (i) 3.50% in respect of Eurodollar Rate loans and (ii) 2.50% in respect of base rate loans. The applicable margins for the New Term Loan Facility from and after the effectiveness of the Second Amendment are: (i) 3.00% in respect of Eurodollar Rate loans and (ii) 2.00% 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, however, without premium or penalty, except that certain refinancings of the term loans within six months after the Repricing 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 December 31, 2018, our consolidated secured leverage ratio was 3.28 to 1.00, with a maximum allowable ratio of 4.75 to 1.00. Our maximum consolidated secured leverage will be reduced to 4.50 to 1.00 as of December 31, 2019, 4.25 to 1.00 as of December 31, 2020, and 4.00 to 1.00 as of December 31, 2021 and each December 31 thereafter.
We were in compliance with the covenants and terms of the New Credit Facilities as of December 31, 2018.
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, commencing on the last business day of December 2021, the interest payment dates shall be last business day of each of March, June, September and December and the maturity date.
Voluntary prepayments of the New Term Loan and the New Revolver 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, and without premium or penalty, except that certain refinancings or repricings of the New Term Loan within six months after the Closing Date will be subject to a prepayment premium of 1.00% of the principal amount repaid.
The New Credit Agreement contains certain covenants that, among other things, limit the Company’s 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 also requires the Company, together with its subsidiaries, to comply with a maximum consolidated secured leverage ratio of 4.25:1.00 as of the measurement date.
ForThe weighted average interest rate on the New Term Loan was 3.00% for the year ended December 31, 2018, the New Term Loan Facility had an applicable weighted average interest rate of 5.17%.2021.
At December 31, 2018, we had approximately $807.7 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 December 31, 2018.
Refinanced Senior Secured Notes
In connection with entering into the New Credit Agreement, on May 9, 2017, Everi Payments redeemed in full all outstanding Refinanced Secured Notes in the aggregate principal amount of $335.0 million plus accrued and unpaid interest. As a result of the redemption, the Company recorded non-cash charges in the amount of approximately $1.7 million, which consisted of unamortized deferred financing fees of $0.2 million and discounts of $1.5 million, which were included in the total $14.6 million non-cash charge.
2021 Senior Unsecured Notes
In December 2014, we issued $350.0On July 15, 2021, the Company, as issuer, completed the debt offering (the “Offering”) of $400 million in aggregate principal amount of 10.0% SeniorEveri’s 5.00% senior unsecured notes due 2029 (the “2021 Unsecured Notes”). Pursuant to a Purchase Agreement dated June 30, 2021 (the “Purchase Agreement”) by and among the Company and certain of Everi’s direct and indirect domestic subsidiaries, as guarantors (collectively the “Guarantors”), and Jefferies LLC as representative of the several initial purchasers (collectively the “Initial Purchasers”), the Company issued, at a price of par, and sold the 2021 Unsecured Notes to the Initial Purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons pursuant to Regulation S of the Securities Act. The 2021 Unsecured Notes, due 2022 (the “2014and guarantees thereof, have not been and will not be registered under the Securities Act or the securities laws of any state or other jurisdictions, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws.
The fees associated with the 2021 Unsecured Notes”)Notes included debt issuance costs of approximately $5.9 million.
The 2021 Unsecured Notes were issued under an indenture (as supplemented,(the “Indenture”) dated July 15, 2021 by and among Everi, the “2014 Notes Indenture”), dated December 19, 2014, between Everi Payments (as successor issuer),Guarantors and Deutsche Bank Trust Company Americas, as trustee.trustee (the “Trustee”). The fees associated with the 20142021 Unsecured Notes included original issue discounts of approximately $3.8 millionare fully and debt issuance costs of approximately $14.0 million. In December 2015, we completed an exchange offer in which all ofunconditionally guaranteed on a senior unsecured basis by the unregistered 2014 Unsecured Notes were exchanged for a like amount of 2014 Unsecured Notes that had been registered under the Securities Act.
In December 2017, we issued $375.0 million in aggregate principal amount of 7.50% Senior Unsecured Notes due 2025 (the “2017 Unsecured Notes”) under an indenture (the “2017 Notes Indenture”), dated December 5, 2017, among Everi Payments (as issuer), Holdings and certain of its direct and indirect domestic subsidiaries as guarantors, and Deutsche Bank Trust Company Americas, as trustee.Guarantors. Interest on the 2017 Unsecured2021 Unsecured Notes accrues at a rate of 7.50%5.00% per annum and is payable semi-annually in arrears on each JuneJanuary 15 and DecemberJuly 15 (the “Interest Payment Dates”), commencing on JuneJanuary 15, 2018.2022. The 2017Company will make each interest payment to the holders of record on each January 1 and July 1 immediately preceding the Interest Payment Dates. The 2021 Unsecured Notes willwill mature on DecemberJuly 15, 2025. We incurred approximately $6.1 million2029.
The 2021 Unsecured Notes and the related guarantees are senior obligations of debt issuance costsEveri and fees associatedthe Guarantors, respectively, and rank equally with all of the Company’s and each Guarantor’s present and future senior indebtedness and rank senior in right of payment to all of Everi’s and each Guarantor’s present and future subordinated indebtedness. The 2021 Unsecured Notes and related guarantees are effectively subordinated to all of Everi’s and each Guarantor’s present and future secured indebtedness
(to the extent of the value of the assets securing such indebtedness). The 2021 Unsecured Notes are structurally subordinated in right of payment to all present and future indebtedness and other liabilities of the Company’s subsidiaries that do not guarantee the 2021 Unsecured Notes.
The Company will have the option to redeem some, or all, of the 2021 Unsecured Notes at any time on, or after, July 15, 2024 at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption. Everi will also have the option to redeem some, or all, of the 2021 Unsecured Notes at any time prior to July 15, 2024 at a redemption price of 100% of the principal amount of the 2021 Unsecured Notes to be redeemed, plus an applicable premium and accrued and unpaid interest, if any, to the date of redemption. In addition, at any time before July 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2021 Unsecured Notes at a redemption price of 105.00% of the principal amount of the 2021 Unsecured Notes redeemed together with accrued and unpaid interest to, but excluding, the redemption date with the refinancingproceeds from certain equity issuances. The 2021 Unsecured Notes are also subject to redemption requirements under state and local gaming laws and regulations. If Everi experiences specified changes of our 2017control, the Company may be required to offer to purchase the 2021 Unsecured Notes.Notes at 101% of their aggregate principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
On December 5, 2017,The Indenture contains customary covenants restricting the Company’s ability and the ability of its restricted subsidiaries to, among other things: (i) incur additional indebtedness or issue certain preferred stock; (ii) pay dividends or repurchase or redeem capital stock or make other restricted payments; (iii) limit dividends or other payments by the Company’s restricted subsidiaries to the Company or the Company’s other restricted subsidiaries; (iv) incur certain liens; (v) enter into transactions with affiliates; (vi) become an investment company; (vii) consolidate or merge with or into certain other companies; and (viii) designate certain of the Company’s subsidiaries as unrestricted subsidiaries under the Indenture. These covenants are subject to a number of important limitations and exceptions, including certain provisions permitting the Company, subject to the satisfaction of certain conditions, to transfer assets to certain of the Company’s unrestricted subsidiaries. The Indenture also contains customary events of default. Upon an event of default under the Indenture, the Trustee or the holders of at least 30% in aggregate principal amount of the 2021 Unsecured Notes then outstanding may declare all amounts owing under the 2021 Unsecured Notes to be due and payable.
Refinancing and Repayment
The proceeds from the New Term Loan incurred on the Closing Date, together with the issuanceproceeds of the 2017$400 million in aggregate principal amount of the Company’s 2021 Unsecured Notes, issued at a price of par on July 15, 2021, and cash on hand were used to: (i) prepay in full and terminate all commitments under the Everi Payments satisfiedInc. (“Everi Payments”) existing credit facility in the aggregate original principal amount of $820 million with an outstanding balance of approximately $735.5 million with Jefferies Finance LLC, as administrative agent, collateral agent, swing line lender, letter of credit issuer, sole lead arranger and dischargedsole book manager (the “Prior Term Loan”); (ii) redeem in full the 2014 Notes Indenture relating to the 2014 Unsecured Notes. To effect the satisfaction and discharge, Everi Payments issued7.50% senior unsecured notes due in 2025 (the “2017 Unsecured Notes”) in the aggregate original principal amount of $375.0 million with an unconditional noticeoutstanding balance of redemption toapproximately $285.4 million with Everi Payments, the Company and Deutsche Bank Trust Company Americas, as trustee, of the redemptionTrustee; (iii) prepay in full on January 15, 2018 (the “Redemption Date”) ofand terminate all outstanding 2014 Unsecured Notescommitments under the terms of the 2014 Notes Indenture. In addition, using the proceeds from the sale of the 2017 Unsecured Notes and cash on hand, Everi Payments irrevocably depositedexisting incremental term loan facility (the “Prior Incremental Term Loan”) in the aggregate original principal amount of $125 million with an outstanding balance of approximately $123.8 million with the trustee funds sufficient tolenders party thereto and Jefferies Finance LLC, as administrative agent and collateral agent; and (iv) pay the redemption price of the 2014 Unsecured Notes of 107.5% of the principal amount thereof, plus accruedrelated transaction fees and unpaid interest to, but not including, the Redemption Date (the “Redemption Price”), and irrevocably instructed the trustee to apply the deposited money toward payment of the Redemption Price for the 2014 Unsecured Notes on the Redemption Date. Upon the trustee’s receipt of such funds and instructions, alongexpenses with an officer’s certificate of Everi Payments and an opinion of counsel certifying and opining that all conditions under the 2014 Notes Indenturerespect to the satisfaction and discharge ofaforementioned debt instruments.
During the 2014 Notes Indenture had been satisfied, the 2014 Notes Indenture was satisfied and discharged, and all of the obligations of Everi Payments and the guarantors under the 2014 Notes Indenture ceased to be of further effect, as ofyear ended December 5, 2017 (subject to certain exceptions). The 2014 Unsecured Notes were thereafter redeemed on the Redemption Date.
In31, 2021, in connection with these refinancing and repayment activities, the total fees were approximately $40.6 million, comprised of approximately $20.8 million of early redemption penalties and make-whole interest associated with the prior debt instruments and approximately $19.8 million of capitalized debt issuance ofcosts attributable to the 2017 Unsecured Notesnew debt instruments.
During the year ended December 31, 2021, in connection with these refinancing and the redemption of the 2014 Unsecured Notes,repayment activities, we incurredrecorded a $37.2 million loss on extinguishment of debt consisting of a $26.3approximately $34.4 million, comprised of cash charges of approximately $20.8 million for prepayment penalties and make-whole premiuminterest and non-cash charges of approximately $13.6 million related to the satisfaction and redemption of the 2014 Unsecured Notes and approximately $10.9 million for the write-off of related unamortized debt issuance costs and fees.discounts associated with the Prior Term Loan, the Prior Incremental Term Loan and the 2017 Unsecured Notes.
For the period from January 1, 2021 to the Closing Date, the Prior Term Loan and the Prior Incremental Term Loan each had a weighted average interest rate of 3.54% and 11.50%, respectively. Together, the two facilities had a blended weighted average interest rate of 4.69% for the twelve months ended December 31, 2021.
Compliance with Debt Covenants
We were in compliance with the covenants and terms of the 2017New Credit Facilities and the 2021 Unsecured Notes as of December 31, 2018.
2021.
Principal Repayments
The maturities of our borrowings at December 31, 20182021 are as follows (in thousands):
| | | | | |
| | Amount |
| Maturities of borrowings | |
| 2022 | $ | 6,000 | |
| 2023 | 6,000 | |
| 2024 | 6,000 | |
| 2025 | 6,000 | |
| 2026 | 6,000 | |
| Thereafter | 968,500 | |
| Total | $ | 998,500 | |
|
| | | |
| | Amount |
| Maturities of borrowings | |
| 2019 | $ | 8,200 |
|
| 2020 | 8,200 |
|
| 2021 | 8,200 |
|
| 2022 | 8,200 |
|
| 2023 | 8,200 |
|
| Thereafter | 1,141,700 |
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| Total | $ | 1,182,700 |
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13. COMMITMENTS AND CONTINGENCIES
Placement Fee Arrangements
In July 2017, we extended the term of our then-existing placement fee agreement to 6 years and 11 months with our largest customer in Oklahoma. Under the terms of the agreement, we will pay approximately $5.6 million per quarter in placement fees, inclusive of imputed interest, beginning in January 2018 and ending in July 2019. We paid approximately $22.7 million and $13.3 million in placement fees to this customer for the years ended December 31, 2018 and 2017, respectively. The payments made in 2018 included approximately $2.1 million of imputed interest.
Lease Obligations
We lease office facilities and operating equipment under cancelable and non-cancelable agreements. Total rent expense was approximately $7.8 million, $6.8 million, and $6.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.
We have a long‑term lease agreement related to office space for our corporate headquarters located in Las Vegas, Nevada that expires in April 2023.
In September 2014, the long-term lease agreement for office space in Austin, Texas was extended through June 2021.
We also have leased facilities in Chicago, Illinois and Reno, Nevada, which support the design, production and expansion of our gaming content. The long-term lease agreement for our Chicago facilities commenced in November 2015 and expires in June 2023. The long-term lease agreement for our Reno facilities commenced in February 2016 and expires in May 2021.
As of December 31, 2018, the minimum aggregate rental commitment under all non‑cancelable operating leases were as follows (in thousands):
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| | | |
| | Amount |
| Minimum aggregate rental commitments | |
| 2019 | $ | 5,570 |
|
| 2020 | 5,680 |
|
| 2021 | 4,598 |
|
| 2022 | 2,799 |
|
| 2023 | 1,074 |
|
| Thereafter | — |
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| Total | $ | 19,721 |
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Litigation Claims and Assessments
We are subject to claims and suits that arise from time to timeinvolved in various legal proceedings in the ordinary course of our business. We do notWhile we believe resolution of the liabilities, if any, which may ultimately result from the outcome of such matters,claims brought against us, both individually orand in the aggregate, will not have a material adverse impact on our financial position, liquidity,condition or results of operations.
operations, litigation of this nature is inherently unpredictable. Our views on these legal proceedings, including those described below, may change in the future. We intend to vigorously defend against these actions, and ultimately believe we should prevail.
Legal Contingencies
We evaluate matters and record an accrual for legal contingencies when it is both probable that a liability has been incurred and the amount or range of the loss may be reasonably estimated. We evaluate legal contingencies at least quarterly and, as appropriate, establish new accruals or adjust existing accruals to reflect: (i) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings, and other relevant events and developments; (ii) the advice and analyses of counsel; and (iii) the assumptions and judgment of management. Legal costs associated with such proceedings are expensed as incurred. Due to the inherent uncertainty of legal proceedings as a result of the procedural, factual, and legal issues involved, the outcomes of our legal contingencies could result in losses in excess of amounts we have accrued.
We accrued approximately $14.0 million for legal contingencies in December 2019 in connection with Fair and Accurate Credit Transactions Act (“FACTA”)-related matters based on then-ongoing settlement negotiations by and among various plaintiffs and Everi by and on behalf of itself and Everi FinTech. We recovered approximately $7.7 million of the amount accrued from certain of our insurance providers in 2021, for which we had recorded an insurance settlement receivable included within trade and other receivables, net on our Balance Sheets as of December 31, 2020 and 2019. In addition, we were granted relief from Peleus Insurance Company pursuant to the provisions of our policy.
In the first quarter of 2021, we entered into a settlement agreement and received funds from our third-tier insurance carrier in the amount of approximately $1.9 million related to the FACTA matters. We recorded these proceeds against our operating expenses in our Statements of Operations during the year ended December 31, 2021. In total, the receivables have been received in full and the expenses accrued have been paid in full, which resulted in total funds received from our insurance providers of approximately $9.6 million and a net charge of approximately $4.4 million to our Statements of Operations, of which approximately $6.3 million was recorded in December 2019, offset by the reduction of operating expenses of $1.9 million recorded in the first quarter of 2021.
We did not have any new material legal matters that were accrued as of December 31, 2021.
FACTA-related matter:
Geraldine Donahue, et al. v. Everi Payments Inc., et al. (“Donahue”) is a putative class action matter filed on December 12, 2018, in the Circuit Court of Cook County, Illinois County Division, Chancery Division. The original defendant was dismissed and Everi Holdings and FinTech were substituted as the defendants on April 22, 2019. Plaintiff, on behalf of himself and others
similarly situated, alleges that Everi Holdings and Everi FinTech (i) have violated certain provisions of FACTA by their failure, as agent to the original defendant, to properly truncate patron credit card numbers when printing financial access receipts as required under FACTA, and (ii) have been unjustly enriched through the charging of service fees for transactions conducted at the original defendant’s facilities. Plaintiff sought an award of statutory damages, attorneys’ fees, and costs. The parties settled this matter on a nationwide class basis. On December 3, 2020, the court entered the Final Order and Judgment approving the settlement and dismissing all claims asserted against defendants with prejudice. Everi Holdings and Everi FinTech have paid all funds required pursuant to the settlement. Distributions were made to class members and remaining unclaimed funds will be distributed to nonprofit charitable organizations in compliance with the court’s October 4, 2021, approval. When the distribution of unclaimed funds to charitable organizations is complete, the parties will file a joint notice of completion of all settlement terms and ask the court to close the file.
NRT matter:
NRT Technology Corp., et al. v. Everi Holdings Inc., et al. is a civil action filed on April 30, 2019 against Everi Holdings and Everi FinTech in the United States District Court for the District of Delaware by NRT Technology Corp. and NRT Technology, Inc., alleging monopolization of the market for unmanned, integrated kiosks in violation of federal antitrust laws, fraudulent procurement of patents on functionality related to such unmanned, integrated kiosks and sham litigation related to prior litigation brought by Everi FinTech (operating as Global Cash Access Inc.) against the plaintiff entities. The plaintiffs are seeking compensatory damages, treble damages, and injunctive and declaratory relief. This case is currently proceeding through the discovery process. We are currently unable to determine the probability of the outcome or estimate the range of reasonably possible loss, if any, in this matter.
Zenergy Systems, LLC matter:
Zenergy Systems, LLC v. Everi Payments Inc. is a civil action filed on May 29, 2020, against Everi FinTech in the United States District Court for the District of Nevada, Clark County by Zenergy Systems, LLC, alleging breach of contract, breach of a non-disclosure agreement, conversion, breach of the covenant of good faith and fair dealing, and breach of a confidential relationship related to a contract with Everi FinTech that expired in November 2019. The plaintiff is seeking compensatory and punitive damages. Everi FinTech has counterclaimed against Zenergy alleging breach of contract, breach of implied covenant of good faith and fair dealing, and for declaratory relief. The case is set for trial in June 2022. We are currently unable to determine the probability of the outcome or estimate the range of reasonably possible loss, if any, in this matter.
Sadie Saavedra matter:
Sadie Saavedra, et al. v. Everi Payments Inc., et al. is a civil action filed on August 30, 2021, against Everi Holdings and Everi FinTech in the United States District Court, Central District of California (Western Division) by Sadie Saavedra, individually and on behalf of a class of similarly situated individuals, alleging violations of the Unfair Competition Law (California Business & Professions Code § 17200) and unjust enrichment. The plaintiffs allege that certain of Everi’s ATM screens are deceptive and designed to maximize the number of transaction fees and mislead consumers into incurring fees for transactions they did not wish to conduct. The plaintiffs are seeking restitution, injunctive relief and attorneys’ fees. We are in the early stages of litigation and currently unable to determine the probability of the outcome or estimate the range of reasonably possible loss, if any, in this matter.
Sightline Payments matter:
Sightline Payments LLC v. Everi Holdings Inc., et al. is a civil action filed on September 30, 2021, against Everi Holdings, Everi FinTech, Everi Games Holding Inc., and Everi Games in the United States District Court, Western District of Texas (Waco Division) by Sightline Payments LLC alleging patent infringement in violation of 35 U.S.C. § 271 et seq. The plaintiff’s complaint alleges that Everi’s CashClub Wallet product infringes on certain patents owned by the plaintiff. The plaintiff is seeking compensatory damages. Everi filed a Motion to Dismiss or Transfer for Lack of Venue. The court has not yet set a hearing date for the pending motion. We are in the early stages of litigation and currently unable to determine the probability of the outcome or estimate the range of reasonably possible loss, if any, in this matter.
14. SHAREHOLDERS’ EQUITY
On February 28, 2020, our Board of Directors authorized and approved a new share repurchase program granting us the authority to repurchase an amount not to exceed $10.0 million of outstanding Company common stock with no minimum number of shares that the Company is required to repurchase. This new repurchase program commenced in the first quarter of 2020 and authorizes us to buy our common stock from time to time in open market transactions, block trades or in private transactions in accordance with trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended, or by a combination of such methods, including compliance with the Company’s finance agreements. The share repurchase program is subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors, and may be suspended or discontinued at any time without prior notice. In light of COVID-19, we have suspended our share repurchase program. There were no share repurchases during the year ended December 31, 2021.
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 December 31, 20182021 and 2017,2020, 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 one1 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 December 31, 20182021 and 2017,2020, we had 95,099,532116,996,348 and 93,119,988111,872,439 shares of common stock issued, respectively.
Treasury Stock. Employees may direct us to withhold vested shares of restricted stock to satisfy the minimummaximum statutory withholding requirements applicable to their restricted stock vesting. We repurchased or withheld from restricted stock awards 17,552493,662 and 15,457193,809 shares of common stock at an aggregate purchase price of $0.1approximately $9.4 million and $1.3 million for the years ended December 31, 20182021 and 20172020, respectively, to satisfy the minimummaximum applicable tax withholding obligations related to the vesting of such restricted stock awards.
Issuance of Common Stock. In December 2019, we issued and sold 11,500,000 shares of our common stock and used the aggregate net proceeds of approximately $122.4 million to pay down a portion of the Term Loan Facility and to redeem a portion of the 2017 Unsecured Notes. 15. WEIGHTED AVERAGE SHARES OF COMMON STOCK
The weighted average number of common stock outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands):
|
| | | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 | | 2016 |
| Weighted average shares | | | | | | |
| Weighted average number of common shares outstanding - basic | | 69,464 |
| | 66,816 |
| | 66,050 |
|
Potential dilution from equity awards(1)
| | 4,332 |
| | — |
| | — |
|
Weighted average number of common shares outstanding - diluted(1) | | 73,796 |
| | 66,816 |
| | 66,050 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2021 | | 2020 | | 2019 |
| Weighted average shares | | | | | | |
| Weighted average number of common shares outstanding — basic | | 89,284 | | 85,379 | | 72,376 |
Potential dilution from equity awards (1) | | 10,683 | | | — | | | 6,859 | |
Weighted average number of common shares outstanding — diluted (1) | | 99,967 | | 85,379 | | 79,235 |
(1) There were no shares that were anti-dilutive under the treasury stock method for the year ended December 31, 2021. The Company was in a net loss position for the year ended December 31, 2020; therefore, no potential dilution from the application of the treasury stock method was applicable. The potential dilution excludes the weighted average effect of equity awards to purchase approximately 3.3 million and 0.5 million shares of common stock for the years ended December 31, 2020, and 2019 as the application of the treasury stock method, as required, makes them anti-dilutive. | |
(1) | The potential dilution excludes the weighted average effect of equity awards to purchase approximately 7.5 million shares of common stock for the year ended December 31, 2018, as the application of the treasury stock method, as required, makes them anti-dilutive. The Company was in a net loss position for the years ended December 31, 2017 and 2016; therefore, no potential dilution from the application of the treasury stock method was applicable. Equity awards to purchase approximately 16.0 million and 15.7 million shares of common stock for the years ended December 31, 2017 and 2016, respectively, were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive. |
16. SHARE‑BASEDSHARE-BASED COMPENSATION
Equity Incentive Awards
Our 2014 Equity Incentive Plan (as amended and restatedrestated effective May 23, 2017,19, 2021, the “Amended“Amended and Restated 2014 Plan”) and our 2012 Equity Incentive Plan (as amended, the “2012 Plan”) are used to attract and retain the best availablekey personnel, to provide additional incentives to employees, directors, and consultants, and to promote the success of our business. 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.
prices, as applicable.
Generally, we grant the following award types: (a) time-based options; (b) market-based options; (c) time-based restricted stock; and (d)types of awards: (i) restricted stock units (“RSUs”) with either time- or performance-based criteria.criteria; (ii) time-based options; and (iii) market-based options. We estimate forfeiture amounts based on historical patterns.
A summary of award activity is as follows (in thousands):
|
| | | | | | | | | |
| | | Stock Options Granted | | Restricted Stock Awards Granted | | Restricted Stock Units Granted |
| Outstanding, December 31, 2017 | | 19,131 |
| | 74 |
| | — |
|
| Granted | | 20 |
| | — |
| | 1,877 |
|
| Exercised options or vested shares | | (1,980 | ) | | (66 | ) | | — |
|
| Cancelled or forfeited | | (1,497 | ) | | — |
| | (80 | ) |
| Outstanding, December 31, 2018 | | 15,674 |
|
| 8 |
| | 1,797 |
|
| | | | | | | | | | | | | | |
| | Stock Options Granted | | Restricted Stock Units Granted |
| Outstanding, December 31, 2020 | | 10,261 | | | 4,250 | |
| Granted | | — | | | 968 | |
| Exercised options or vested shares | | (3,180) | | | (1,566) | |
| Canceled or forfeited | | (8) | | | (112) | |
| Outstanding, December 31, 2021 | | 7,073 | | | 3,540 | |
There wereare approximately 3.65.1 million awards of our common stock available for future equity grants both under the Amended and Restated 2014 Plan and the 2012 Plan as of December 31, 2018.our existing equity incentive plans.
Stock Options
Our time-based stock options granted under our equity plans generally vest at a rate of 25% per year on each of the first four anniversaries of the option grant dates, and the options expire after a ten-year period. We estimate forfeiture amounts based on historical patterns.
Our market-based options granted in 2017 and 2016 under our 2014 Plan and 2012 Plan vest at a rate of 25% per year on each of the first four anniversaries of the grant date, provided that as of the vesting date for each vesting tranche, the closing price of the Company’s shares on the New York Stock Exchange is at least a specified price hurdle, defined as a 25% and 50% premium for 2017 and 2016, respectively, 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.
There were no market-based option awards granted during the year ended December 31, 2018.
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:
|
| | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Risk-free interest rate | | 3 | % | | 2 | % | | 1 | % |
| Expected life of options (in years) | | 6 |
| | 6 |
| | 5 |
|
| Expected volatility | | 53 | % | | 54 | % | | 51 | % |
| 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:
|
| | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 |
| Risk-free interest rate | | 3 | % | | 2 | % |
| Measurement period (in years) | | 10 |
| | 10 |
|
| Expected volatility | | 70 | % | | 68 | % |
| Expected dividend yield | | — |
| | — |
|
The following table presents the options activity:
|
| | | | | | | | | | | | | |
| | | Number of Options (in thousands) | | Weighted Average Exercise Price (per Share) | | Weighted Average Life Remaining (Years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding, December 31, 2017 | | 19,131 |
| | $ | 5.34 |
| | 6.4 | | $ | 45,887 |
|
| Granted | | 20 |
| | 7.88 |
| | | | |
| Exercised | | (1,980 | ) | | 4.84 |
| | | | |
| Canceled or forfeited | | (1,497 | ) | | 5.51 |
| | | | |
| Outstanding, December 31, 2018 | | 15,674 |
| | $ | 5.39 |
| | 6.0 | | $ | 17,733 |
|
| Vested and expected to vest, December 31, 2018 | | 14,947 |
| | $ | 5.44 |
| | 5.9 | | $ | 16,559 |
|
| Exercisable, December 31, 2018 | | 9,728 |
| | $ | 6.15 |
| | 5.3 | | $ | 7,284 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Options
(in thousands) | | Weighted Average Exercise Price
(per Share) | | Weighted Average Life Remaining
(Years) | | Aggregate Intrinsic Value
(in thousands) |
| Outstanding, December 31, 2020 | | 10,261 | | | $ | 5.18 | | | 4.4 | | $ | 88,550 | |
| Granted | | — | | | 0 | | | | |
| Exercised | | (3,180) | | | 5.74 | | | | | |
| Canceled or forfeited | | (8) | | | 5.21 | | | | | |
| Outstanding, December 31, 2021 | | 7,073 | | | 4.93 | | | 3.8 | | 116,155 | |
| Vested and expected to vest after, December 31, 2021 | | 7,073 | | | 4.93 | | | 3.8 | | 116,148 | |
| Exercisable, December 31, 2021 | | 7,068 | | | $ | 4.93 | | | 3.8 | | $ | 116,088 | |
The following table presents the options outstanding and exercisable by price range:
| | | | | | | | Options Outstanding | | Options Exercisable | | | | | Options Outstanding | | Options Exercisable |
| | | | | | Number Outstanding | | Weighted Average Remaining Contract | | Weighted Average Exercise | | Number Exercisable | | Weighted Average Exercise | | Number Outstanding | | Weighted Average Remaining Contract Life | | Weighted Average Exercise | | Number Exercisable | | Weighted Average Exercise |
| Range of Exercise Prices | Range of Exercise Prices | | (in thousands) | | Life (Years) | | Prices | | (in thousands) | | Price | Range of Exercise Prices | | (in thousands) | | (Years) | | Prices | | (in thousands) | | Price |
| $ | 1.46 |
| | $ | 2.40 |
| | 2,630 |
| | 7.3 | | $ | 1.54 |
| | 1,110 |
| | $ | 1.55 |
| 1.46 | | | $ | 1.46 | | | 1,095 | | | 4.4 | | $ | 1.46 | | | 1,095 | | | $ | 1.46 | |
| 2.70 |
| | 2.78 |
| | 565 |
| | 7.1 | | 2.77 |
| | 515 |
| | 2.77 |
| |
| 1.57 | | 1.57 | | | 2.78 | | | 820 | | | 4.3 | | 2.54 | | | 820 | | | 2.54 | |
| 3.29 | 3.29 |
| | 3.29 |
| | 3,326 |
| | 8.2 | | 3.29 |
| | 741 |
| | 3.29 |
| 3.29 | | | 3.29 | | | 2,092 | | | 5.2 | | 3.29 | | | 2,092 | | | 3.29 | |
| 3.41 |
| | 7.05 |
| | 2,611 |
| | 4.1 | | 5.81 |
| | 2,545 |
| | 5.79 |
| |
| 7.09 |
| | 7.61 |
| | 929 |
| | 5.5 | | 7.34 |
| | 810 |
| | 7.32 |
| |
| 5.58 | | 5.58 | | | 7.09 | | | 824 | | | 2.3 | | 6.68 | | | 824 | | | 6.68 | |
| 7.10 | | 7.10 | | | 7.61 | | | 245 | | | 1.4 | | 7.45 | | | 245 | | | 7.45 | |
| 7.74 | 7.74 |
| | 9.74 |
| | 5,613 |
| | 4.9 | | 8.19 |
| | 4,007 |
| | 8.36 |
| 7.74 | | | 7.74 | | | 694 | | | 3.3 | | 7.74 | | | 694 | | | 7.74 | |
| 7.88 | | 7.88 | | | 7.88 | | | 20 | | | 6.6 | | 7.88 | | | 15 | | | 7.88 | |
| 8.32 | | 8.32 | | | 8.32 | | | 25 | | | 5.8 | | 8.32 | | | 25 | | | 8.32 | |
| 8.92 | | 8.92 | | | 8.92 | | | 1,250 | | | 2.1 | | 8.92 | | | 1,250 | | | 8.92 | |
| 9.74 | | 9.74 | | | 9.74 | | | 8 | | | 2.0 | | 9.74 | | | 8 | | | 9.74 | |
| | | | | | 15,674 |
| | | | | | 9,728 |
| | | | | | | 7,073 | | | | | | | 7,068 | | | |
There were 20,000, 4.3 million, and 4.4 million optionsno time-based or market-based option awards granted forduring the years ended December 31, 2018, 2017,2021, 2020, and 2016, respectively. The weighted average grant date fair value per share of the options granted was $4.15, $1.98, and $0.83 for the years ended December 31, 2018, 2017, and 2016, respectively.2019. The total intrinsic value of options exercised was $6.5$46.5 million, $6.7 million, and $5.3$9.1 million for the years ended December 31, 20182021, 2020, and 2017. There were no2019, respectively.
The unrecognized compensation expense related to options exercisedexpected to vest as of December 31, 2021 was not material. We received approximately $18.2 million in 2016.cash proceeds from the exercise of options during 2021.
There was approximately $3.4$0.3 million and $1.4 million in unrecognized compensation expense related to options expected to vest as of December 31, 2018. This cost was expected to be recognized on a straight‑line basis over a weighted average period of 2.8 years. We recorded approximately $5.1 million in non‑cash compensation expense related to options granted that were expected to vest as of December 31, 2018. We received approximately $9.6 million in cash proceeds from the exercise of options during 2018.
There was approximately $7.9 million2020 and $11.7 million in unrecognized compensation expense related to options expected to vest as of December 31, 2017 and 2016,2019, respectively. This cost was expected to be recognized on a straight-line basis over a weighted average period of 3.50.2 years and 2.1 years1.0 year for the years ended December 31, 20172020 and 2016,2019, respectively. We recorded approximately $6.0$1.4 million and $6.3$2.4 million in non‑cashnon-cash compensation expense related to options granted that were expected to vest as of December 31, 20172020 and 2016,2019, respectively. We received approximately $10.9$6.2 million and $15.7 million in cash proceeds from the exercise of options during 20172020 and there was no exercise of options during 2016, as no exercises occurred during the period.
Restricted Stock Awards
The following is a summary of non‑vested share awards for our time‑based restricted shares:
|
| | | | | | | |
| | | Shares Outstanding (in thousands) | | Weighted Average Grant Date Fair Value (per Share) |
| Outstanding, December 31, 2017 | | 74 |
| | $ | 7.00 |
|
| Granted | | — |
| | — |
|
| Vested | | (66 | ) | | 7.04 |
| Forfeited | | — |
| | — |
|
| Outstanding, December 31, 2018 | | 8 |
| | $ | 6.66 |
|
There were no shares of restricted stock granted for the year ended December 31, 2018. The total fair value of restricted stock vested was approximately $0.5 million for the year ended December 31, 2018. There was $31,952 in unrecognized compensation expense related to shares of restricted stock expected to vest as of December 31, 2018, which was expected to be recognized on a straight‑line basis over a weighted average period of 0.3 years. There were 65,501 shares of restricted stock that vested during 2018, and we recorded approximately $0.4 million in non-cash compensation expense related to the restricted stock granted that was expected to vest during 2018.
There were 50,000 shares of restricted stock granted for the year ended December 31, 2017 and no shares of restricted stock granted for the year ended December 31, 2016. The total fair value of restricted stock vested was approximately $0.4 million and approximately $0.2 million for the years ended December 31, 2017 and 2016, respectively. There was approximately $0.5 million and approximately $1.0 million in unrecognized compensation expense related to shares of time‑based restricted awards expected to vest as of December 31, 2017 and 2016, respectively, and is expected to be recognized on a straight‑line basis over a weighted average period of 1.1 years and 1.7 years, respectively. There were 56,578 shares and 74,919 shares of restricted stock that vested during 2017 and 2016, respectively, and we recorded approximately $0.4 million and approximately $0.5 million in non‑cash compensation expense related to the restricted stock granted that was expected to vest during 2017 and 2016,2019, respectively.
Restricted Stock Units
The followingfair value of our restricted stock units awarded is a summarybased on the closing stock price of non-vested RSU awards:our common stock at the date of grant.
|
| | | | | | | | | | | | | |
| | | Shares Outstanding (in thousands) | | Weighted Average Grant Date Fair Value (per Share) | | Weighted Average Life Remaining (Years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding, December 31, 2017 | | — |
| | $ | — |
| |
| |
|
| Granted | | 1,877 |
| | 7.49 |
| |
| |
|
| Exercised | | — |
| | — |
| |
| |
|
| Canceled or forfeited | | (80 | ) | | 7.46 |
| |
| |
|
| Outstanding, December 31, 2018 | | 1,797 |
| | $ | 7.49 |
| | 2.0 | | $ | 9,254 |
|
| Vested and expected to vest, December 31, 2018 | | 1,219 |
| | $ | 7.49 |
| | 1.8 | | $ | 6,278 |
|
The time-based RSUsrestricted stock units (“RSUs”) granted to executives and the employee base, during 20182021, 2020 and 2019, vest at a rate of 25%either 33% per year on each of the first fourthree anniversaries of the dates of grant, dates.or 100% on the anniversary of grant date ending after either 1 year or 2 years.
The performance-based RSUs granted during 2018 will be evaluated by our Compensation Committee of our Board of Directors after a performanceperiod, beginning on the date of grant through December 31, 2020, based on certain revenue and Adjusted EBITDA growth rate metrics, with achievement of each measure to be determined independently of one another. If the performance criteria of the metrics are approved, the eligible awards will become vested on the third anniversary of the grant dates.
The time-based RSUs granted during the first quarter of 2018 to independent members of our Board of Directors, during 2021, 2020 and 2019, vest in equal installments on eacheither the one-year or three-year anniversary of the first three anniversary datesdate of the grant date and settle on the earliest of the following events: (i) March 7, 2028;ten-year anniversary of the date of grant; (ii) death; (iii) the occurrence of a Change in Control (as defined in the Amended and Restated 2014 Plan), subject to qualifying conditions; or (iv) the date that is six months following the separation from service, subject to qualifying conditions.
Performance-based Awards
The performance-based restricted stock units (“PSUs”) granted during 2021 will be evaluated by the Compensation Committee of our Board of Directors after a performance period, beginning on the date of grant through December 31, 2023, based on certain revenue and free cash flow growth rate metrics, with achievement of each measure to be determined independently of one another. To the extent the performance criteria of the metrics are approved, the eligible awards will become vested on the third anniversary of the date of grant.
The PSUs granted during 2020 will be evaluated by the Compensation Committee of our Board of Directors after a performance period, beginning on the date of grant through December 31, 2022, based on total revenue and certain revenue growth rate metrics. If the performance criteria of the metrics are approved, the eligible awards will become vested on the third anniversary of the grant dates.
The PSUs granted during 2019 will be evaluated by the Compensation Committee of our Board of Directors after a performance period, beginning on the date of grant through December 31, 2021, based on certain revenue and free cash flow growth rate metrics, with achievement of each measure to be determined independently of one another. If the performance criteria of the metrics are approved, the eligible awards will become vested on the third anniversary of the grant dates.
The following table presents our restricted stock unit awards activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares Outstanding
(in thousands) | | Weighted Average Grant Date Fair Value
(per Share) | | Weighted Average Life Remaining
(Years) | | Aggregate Intrinsic Value
(in thousands) |
| Outstanding, December 31, 2020 | | 4,250 | | | $ | 7.75 | | | 1.2 | | $ | 58,680 | |
| Granted | | 968 | | | 17.70 | | | | | |
| Vested | | (1,566) | | | 7.60 | | | | | |
| Forfeited | | (112) | | | 9.53 | | | | | |
| Outstanding, December 31, 2021 | | 3,540 | | | 10.49 | | | 1.0 | | 75,532 | |
| Vested and expected to vest after, December 31, 2021 | | 3,087 | | | $ | 10.69 | | | 1.0 | | $ | 65,907 | |
There were approximately 1.91.0 million shares of RSUthese awards granted forduring the year ended December 31, 2018 and no RSUs granted for the years ended December 31, 2017 and 2016.2021. There were zero RSUsapproximately 1.6 million awards that vested during the yearsyear ended December 31, 2018, 2017 and 2016.
2021. There was approximately $6.7$23.3 million in unrecognized compensation expense related to RSUthese awards expected to vest as of December 31, 2018.2021. This cost is expected to be recognized on a straight-line basis over a weighted average period of 3.01.4 years. We recorded approximately $1.8$20.6 million in non-cash compensation expense related to these awards for the year ended December 31, 2021.
There were approximately 2.2 million and 2.0 million shares of these awards granted for the years ended December 31, 2020 and 2019, respectively. The weighted average grant date fair value per share of these awards granted was $6.08 and $10.16 for the years ended December 31, 2020 and 2019, respectively. There were 0.9 million and 0.3 million RSU awards that vested during the years ended December 31, 2020 and 2019, respectively. There was approximately $15.3 million and $14.1 million unrecognized compensation expense related to these awards expected to vest as of December 31, 2020 and 2019, respectively. This cost was expected to be recognized on a straight-line basis over a weighted average period of 1.8 years and 2.5 years, respectively. We recorded approximately $11.6 million and $5.7 million in non-cash compensation expense related to RSU awards for the years ended December 31, 2020 and 2019, respectively .
In February 2020, the Compensation Committee of our Board of Directors authorized an award of RSUs to be granted to key members of management during the quarter ending March 31, 2020 based on the results of operations for the year ended December 31, 2018.2019. The award met the definition of a liability-classified award with 2019 being the service period. As a result, the Company recorded compensation cost and corresponding share-based liability of approximately $1.7 million representing the fair value of the award at December 31, 2019 measured using the same valuation technique as for our equity-classified awards. The award was expected to be fully vested six months from the grant date and expected to be settled in shares of common stock.
17. INCOME TAXES
(Benefit) Provision for Income Taxes
The following presents consolidated lossincome (loss) before tax for domestic and foreign operations (in thousands):
| | | | | Year Ended December 31, | | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 | | | 2021 | | 2020 | | 2019 |
| Consolidated income (loss) before tax | | | | | | | Consolidated income (loss) before tax | | | | | | |
| Domestic | | $ | 1,227 |
| | $ | (73,445 | ) | | $ | (225,538 | ) | Domestic | | $ | 100,232 | | | $ | (87,832) | | | $ | 11,709 | |
| Foreign | | 1,419 |
| | 1,378 |
| | 7,755 |
| Foreign | | 793 | | | 396 | | | 4,285 | |
| Total | | $ | 2,646 |
| | $ | (72,067 | ) | | $ | (217,783 | ) | Total | | $ | 101,025 | | | $ | (87,436) | | | $ | 15,994 | |
The income tax (benefit) provision attributable to lossthe (loss) income from operations before tax consists of the following components (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Income tax (benefit) provision | | | | | | |
| Domestic | | $ | (51,923) | | | $ | (5,711) | | | $ | (1,238) | |
| Foreign | | 23 | | | (45) | | | 715 | |
| Total income tax benefit | | $ | (51,900) | | | $ | (5,756) | | | $ | (523) | |
| Income tax (benefit) provision | | | | | | |
| Current | | $ | 177 | | | $ | 823 | | | $ | 1,071 | |
| Deferred | | (52,077) | | | (6,579) | | | (1,594) | |
| Total income tax benefit | | $ | (51,900) | | | $ | (5,756) | | | $ | (523) | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Income tax (benefit) provision | | | | | | |
| Domestic | | $ | (10,166 | ) | | $ | (20,507 | ) | | $ | 30,400 |
|
| Foreign | | 456 |
| | 343 |
| | 1,296 |
|
| Total income tax (benefit) provision | | $ | (9,710 | ) |
| $ | (20,164 | ) | | $ | 31,696 |
|
| Income tax (benefit) provision | | | | | | |
| Current | | $ | 633 |
| | $ | 461 |
| | $ | 1,756 |
|
| Deferred | | (10,343 | ) | | (20,625 | ) | | 29,940 |
|
| Total income tax (benefit) provision | | $ | (9,710 | ) |
| $ | (20,164 | ) | | $ | 31,696 |
|
A reconciliation of the federal statutory rate and the effective income tax rate is as follows:
| | | | | Year Ended December 31, | | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 | | | 2021 | | 2020 | | 2019 |
| Income tax reconciliation | | | | | | | Income tax reconciliation | | | | | | |
| Federal statutory rate | | 21.0 | % | | 35.0 | % | | 35.0 | % | Federal statutory rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Foreign provision | | 6.8 | % | | 0.3 | % | | 0.5 | % | Foreign provision | | — | % | | (0.2) | % | | 2.5 | % |
| State/province income tax | | 12.4 | % | | 2.4 | % | | 0.8 | % | State/province income tax | | 3.5 | % | | 4.2 | % | | (1.6) | % |
| Non-deductible compensation cost | | (7.7 | )% | | (2.0 | )% | | (0.5 | )% | Non-deductible compensation cost | | (8.1) | % | | 0.5 | % | | (5.3) | % |
Adjustment to carrying value(1) | | 6.2 | % | | 31.2 | % | | 0.2 | % | |
| Research credit | | (76.3 | )% | | 1.9 | % | | 0.2 | % | |
| Valuation allowance | | (344.9 | )% | | (39.6 | )% | | (27.4 | )% | |
| Goodwill impairment | | — | % | | — | % | | (23.5 | )% | |
| Global intangible low-taxed income | | 9.1 | % | | — | % | | — | % | |
| Adjustments to carrying values | | Adjustments to carrying values | | 1.7 | % | | 0.2 | % | | 6.8 | % |
| Research and development credit | | Research and development credit | | (2.3) | % | | 1.0 | % | | (18.8) | % |
Valuation allowance(1) | | Valuation allowance(1) | | (67.2) | % | | (19.7) | % | | (11.9) | % |
Global intangible low-taxed income(2) | | Global intangible low-taxed income(2) | | 0.1 | % | | — | % | | 2.7 | % |
| Non-deductible expenses - other | | 7.2 | % | | (0.5 | )% | | (0.1 | )% | Non-deductible expenses - other | | 0.1 | % | | (0.1) | % | | 1.2 | % |
| Other | | (0.8 | )% | | (0.7 | )% | | 0.2 | % | Other | | (0.2) | % | | (0.3) | % | | 0.1 | % |
| Effective tax rate | | (367.0 | )% | | 28.0 | % | | (14.6 | )% | Effective tax rate | | (51.4) | % | | 6.6 | % | | (3.3) | % |
(1) We removed the full valuation allowance in the federal and certain state jurisdictions in the fourth quarter of 2021.
(2) We had no GILTI inclusion in 2020 due to the high tax exception in some foreign jurisdictions and losses in others.
Deferred Income Taxes
| |
(1) | The adjustment to carrying value in 2017 is due primarily to the federal tax rate change in the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). |
The major tax‑effectedtax-effected components of the deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Deferred income tax assets related to: | | | | | | |
| Net operating losses | | $ | 84,619 | | | $ | 109,872 | | | $ | 97,613 | |
| Stock compensation expense | | 6,210 | | | 7,293 | | | 6,802 | |
| Accounts receivable allowances | | 1,275 | | | 912 | | | 1,415 | |
| Accrued and prepaid expenses | | 11,284 | | | 8,977 | | | 7,869 | |
| Other | | 913 | | | 2,098 | | | 1,880 | |
| Tax credits | | 14,688 | | | 12,377 | | | 12,116 | |
| Interest limitation | | — | | | — | | | 3,738 | |
| Valuation allowance | | (804) | | | (68,746) | | | (51,522) | |
| Total deferred income tax assets | | $ | 118,185 | | | $ | 72,783 | | | $ | 79,911 | |
| Deferred income tax liabilities related to: | | | | | | |
| Property and equipment | | $ | 23,610 | | | $ | 18,699 | | | $ | 23,012 | |
| Other intangible assets | | 59,156 | | | 67,996 | | | 76,279 | |
| Long-term debt | | 7 | | | 1,482 | | | 2,680 | |
| Other | | 3,291 | | | 4,562 | | | 4,341 | |
| Total deferred income tax liabilities | | $ | 86,064 | | | $ | 92,739 | | | $ | 106,312 | |
| Deferred income taxes, net | | $ | 32,121 | | | $ | (19,956) | | | $ | (26,401) | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Deferred income tax assets related to: | | | | | | |
| Net operating losses | | $ | 97,190 |
| | $ | 87,250 |
| | $ | 98,664 |
|
| Stock compensation expense | | 7,264 |
| | 6,601 |
| | 11,559 |
|
| Accounts receivable allowances | | 1,582 |
| | 1,117 |
| | 1,745 |
|
| Accrued and prepaid expenses | | 3,639 |
| | 3,953 |
| | 6,276 |
|
| Long-term debt | | — |
| | — |
| | 493 |
|
| Other | | 1,319 |
| | 479 |
| | 1,399 |
|
| Tax credits | | 9,244 |
| | 6,822 |
| | 6,394 |
|
| Interest Limitation | | 2,738 |
| | — |
| | — |
|
| Valuation allowance | | (53,156 | ) | | (63,303 | ) | | (61,012 | ) |
| Total deferred income tax assets | | $ | 69,820 |
|
| $ | 42,919 |
|
| $ | 65,518 |
|
| Deferred income tax liabilities related to: | | | | | | |
| Property, equipment and leased assets | | $ | 3,855 |
| | $ | 3,129 |
| | $ | 13,216 |
|
| Intangibles | | 89,865 |
| | 73,597 |
| | 106,307 |
|
| Long-term debt | | 3,614 |
| | 3,292 |
| | — |
|
| Other | | 353 |
| | 1,108 |
| | 3,606 |
|
| Total deferred income tax liabilities | | $ | 97,687 |
|
| $ | 81,126 |
|
| $ | 123,129 |
|
| Deferred income taxes, net | | $ | (27,867 | ) |
| $ | (38,207 | ) |
| $ | (57,611 | ) |
The 2017 Tax Act was enacted onWe had approximately $361.0 million, or $75.8 million, tax effected, of accumulated federal NOLs as of December 22, 2017. The 2017 Tax Act made significant changes31, 2021, which may be carried forward and applied to the federal tax law, including a reduction in the federal income tax rate from 35% to 21% effective January 1, 2018, stricter limits on deduction of interest, an 80%offset taxable income limitation on the usefor 20 years and will expire starting in 2032 (for losses incurred prior to 2018). NOLs incurred after 2017 of post-2017 net operating loss (“NOL”),approximately $94.8 million, or $19.9 million, tax effected, are carried forward indefinitely to offset taxable income. We had approximately $14.7 million, tax effected, of federal research and a one-time transition tax on previously deferred earningsdevelopment credit carry-forwards as of certain foreign subsidiaries. As a result of our initial analysis of the 2017 Tax Act and existing implementation guidance, we remeasured our deferred tax assets and liabilities, which resulted in a $22.5 million reduction in our income tax expense in 2017. We computed our transition tax liability of $1.3 million due to the 2017 Tax Act, net of associated foreign tax credits, which was completely offset by additional foreign tax credits carried forward. Any remaining foreign tax credits not utilized by the transition tax were fully offset by a valuation allowance.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the 2017 Tax Act. In accordance with the SAB 118 guidance, some of the income tax effects recorded in 2017 and through December 22, 2018 were provisional, including the one-time transition tax, the effect on our valuation allowance including the stricter limits on interest deductions, the GILTI provisions of the 2017 Tax Act, and the remeasurement of our deferred tax assets and liabilities. During 2018, we recognized insignificant adjustments to the provisional amounts recorded at December 31, 20172021. The research and included these adjustments asdevelopment credits are limited to a component20 year carry-forward period and will expire starting in 2029.
We had tax effected state NOL carry-forwards of income tax expense from continuing operations.
Unrepatriated earnings were approximately $19.7approximately $8.8 million as of December 31, 2018. Almost all2021, which will expire between 2022 and 2041. The determination and utilization of these earningsstate NOL carry-forwards are considered permanently reinvested, as it is management’s intentiondependent upon apportionment percentages and other respective state laws, which may change from year to reinvest foreign earnings in foreign operations. We project sufficient cash flow, or borrowings available under our New Credit Facilities in the U.S.; therefore, we do not need to repatriate our foreign earnings to finance U.S. operations at this time. Due to the 2017 Tax Act, there is no U.S. federal tax on cash repatriation from foreign subsidiaries, however, it could be subject to foreign withholding tax and U.S. state income taxes.
The 2017 Tax Act subjects a U.S. corporation to current tax on the GILTI earned by certain foreign subsidiaries and a base erosion anti-avoidance tax (“BEAT”). Our foreign subsidiaries’ earnings for the year-endedyear. As of December 31, 2018 have been subject2021, approximately $0.7 million of our valuation allowance relates to U.S. federal income tax via the newly enacted GILTI provision. We have electedcertain state NOL carry-forwards that we estimate are not more likely than not to recognize the taxes on GILTI and BEAT as a period expense in the period the taxes are incurred.be realized.
Deferred Tax Assets - Valuation Allowance Assessment
Deferred tax assets arise primarily because expenses have been recorded in historical financial statement periods that will not become deductible for income taxes until future tax years. We record a valuation allowancesallowance to reduce the book value of our deferred tax assets to amounts that are estimated on a more likely than not basis to be realized. This assessment requires judgment and is performed on the basis of the weight of all available evidence, both positive and negative, with greater weight placed on information that is objectively verifiable such as historical performance.
We evaluatedBased on an evaluation of the then-available positive and negative evidence, noting that we reported cumulative net losses for the three-year periods endeddetermined it was appropriate to establish a full valuation allowance on our federal and states deferred tax assets as of December 31, 2016, 2017,2016. At that time, and 2018. Pursuant to accounting guidance,in subsequent quarters, negative evidence, including three years of cumulative losses, outweighed the positive evidence.However, as of December 31, 2021, our U.S. operations emerged from a three-year cumulative loss in recent years is a significant pieceposition. Our U.S. federal and states operating businesses had deferred tax asset valuation allowances of negative evidence that must be considered and is difficult to overcome without sufficient objectively verifiable, positive evidence. As such, certain aspectsapproximately $68.7 million as of our historical results were included in our forecasted taxable income. Although our forecast of future taxable income was a positive indicator, since this form of evidence was not objectively verifiable, its weight was not sufficient to overcome the negative evidence. However, basedDecember 31, 2020. Based on our current year activity andmost recent analysis as of December 31, 2021, we removed the changesfull valuation allowance in the 2017 Tax Act, we decreased our valuation allowance for deferred tax assets by $10.1federal and certain state jurisdictions, contributing to a $67.9 million during 2018. The decreasereduction in our valuation allowance in 2021. The significant positive
evidence in our analysis included: improvements in profitability, product mix, capital levels, credit metrics, a stabilizing economy and future longer-term forecasts showing sustained profitability. We believe the positive evidence now outweighs the negative evidence as of December 31, 2021 and it is primarily due to the net operating loss during the year and the interest deduction limitation (deferred tax assets) which can be offset against our indefinite lived deferred tax liabilities. The ultimate realization ofmore likely than not that these deferred tax assets depends on having sufficient taxable income in the future years when the tax deductions associated with the deferred tax assets become deductible. The establishment of a valuation allowance does not impact cash, nor does it preclude us from using our tax credits, loss carry-forwards and other deferred tax assets in the future.will be realized.
The following is a tabular reconciliation of the total amounts of deferred tax asset valuation allowance (in thousands):
| | | | | Year Ended December 31, | | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 | | | 2021 | | 2020 | | 2019 |
| Balance at beginning of period | | $ | 63,303 |
| | $ | 61,012 |
| | $ | 1,442 |
| Balance at beginning of period | | $ | 68,746 | | | $ | 51,522 | | | $ | 53,156 | |
| Charged to provision for income taxes | | (9,125 | ) | | (2,263 | ) | | 59,570 |
| |
Other(1) | | (1,022 | ) | | 4,554 |
| | — |
| |
| Valuation allowance - (reversal) charge | | Valuation allowance - (reversal) charge | | (67,942) | | | 17,224 | | | (1,634) | |
| | Balance at end of period | | $ | 53,156 |
| | $ | 63,303 |
| | $ | 61,012 |
| Balance at end of period | | $ | 804 | | | $ | 68,746 | | | $ | 51,522 | |
(1) For 2017, the amount was recorded as a result of our adoption of ASU No. 2016-09 effective January 1, 2017. For 2018, the amount was recorded as a result of our adoption of ASC 606 effective January 1, 2018.
We had $395.2 million, or $83.0 million, tax effected, of accumulated federal net operating losses as of December 31, 2018. The net operating losses can be carried forward and applied to offset taxable income for 20 years and will expire starting in 2022 (for losses incurred before 2018). Losses incurred in 2018 of approximately $38.9 million, or $8.2 million, tax effected, can be carried forward indefinitely to offset taxable income. We had $8.5 million, tax effected, of federal research and development credit carry- forwards and $0.5 million, tax effected, of foreign tax credit carry-forwards as of December 31, 2018. The research and development credits are limited to a 20 years carry-forward period and will expire starting in 2029. The foreign tax credits can be carried forward 10 years and will expire in 2020, if not utilized. Our $0.3 million balance of alternative minimum tax credits at December 31, 2018 will be refunded over the next four years in accordance with the 2017Unrecognized Tax Act. We also have a receivable for $0.6 million related to alternative minimum tax credits for which a refund was requested on our December 31, 2017 federal tax return. As of December 31, 2018, $46.6 million of our valuation allowance relates to federal net operating loss carry-forwards and credits that we estimate are not more likely than not to be realized.
We had tax effected state net operating loss carry-forwards of approximately $14.1 million as of December 31, 2018. The state net operating loss carry-forwards will expire between 2019 and 2039. The determination and utilization of these state net operating loss carry-forwards are dependent upon apportionment percentages and other respective state laws, which can change from year to year. As of December 31, 2018, $6.5 million of our valuation allowance relates to certain state net operating loss carry-forwards that we estimate are not more likely than not to be realized. The remaining valuation allowance of $0.1 million relates to foreign net operating losses.Positions
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
| | | | | Year Ended December 31, | | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 | | | 2021 | | 2020 | | 2019 |
| Unrecognized tax benefit | | | | | | | Unrecognized tax benefit | | | | | | |
| Unrecognized tax benefit at the beginning of the period | | $ | 937 |
| | $ | 834 |
| | $ | 729 |
| Unrecognized tax benefit at the beginning of the period | | $ | 1,714 | | | $ | 1,435 | | | $ | 1,062 | |
| Gross increases - tax positions in prior period | | 125 |
| | 103 |
| | 105 |
| |
| Gross increases — tax positions in prior period | | Gross increases — tax positions in prior period | | 437 | | | 279 | | | 373 | |
| Unrecognized tax benefit at the end of the period | | $ | 1,062 |
| | $ | 937 |
| | $ | 834 |
| Unrecognized tax benefit at the end of the period | | $ | 2,151 | | | $ | 1,714 | | | $ | 1,435 | |
We have analyzed filing positions in all of the federal, state, and foreign jurisdictions wherein which we are required to file income tax returns, as well as allthe open tax years in these jurisdictions. As of December 31, 2018, the Company2021, we recorded $1.1approximately $2.2 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 Income (Loss).Operations.
Foreign Operations
We had unrepatriated foreign earnings of approximately $14.4 million as of December 31, 2021. These earnings are considered permanently reinvested, as it is management’s intention to reinvest these foreign earnings in foreign operations. We project sufficient cash flow, or borrowings available under our Senior Secured Credit Facilities in the U.S.; therefore, we do not need to repatriate our remaining foreign earnings to finance U.S. operations at this time. Due to the 2017 Tax Act, there is no U.S. federal tax on cash repatriation from foreign subsidiaries, however, it could be subject to foreign withholding and other taxes.
COVID-19 Relief
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and signed into law. The CARES Act contains numerous tax provisions including changes to the limitation on interest deductions for 2019 and 2020. The CARES Act significantly increases the allowable interest expense deduction of the Company and results in significantly larger taxable loss for the years ended 2019 and 2020. As a result of the CARES Act, the Company fully utilized all interest expense that was deferred beginning in 2018 with no additional disallowed interest expense in 2020.
Other
We are subject to taxation in the U.S. and various states and foreign jurisdictions. We have a number of federal and state income tax years still open for examination as a result of our net operating loss carry-forwards. Accordingly, we are subject to examination for both U.S. federal and some of the state tax returns for the years 20042005 to present. For the remaining state, local, and foreign jurisdictions, with some exceptions, we are no longer subject to examination by tax authorities for years before 2015.2018.
18. SEGMENT INFORMATION
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-making group (the “CODM”). Our CODM consists of the Chief Executive Officer, the President and Chief Operating Officer, and the Chief Financial Officer. Our CODM allocates resources and measures profitability based on our operating segments, which are managed and reviewed separately, as each representrepresents products and services that can be sold separately to our customers. Our segments are monitored by management for performance against our internal forecasts.
We have reported our financial performance based on our segments in both the current and prior periods. Our CODM determined that our operating segments for conducting business are: (a) Games;(i) Games and (b)(ii) FinTech:
The•Everi Games segmentprimarily provides solutions directly to gaming establishments to offer their patronsoperators with gaming entertainment- related experiences including: leased gaming equipment; sales and maintenance-related services of gaming equipment; gaming systems; interactive solutions; and ancillarytechnology products and services.services, including: (i) gaming machines, primarily comprising Class II and Class III slot machines placed under participation or fixed-fee lease arrangements or sold to casino customers; (ii) provision and maintenance of the central determinant systems for the VLTs installed in the State of New York and similar technology in certain tribal jurisdictions; and (iii) B2B digital online gaming activities.
The•Everi FinTech segment provides gaming operators with financial technology and entertainment products and services, including: (i) financial access and related services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels; (ii) loyalty and marketing software and tools, RegTech software solutions, directly to gaming establishments to offer their patrons cash access-relatedother information-related products and 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; equipment andhardware maintenance services; compliance, audit and data software;(iii) associated casino credit data and reporting servicespatron self-service hardware that utilizes our financial access, software and other ancillary offerings.services.
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. Since we adopted ASC 606 utilizing the modified retrospective method, the prior year comparative amounts shown in the tables below have not been restated. Refer to “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies” and “Note 3 — Adoption of ASC 606, Revenue from Contracts with Customers” for more information.
The following tables present segment information (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Games | | | | | | |
| Revenue | | | | | | |
| Gaming operations | | $ | 272,767 | | | $ | 156,199 | | | $ | 188,874 | |
| Gaming equipment and systems | | 103,844 | | | 44,006 | | | 90,919 | |
| Gaming other | | 118 | | | 96 | | | 3,326 | |
| Total revenues | | 376,729 | | | 200,301 | | | 283,119 | |
| Costs and expenses | | | | | | |
Cost of revenues (1) | | | | | | |
| Gaming operations | | 21,663 | | | 15,192 | | | 18,043 | |
| Gaming equipment and systems | | 60,093 | | | 25,680 | | | 50,826 | |
| Gaming other | | — | | | 456 | | | 3,025 | |
| Cost of revenues | | 81,756 | | | 41,328 | | | 71,894 | |
| Operating expenses | | 70,150 | | | 63,789 | | | 61,522 | |
| Research and development | | 26,060 | | | 20,060 | | | 24,954 | |
| Depreciation | | 53,876 | | | 61,566 | | | 56,882 | |
| Amortization | | 42,866 | | | 59,926 | | | 57,491 | |
| Total costs and expenses | | 274,708 | | | 246,669 | | | 272,743 | |
| Operating income (loss) | | $ | 102,021 | | | $ | (46,368) | | | $ | 10,376 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Games | | |
| | |
| | |
|
| Revenue | | | | | | |
| Gaming operations | | $ | 168,146 |
| | $ | 148,654 |
| | $ | 152,514 |
|
| Gaming equipment and systems | | 87,038 |
| | 70,118 |
| | 56,277 |
|
| Gaming other | | 3,794 |
| | 4,005 |
| | 4,462 |
|
| Total revenues | | $ | 258,978 |
| | $ | 222,777 |
| | $ | 213,253 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
Cost of revenues(1) | | | | | | |
| Gaming operations | | 17,603 |
| | 15,741 |
| | 15,265 |
|
| Gaming equipment and systems | | 47,121 |
| | 35,707 |
| | 31,602 |
|
| Gaming other | | 3,285 |
| | 3,247 |
| | 3,441 |
|
| Total cost of revenues | | 68,009 |
| | 54,695 |
| | 50,308 |
|
| | | | | | | |
| Operating expenses | | 57,244 |
| | 42,780 |
| | 42,561 |
|
| Research and development | | 20,497 |
| | 18,862 |
| | 19,356 |
|
| Goodwill impairment | | — |
| | — |
| | 146,299 |
|
| Depreciation | | 55,058 |
| | 40,428 |
| | 41,582 |
|
| Amortization | | 55,099 |
| | 57,060 |
| | 79,390 |
|
| Total costs and expenses | | 255,907 |
| | 213,825 |
| | 379,496 |
|
| Operating income (loss) | | $ | 3,071 |
| | $ | 8,952 |
| | $ | (166,243 | ) |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| FinTech | | | | | | |
| Revenues | | | | | | |
| Cash access services | | $ | 156,806 |
| | $ | 707,222 |
| | $ | 601,874 |
|
| Equipment | | 20,977 |
| | 13,258 |
| | 14,995 |
|
| Information services and other | | 32,754 |
| | 31,691 |
| | 29,334 |
|
| Total revenues | | $ | 210,537 |
| | $ | 752,171 |
| | $ | 646,203 |
|
| | | | | | |
| Costs and expenses | | | | | | |
Cost of revenues(1) | | | | | | |
| Cash access services | | 9,717 |
| | 572,880 |
| | 485,061 |
|
| Equipment | | 12,601 |
| | 7,717 |
| | 9,889 |
|
| Information services and other | | 4,110 |
| | 3,253 |
| | 3,756 |
|
| Cost of revenues | | 26,428 |
| | 583,850 |
| | 498,706 |
|
| | | | | | |
| Operating expenses | | 85,054 |
| | 76,155 |
| | 76,148 |
|
| Depreciation | | 6,167 |
| | 6,854 |
| | 8,413 |
|
| Amortization | | 10,146 |
| | 12,445 |
| | 15,248 |
|
| Total costs and expenses | | 127,795 |
| | 679,304 |
| | 598,515 |
|
| Operating income | | $ | 82,742 |
| | $ | 72,867 |
| | $ | 47,688 |
|
(1) Exclusive of depreciation and amortization. |
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Total Games and FinTech | | |
| | |
| | |
|
| Total revenues | | $ | 469,515 |
| | $ | 974,948 |
| | $ | 859,456 |
|
| Costs and expenses | | |
| | |
| | |
|
Cost of revenues(1) | | 94,437 |
| | 638,545 |
| | 549,014 |
|
| Operating expenses | | 142,298 |
| | 118,935 |
| | 118,709 |
|
| Research and development | | 20,497 |
| | 18,862 |
| | 19,356 |
|
| Goodwill impairment | | — |
| | — |
| | 146,299 |
|
| Depreciation | | 61,225 |
| | 47,282 |
| | 49,995 |
|
| Amortization | | 65,245 |
| | 69,505 |
| | 94,638 |
|
| Total costs and expenses | | 383,702 |
| | 893,129 |
| | 978,011 |
|
| Operating income (loss) | | $ | 85,813 |
| | $ | 81,819 |
| | $ | (118,555 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| FinTech | | | | | | |
| Revenues | | | | | | |
| Financial access services | | $ | 178,019 | | | $ | 112,035 | | | $ | 164,741 | |
| Software and other | | 67,797 | | | 47,041 | | | 47,502 | |
| Hardware | | 37,840 | | | 24,297 | | | 37,865 | |
| Total revenues | | 283,656 | | | 183,373 | | | 250,108 | |
| Costs and expenses | | | | | | |
Cost of revenues (1) | | | | | | |
| Financial access services | | 6,779 | | | 6,755 | | | 14,236 | |
| Software and other | | 4,129 | | | 3,029 | | | 3,964 | |
| Hardware | | 22,785 | | | 14,724 | | | 22,292 | |
| Cost of revenues | | 33,693 | | | 24,508 | | | 40,492 | |
| Operating expenses | | 118,750 | | | 88,757 | | | 100,662 | |
| Research and development | | 12,991 | | | 7,883 | | | 7,551 | |
| Depreciation | | 7,611 | | | 5,893 | | | 6,316 | |
| Amortization | | 15,121 | | | 15,379 | | | 11,446 | |
| Total costs and expenses | | 188,166 | | | 142,420 | | | 166,467 | |
| Operating income | | $ | 95,490 | | | $ | 40,953 | | | $ | 83,641 | |
(1) Exclusive of depreciation and amortization.
|
| | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 |
| Total assets | | |
| | |
| Games | | $ | 912,849 |
| | $ | 925,186 |
|
| FinTech | | 635,412 |
| | 611,888 |
|
| Total assets | | $ | 1,548,261 |
|
| $ | 1,537,074 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Total Games and FinTech | | | | | | |
| Total revenues | | $ | 660,385 | | | $ | 383,674 | | | $ | 533,227 | |
| Costs and expenses | | | | | | |
Cost of revenues (1) | | 115,449 | | | 65,836 | | | 112,386 | |
| Operating expenses | | 188,900 | | | 152,546 | | | 162,184 | |
| Research and development | | 39,051 | | | 27,943 | | | 32,505 | |
| Depreciation | | 61,487 | | | 67,459 | | | 63,198 | |
| Amortization | | 57,987 | | | 75,305 | | | 68,937 | |
| Total costs and expenses | | 462,874 | | | 389,089 | | | 439,210 | |
| Operating income (loss) | | $ | 197,511 | | | $ | (5,415) | | | $ | 94,017 | |
(1) Exclusive of depreciation and amortization.
| | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2021 | | 2020 |
| Total assets | | | | |
| Games | | $ | 913,880 | | | $ | 811,523 | |
| FinTech | | 721,770 | | | 665,656 | |
| Total assets | | $ | 1,635,650 | | | $ | 1,477,179 | |
For the year ended December 31, 2021, cash spent for capital expenditures totaled $104.7 million, of which $81.7 million and $23.0 million was related to our Games and FinTech businesses, respectively. For the year ended December 31, 2020, cash spent for capital expenditures totaled $76.4 million, of which $62.6 million and $13.8 million, was related to our Games and FinTech businesses, respectively.
Major customers. For the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, no single customer accounted for more than 10% of our revenues. Our five largest customers accounted for approximately 22%16%, 31%16%, and 31%14% of our total revenue in 2018, 2017,2021, 2020, and 2016,2019, respectively.
19. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited selected quarterly results of operations are as follows (in thousands, except for per share amounts)*. Since we adopted ASC 606 utilizing the modified retrospective method, the prior year comparative amounts shown in the table below have not been restated.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Quarter | | |
| | | First | | Second | | Third | | Fourth | | Year |
| 2018 | | | | | | | | | | |
| Revenues | | $ | 111,001 |
| | $ | 118,682 |
| | $ | 120,330 |
| | $ | 119,502 |
| | $ | 469,515 |
|
Operating income
| | 24,491 |
| | 22,597 |
| | 21,510 |
| | 17,215 |
| | 85,813 |
|
| Net income | | 4,609 |
| | 1,475 |
| | 2,069 |
| | 4,203 |
| | 12,356 |
|
| Basic earnings per share | | $ | 0.07 |
| | $ | 0.02 |
| | $ | 0.03 |
| | $ | 0.06 |
| | $ | 0.18 |
|
| Diluted earnings per share | | $ | 0.06 |
| | $ | 0.02 |
| | $ | 0.03 |
| | $ | 0.06 |
| | $ | 0.17 |
|
| Weighted average common shares outstanding | | | | | | | | | | |
| Basic | | 68,686 |
| | 69,203 |
| | 69,750 |
| | 70,196 |
| | 69,464 |
|
| Diluted | | 73,285 |
| | 73,440 |
| | 74,594 |
| | 74,024 |
| | 73,796 |
|
| 2017 | | | | | | | | | | |
| Revenues | | $ | 237,537 |
| | $ | 242,230 |
| | $ | 247,322 |
| | $ | 247,859 |
| | $ | 974,948 |
|
| Operating income (loss) | | 22,603 |
| | 21,292 |
| | 19,795 |
| | 18,129 |
| | 81,819 |
|
Net loss
| | (3,508 | ) | | (19,057 | ) | | (4,289 | ) | | (25,049 | ) | | (51,903 | ) |
| Basic loss per share | | $ | (0.05 | ) | | $ | (0.29 | ) | | $ | (0.06 | ) | | $ | (0.37 | ) | | $ | (0.78 | ) |
| Diluted loss per share | | $ | (0.05 | ) | | $ | (0.29 | ) | | $ | (0.06 | ) | | $ | (0.37 | ) | | $ | (0.78 | ) |
| Weighted average common shares outstanding | | | | | | | | | | |
| Basic | | 66,090 |
| | 66,350 |
| | 66,897 |
| | 67,755 |
| | 66,816 |
|
| Diluted | | 66,090 |
| | 66,350 |
| | 66,897 |
| | 67,755 |
| | 66,816 |
|
|
| |
* | Rounding may cause variances. |
20. SUBSEQUENT EVENTS
On March 8, 2019, weFebruary 7, 2022, Everi Holdings Inc. (the “Company”) announced that it has entered into an agreement to acquire certain assets fromthe stock of ecash Holdings Pty Limited and wholly-owned subsidiaries, Global Payment Technologies Australia Pty Limited, and ACN 121 187 068 Pty Limited (collectively “ecash”), a privately held company that developsowned, Australia-based developer and distributes hardwareprovider of innovative cash handling and software applications tofinancial payment solutions for the broader gaming operators to enhance gaming patron loyalty. Thisindustry in Australia, Asia, Europe, and the United States.
The anticipated acquisition includes existing contracts with gaming operators, technologyof ecash’s products and intellectual property that allow us to provide gaming operatorsservices represent a self-service enrollment and loyalty card printing kiosk, a mobile application to offer a gaming operator's patrons additional flexibility in accessing casino promotions, and a marketing platform that manages and delivers a gaming operator’s marketing programs through these patron interfaces. This acquisition will expand ourstrategic extension of Everi’s current suite of financial technology solutions offerings within ourthe FinTech segment. The acquisition will provide Everi with a complementary portfolio of new customer locations throughout Australia, the United States, and other geographies. The closing of the transaction, subject to customary conditions, is expected to occur within 60 days.
Under the terms of the assetstock purchase agreement, we paid the seller $20Company will make guaranteed payments totaling AUD$33 million, with an initial payment at the time of closing of AUD$20 million (approximately US$14 million) with the transactionremaining payments to be made on each of the first and will pay an additional $10 million one yearsecond anniversaries in 2023 and 2024, respectively, following after closing and another $10 million two years following after the date of closing. In addition, we expect thatSubject to achieving certain growth targets, there will be an additional $10contingent payment of up to AUD$10 million, in contingentwhich could increase the total consideration will be earned by the seller based upon the achievement of certain revenue targets over the first two years post-closing. We expectto AUD$43 million. Everi expects to fund the total purchase price for this acquisition, inclusive of the contingent consideration, to be approximately $50 million. We have not completed the purchase price accounting analysis, however, we do not expect that the acquisition will have a material impactfrom existing cash on our results of operations or financial condition.hand and future cash flow.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management, includingwith the participation of 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 Exchange Act) as of the end of the reporting period covered by this Form 10-K.December 31, 2021. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report on Form 10-K, the Company’s disclosure controls and procedures are effective such that 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 in the SEC’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Report of Internal Control over Financial Reporting
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.U.S. generally accepted accounting principles (“GAAP”). Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Management assessed the effectiveness of internal control over financial reporting as of December 31, 2018,2021, utilizing the criteria described in the “Internal Control -— Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this assessment, management has concluded that our internal control over financial reporting was effective at a reasonable assurance level as of December 31, 2018.2021.
Our independent registered public accounting firm, BDO USA, LLP, independently assessed the effectiveness of the Company’s internal control over financial reporting, as stated in the firm’s attestation report, which is included within Part II, Item 8 of this Form 10-K.on the following page.
Changes in Internal Control over Financial Reporting
There was no change to our internal control over financial reporting (as defined in Rules 13a‑15(f)13a-15(f) and 15d‑15(f)15d-15(f) under the Exchange Act) that occurred during the fourth quarter ended December 31, 20182021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Everi Holdings Inc. and subsidiariesSubsidiaries
Las Vegas, Nevada
Opinion on Internal Control over Financial Reporting
We have audited Everi Holdings Inc. and subsidiaries’subsidiaries (the “Company’s”) internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2021, based on the COSO criteria.criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 20182021 and 2017,2020, the related consolidated statements of income (loss)operations and comprehensive income (loss), stockholders’ deficit,equity (deficit), and cash flows for each of the three years in the period ended December 31, 2018,2021, and the related notes and our report dated March 12, 20191, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Las Vegas, Nevada
March 12, 20191, 2022
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information regarding our directors, executive officers, and certain corporate governance related matters including our Code of Business Conduct, Standards and Ethics is contained under the headings “Election of Directors,“Proposal 1,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Board and Corporate Governance Matters”Matters,” and to the extent applicable, “Delinquent Section 16(a) Reports” in the Company’s definitive proxy statement to be filed with the SEC in connection with our 20192022 annual meeting of stockholders (the “2019“2022 Proxy Statement”) is incorporated herein by reference.
Item 11. Executive Compensation.
The information regarding director compensation and executive officer compensation contained under the headings “Board and Corporate Governance Matters – 2018— Director Compensation” and “Executive Compensation,” respectively, in the 20192022 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information regarding share ownership contained under the heading “Security Ownership of Certain Beneficial Owners and Management” in the 20192022 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information regarding director independence and related party transactions under the headings “Board and Corporate Governance Matters –— Director Independence” and “Transactions with Related Persons,” respectively, in the 20192022 Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information regarding audit fees, audit-related fees, tax fees, all other fees, and the Audit Committee’s policies and procedures on pre-approval of audit and permissible non-audit services of independent auditors contained under the heading “Ratification of the Appointment of Independent Registered Public Accounting Firm” in the 20192022 Proxy Statement is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
| |
(a) | The following documents are filed as part of this Annual Report on Form 10‑K: |
(a)The following documents are filed as part of this Annual Report on Form 10‑K:
1. Financial Statements
2. Financial Statement Schedules
All schedules have been omitted as they are either not required or not applicable or the required information is included in the Consolidated Financial Statements or notes thereto.
3. See Item 15(b)
(b) Exhibits:
|
| | | | | | | |
Exhibit
Number
| | Exhibit Description |
| | |
| 3.1 | | |
| | |
| 3.2 | | |
| | |
| 3.3 | | |
| | |
| 3.4 | | |
| | |
| 4.1 | | |
| | |
| 4.2 | | Indenture (and Form of 7.50% Senior Note due 2025 attached as Exhibit A thereto), dated as of December 5, 2017, by and among Everi Payments,FinTech, Everi Holdings, certain of its wholly owned subsidiaries, as guarantors, and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 of Everi Holdings’ Current Report on Form 8-K filed with the SEC on December 5, 2017). |
| | |
| | | | | | | | |
10.1Exhibit
Number | | Exhibit Description |
| 4.3 | | |
| | |
| 4.4 | | |
| | |
| 10.1 | | Fifth Amendment to Credit Agreement, dated February 2, 2021, among Everi Payments Inc., as borrower, Everi Holdings Inc., as parent, the subsidiary guarantors party thereto, and Jefferies Finance LLC, as administrative agent (incorporated by reference to Exhibit 10.1 of Everi Holdings’ Current Report on Form 8-K filed with the SEC on February 2, 2021 ). |
| | |
| 10.2 | | |
| | |
| 10.3 | | |
| | |
| 10.4 | | |
| | |
| 10.5 | | |
| | |
| 10.6 | | Credit Agreement, dated as of May 9, 2017, among Everi Payments,FinTech, Everi Holdings, 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 (incorporated by reference to Exhibit 10.1 of Everi Holdings’ Current Report on Form 8-K filed with the SEC on May 9, 2017). |
| | |
10.210.7 | | Security Agreement, dated as of May 9, 2017, among Everi Payments,FinTech, Everi Holdings, as a guarantor, the subsidiary guarantors party thereto, and Jefferies Finance LLC, as collateral agent, related to the Credit Agreement (incorporated by reference to Exhibit 10.2 of Everi Holdings’ Current Report on Form 8-K filed with the SEC on May 9, 2017). |
| | |
10.310.8 | | |
| | |
|
| 10.9 | | |
Exhibit
Number
| | Exhibit Description |
10.4 | | |
| | |
10.510.10 | | |
| | |
10.6 | | |
| | |
†10.710.11 | | |
| | |
| | | | | | | | |
†10.8Exhibit
Number | | Exhibit Description |
| †10.12 | | |
| | |
†10.910.13 | | |
| | |
†10.1010.14 | | |
| | |
†10.1110.15 | | |
| | |
†10.1210.16 | | |
| | |
†10.1310.17 | | |
| | |
†10.1410.18 | | |
| | |
†10.1510.19 | | |
| | |
†10.1610.20 | | |
| | |
†10.1710.21 | | |
| | |
†10.1810.22 | | |
| | |
†10.1910.23 | | |
| | |
†10.2010.24 | | |
| | |
†10.2110.25 | | |
| | |
†10.2210.26 | | |
| | |
|
| †10.27 | | |
Exhibit
Number
| | Exhibit Description |
†10.23 | | |
| | |
| | | | | | | | |
†10.24Exhibit
Number | | Exhibit Description |
| †10.28 | | |
| | |
†10.2510.29 | | |
| | |
†10.2610.30 | | |
| | |
†10.2710.31 | | |
| | |
†10.2810.32 | | |
| | |
†10.29 | | |
| | |
†10.30 | | |
| | |
†10.31 | | |
| | |
†10.32 | | |
| | |
†10.33 | | |
| | |
†10.34 | | |
| | |
†10.35 | | |
| | |
†10.3610.33 | | |
| | |
†10.3710.34 | | |
| | |
10.3810.35 | | |
| | |
10.39 | | |
| | |
†*10.4010.36 | |
|
| | |
†*10.41
10.37 | | |
|
| | |
Exhibit
Number
†10.38 | | Exhibit Description |
†10.42
| |
|
| | |
†10.4310.39 | |
|
| | |
†10.44
10.40 | |
|
| | |
†10.45
10.41 | |
|
| | |
†10.46
10.42 | |
|
| | |
| | | | | | | | |
†10.47
Exhibit
Number | | Exhibit Description |
| †10.43 | |
|
| | |
†10.48
10.44 | |
|
| | |
†10.49
10.45 | |
|
| | |
†10.5010.46 | |
|
| | |
| †10.47 | | |
| | |
| †10.48 | | |
| | |
| 10.49 | | |
| | |
| †10.50 | | Fourth Amendment to Credit Agreement, dated April 21, 2020, among Everi Payments Inc., as borrower, Everi Holdings Inc., as parent, the subsidiary guarantors party thereto, the lenders party thereto, and Jefferies Finance LLC, as administrative agent (incorporated by reference to Exhibit 10.1 of Everi Holdings’ Current Report on Form 8-K filed with the SEC on April 21, 2020). |
| | |
| †10.51 | | Term Loan Credit Agreement, dated April 21, 2020, among Everi Payments Inc., as borrower, Everi Holdings Inc., as parent, the lenders party thereto, and Jefferies Finance LLC, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 of Everi Holdings’ Current Report on Form 8-K filed with the SEC on April 21, 2020). |
| | |
| †10.52 | | |
| | |
| †10.53 | | |
| | |
| †10.54 | | |
| | |
| †10.55 | | |
| | |
| †10.56 | | |
| | | | | | | | |
Exhibit
Number | | Exhibit Description |
| | |
| †10.57 | | |
| | |
| †10.58 | | |
| | |
| †10.59 | | |
| | |
| †10.60 | | |
| | |
| †10.61 | | |
| | |
| †10.62 | | |
| | |
| †10.63 | | |
| | |
*21.1*+10.64 | | |
| | |
| **+10.65 | | |
| | |
| **10.66 | | |
| | |
| **+10.67 | | |
| | |
| *†10.68 | | |
| | |
| *†10.69 | | |
| | |
| *21.1 | | |
| | |
| *23.1 | | |
| | |
| *24.1 | | |
| | |
| *31.1 | | |
| | | | | | | | |
Exhibit
Number | | Exhibit Description |
| | |
| *31.2 | | |
| | |
| **32.1 | | |
| | |
| *101.INS | | XBRL Instance Document.Document - this instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | |
| *101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| | |
| *101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
| *101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
| *101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
| *101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
| | |
| *104 | Filed herewith. | The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL (included as Exhibit 101). |
| | | | | | | | |
** | FurnishedFiled herewith. | |
†** | Furnished herewith. |
| † | Management contracts or compensatory plans or arrangements. |
| + | Confidential treatment hasPortions of the exhibit have been granted for certain portions of this exhibitomitted pursuant to Rule 24b-2the rules and regulations of the Securities Exchange Act of 1934, as amended. The confidential information has been omitted and filed separately with the SEC. |
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
| | | | | | | | | | |
Dated: March 12, 20191, 2022 | | EVERI HOLDINGS INC. |
| | | |
| | By: | /s/ TODD A. VALLI |
| | | Todd A. Valli Chief Accounting Officer (Principal Accounting Officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael D. Rumbolz, Randy L. Taylor,Mark F. Labay, and Todd A. Valli and each of them, his attorneys‑in‑fact,attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10‑K10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys‑in‑fact,attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ MICHAEL D. RUMBOLZ | | Chairman of the Board and Chief Executive Officer | | March 1, 2022 |
| Michael D. Rumbolz | | (Principal Executive Officer) and Director | | |
| | | | |
| /s/ RANDY L. TAYLOR | | President and Chief Operating Officer | | March 1, 2022 |
| Randy L. Taylor | | (Principal Operating Officer) | | |
| | | | |
| /s/ MARK F. LABAY | | Executive Vice President, Chief Financial Officer | | March 1, 2022 |
| Mark F. Labay | | (Principal Financial Officer) and Treasurer | | |
| | | | |
| /s/ TODD A. VALLI | | Senior Vice President, Chief Accounting Officer | | March 1, 2022 |
| Todd A. Valli | | (Principal Accounting Officer) | | |
| | | | |
| /s/ RONALD V. CONGEMI | | Lead Independent Director | | March 1, 2022 |
| Ronald V. Congemi | | | | |
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ MICHAEL D. RUMBOLZ | | President and Chief Executive Officer | | March 12, 2019 |
Michael D. Rumbolz | | (Principal Executive Officer) and Director | | |
| | | | |
/s/ RANDY L. TAYLOR | | Chief Financial Officer | | March 12, 2019 |
Randy L. Taylor | | (Principal Financial Officer) | | |
| | | | |
/s/ TODD A. VALLI | | Chief Accounting Officer | | March 12, 2019 |
Todd A. Valli | | (Principal Accounting Officer) | | |
| | | | |
/s/ E. MILES KILBURN | | Chairman of the Board and Director | | March 12, 2019 |
E. Miles Kilburn | | | | |
| | | | |
| /s/ GEOFFREY P. JUDGE | | Director | | March 12, 20191, 2022 |
| Geoffrey P. Judge | | | | |
| | | | |
/s/ RONALD V. CONGEMI | | Director | | March 12, 2019 |
Ronald V. Congemi | | | | |
| | | | |
| /s/ EILEEN F. RANEY | | Director | | March 12, 20191, 2022 |
| Eileen F. Raney | | | | |
| | | | |
| /s/ LINSTER W. FOX | | Director | | March 12, 20191, 2022 |
| Linster W. Fox | | | | |
| | | | |
| /s/ MAUREEN T. MULLARKEY | | Director | | March 12, 20191, 2022 |
| Maureen T. Mullarkey | | | | |
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| /s/ ATUL BALI | | Director | | March 1, 2022 |
| Atul Bali | | | | |
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| /s/ SECIL TABLI WATSON | | Director | | March 1, 2022 |
| Secil Tabli Watson | | | | |
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| /s/ PAUL FINCH | | Director | | March 1, 2022 |
| Paul Finch | | | | |